2024 (1) TMI 361 - HC - Income Tax

Undervaluation of closing stock - Tribunal restricting the disallowance to the extent 25% as AO did not brought any contrary evidence on record to disbelive the contention of the assessee with regard to the justification for increase of quantum of damaged goods before the CIT (Appeal) - Whether Tribunal was right in restricting the disallowance, inspite of the fact that Hon'ble Tribunal itself has observed that the assessee has not provided the quantity of damaged or unsaleable product and valued it without justifying with the comparable cases? - HELD THAT - As the findings of fact arrived at by the Assessing Officer and CIT (Appeal) are without any basis and contrary to the materials produced on record by the Assessing Officer in form of the stock statements of various C and F locations whose stocks were physically taken and verified by the Firms of the Chartered Accountant of those locations. The Tribunal has therefore in order to prevent the revenue leakage has adopted a middle path by restricting the addition to 25% in the closing stock. We would also like to observe that the Tribunal ought not to have restricted such addition to 25% without any basis and only by estimating the same in absence of any material on record for the same. However, as the addition is in closing stock which would have a cascading effect and the year under consideration is 2011-12, we would not like to interfere in the impugned order of Tribunal on that ground only. No substantial question of law arises.

Summary

Issues involved:
The issues involved in this case are:
1. Whether the Tribunal was right in restricting the disallowance on account of undervaluation of closing stock?
2. Whether the Tribunal's decision was in consonance with the facts on record regarding damaged or unsaleable products?

Issue 1:
The appellant filed an appeal under Section 260A of the Income Tax Act, 1961 challenging the order passed by the Income Tax Appellate Tribunal regarding the disallowance on account of undervaluation of closing stock for Assessment Year 2011-12. The Tribunal restricted the addition to 25% of the amount in question, considering the justification provided by the assessee and the potential hazards associated with damaged goods. The Tribunal aimed to prevent revenue leakage by limiting the disallowance based on the available evidence and facts.

Issue 2:
The Tribunal's decision was questioned regarding the treatment of damaged or unsaleable products in the closing stock valuation. The appellant argued that the Tribunal's restriction to 25% without sufficient basis was unjustified, as the Assessing Officer and CIT (Appeal) had not considered the evidence provided by the assessee regarding the segregation of saleable and unsaleable stock. The respondent-assessee had presented stock statements verified by Chartered Accountants, certifying the status of expired, damaged, or unsaleable stock. The Tribunal's decision to limit the addition to 25% was seen as a preventive measure against revenue leakage, despite lacking a strong basis for such restriction.

This judgment highlights the importance of evidence and factual basis in tax assessments, emphasizing the need for thorough consideration of submissions and supporting documents in determining the valuation of closing stock. The Tribunal's role in preventing revenue leakage was acknowledged, although concerns were raised regarding the basis for restricting the disallowance.