2002 (3) TMI 215 - AT - Income Tax

Summary

Issues Involved:
1. Preparation of inventory and quantification of stocks.
2. Valuation of stock.
3. Method of stock assessment during search operations.
4. Maintenance and reliability of regular books of account.
5. Denial of natural justice.

Summary:

1. Preparation of Inventory and Quantification of Stocks:
The primary dispute in the appeals was the preparation of inventory and quantification of stocks during a search conducted on the premises of the assessees from 2nd to 4th November 1995. The Revenue authorities did not find any valuable assets or papers and proceeded to inventory the stock, which the assessees disputed. The assessees argued that the inventory was based on estimations and hypothetical calculations without physical weighment, leading to significant discrepancies between the stock as per the books of account and the inventory by the searching party.

2. Valuation of Stock:
The assessees maintained that the stock valuation was incorrect as it was not based on physical weighment. They argued that the stock was spread over a large area and included heavy materials that required cranes and weighbridges for accurate measurement, which were not utilized by the searching party. The factory manager and other officials suggested physical weighment, but the searching party did not heed their suggestions. The assessees also contended that the stock registers were regularly inspected by the Central Excise authorities, and no specific defects were noticed.

3. Method of Stock Assessment During Search Operations:
The learned AR of the assessees argued that the method adopted by the searching party was unscientific and based on 'eye estimation.' The Revenue authorities, however, claimed that the inventory was prepared on a scientific basis. The Tribunal found that the method of valuation adopted by the authorities was not accurate and that the stock should have been physically weighed. The Tribunal observed that the accounts regularly maintained by the assessees should be accepted unless there were strong reasons to indicate they were unreliable.

4. Maintenance and Reliability of Regular Books of Account:
The Tribunal noted that the assessees maintained regular books of account, including stock registers, which were periodically checked by the Central Excise authorities. Since no defects were found in these books, the authorities were not justified in resorting to estimation of stock without rejecting the books of account. The Tribunal emphasized that the accounts should be taken as correct unless there were strong reasons to prove otherwise.

5. Denial of Natural Justice:
The learned AR of the assessees submitted that natural justice was denied as the CIT approved the draft of the Assessing Officer without giving the assessees an opportunity to be heard. The Tribunal, however, did not find this action to be significant or fatal to the case.

Separate Judgement by Judges:
The Judicial Member disagreed with the Accountant Member, stating that the method of valuation adopted by the Department was appropriate under the circumstances. The matter was referred to the Hon'ble President for the opinion of a Third Member. The Third Member concurred with the Accountant Member, holding that no addition could be made based on the sampling method of valuation. Consequently, in accordance with the majority view, the appeals were allowed, and no addition was made.