2003 (9) TMI 319 - AT - Income Tax

Summary

Issues:
1. Undervaluation of closing stock
2. Alleged unexplained cash credit

Issue 1: Undervaluation of closing stock

The appeal was filed against the order of CIT(A) regarding an addition made on account of undervaluation of closing stock for the assessment year 1989-90. The dispute arose due to the variance in the valuation of stock as shown in the stock statement submitted to the bank compared to the books of accounts. The assessee argued that the stock valuation submitted to the bank was inflated to avail better financial assistance, and it should not be considered as the exact value of the stock. The Tribunal observed that there were no discrepancies in the quantities of stock items, and the difference in valuation was due to business practices to secure bank finance. The Department failed to verify the market price of the stock before making the addition. The Tribunal noted that the business had incurred losses in subsequent years, leading to the closure of the unit, which justified the higher valuation for bank financing purposes. The Tribunal concluded that the AO wrongly added the valuation difference and deleted the addition, disagreeing with the CIT(A)'s confirmation.

Issue 2: Alleged unexplained cash credit

The second issue involved an addition of Rs. 15,000 on account of an alleged unexplained cash credit deposited by Kumari Bharti Shahlot. The AO based the addition on the grounds that Kumari Bharti Shahlot, a college student dependent on her parents, did not have an independent source of income at the time of deposit. The assessee provided a confirmation from Kumari Bharti Shahlot, but the AO relied on the statement of her mother instead of examining Kumari Bharti Shahlot directly. The Tribunal found fault with the AO's approach, stating that Kumari Bharti Shahlot should have been called for confirmation after submitting the letter. The Tribunal noted that the deposit amount was small, the identity of the depositor was clear, and the loan was confirmed by the giver. Additionally, the amount was repaid in the following year, indicating the genuineness of the transaction. The Tribunal directed the AO to further investigate the matter, consider the confirmatory letter, and examine the payment details. Consequently, the Tribunal accepted this ground of appeal for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee on both issues, deleting the addition related to undervaluation of closing stock and directing further investigation into the alleged unexplained cash credit.