2024 (8) TMI 682 - AT - Income Tax

Addition on account of excess stock found during search - AO determined the excess stock after comparing it with the books stock - addition made by AO has also relied on the statement of General Manager of the company and Director of the company - HELD THAT - Both the teams convey to the factory Accounts Department which tallies the quantity and quality with the suppliers bills. Various details in the bill such as GST number, name, computation, etc. are checked and verified. Finally, the bill is couriered or hand-delivered to Noida Head Office from Sikandrabad unit where all details are checked again and further it is checked by the Purchase Department and tallied with the order placed by the assessee. In case of any discrepancy, the bill approval and subsequent entry in the books is held up till the issue is resolved or the material is rejected. This entire process takes time, ranging from a couple of days up to a week depending on the case to case basis. Based on this process of updating the stock register, the material unloaded upto 24.03.2021 could not be entered into the books of account at Noida office because of the search seizure activities being carried on during that period. The assessee filed the quantitative details of the stock updating the stock upto 24.03.2021, since the stock taking exercise was done on 24.03.2021 and not on 22.02.2021 i.e. the date of the stock summary ledger used by the search team for making comparison and drawing adverse inference. The search party took the stock by the description on the cartoons such as Dog, Panther and Zebra whereas the same contents can be a part of stock of Aluminium wire, rod and sheets mentioned in the raw material. Similarly, the production of the material during the two days of search has not been entered in the books but has been valued by the search party. The inventory has been prepared not based on the material but based on the description of the finished product. Further, Shri Subhash Singh in his statement has confirmed the fact that stock was being maintained at the Head Office at C-58, Sector 4, Noida, not at the plant level. Shri Subhash Singh was confronted with the accounts stock ledger at Sikandrabad and was asked to identify and quantify the material. He pointed out all the material as per the accounts stock ledger provided to him by the search team. This is also one of the reasons why the plant General Manager was not able to give a satisfactory reply on the stock. Similarly, it is difficult to distinguish between aluminium scrap 86%, aluminium scrap (low grade) and aluminium scrap. Shri Subhash Singh was not involved in day to day stock taking, manufacturing and technical aspects of the plant. Also in the statement he has slated that he mainly looks after plant administration, government liaisoning and compliances. Similarly, Sh. Akshat Jain, the Director stated in the statement that he needs to check the difference for reconciliation. AO has made the addition solely on the basis of statement recorded of Sh. Akshat Jain and Sh. Subhash Singh. Similarly, the inventorisation of the scrap has been done on estimate basis. The goods received during the period of search have not been entered in books and also the final product which has been manufacture and ready for sale was also not entered in the books. There was a difference to the tune of raw material received as well as the finished goods ready for dispatch which has been available at the premises but not entered in the books of accounts. These finished goods pointed out by the AO represent the production which has been done by the unit and which were ready for subsequent sales as on 24.03.2021. These were not unaccounted stock but the finished goods produced out of the raw material which were duly accounted for. Accordingly, these finished goods and the raw material received were not part of the stock inventory as per books of accounts. At the time of issue for sale, the entry is passed in the stock account whereby the raw material is reduced as consumed and corresponding entry of finished goods produced is recorded with the simultaneous issue of finished goods against the sale invoice. This is the normal accounting practice of stock in any manufacturing unit. AO has straightaway picked up the total quantity of finished goods as on 24.03.2021 and added the same as unaccounted stock ignoring the fact of corresponding raw material being available in the books of accounts. AO has not disputed the details and reconciliation submitted by the assessee including the quantity analysis in this regard. The addition made by the AO and sustained by the CIT(A) are due to the misinterpretation of the accounting system of finished goods and solely based on the statements recorded without any corroborative evidence of unaccounted sales. It is important to point out that nothing incriminating regarding any purchase or sales outside the books of accounts was found. Hence, the addition made on account of excess stock cannot be sustained. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the assessment order under Circular No. 19/2019.
2. Validity of the assessment order being undated and not digitally signed.
3. Legality of proceedings initiated under Section 153A and approval under Section 153D.
4. Addition of Rs. 4,82,58,537/- on account of excess stock found during search.
5. Valuation of stock at lower of cost or net realizable value.
6. Quantitative reconciliation of stock and evidence of sales/purchases outside books.
7. Charging of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Validity of the assessment order under Circular No. 19/2019:
The assessee contended that the assessment order was invalid as it violated Circular No. 19/2019 issued by the CBDT, which mandates a Valid Document Identification Number (DIN). The CIT(A) rejected this contention, and the Tribunal did not further address this issue, implying the rejection was upheld.

2. Validity of the assessment order being undated and not digitally signed:
The assessee argued that the assessment order was invalid as it was undated and not digitally signed. This contention was also rejected by the CIT(A), and the Tribunal did not provide a separate analysis on this point, indicating that the rejection by CIT(A) was maintained.

3. Legality of proceedings initiated under Section 153A and approval under Section 153D:
The assessee argued that the proceedings under Section 153A and the consequent reassessment under Section 153A read with Section 143(3) violated mandatory provisions of Section 153D. The CIT(A) rejected this argument, and the Tribunal did not provide a detailed analysis on this issue, suggesting that the CIT(A)'s decision was upheld.

4. Addition of Rs. 4,82,58,537/- on account of excess stock found during search:
The search conducted on 23.03.2021 led to the discovery of excess stock, resulting in an addition of Rs. 4,82,58,537/-. The AO relied on statements from the General Manager and the Director, who failed to explain the discrepancies. The CIT(A) affirmed the AO's action, emphasizing the diligent inventory task performed by the search team and the un-retracted statements of the company officials.

The Tribunal, however, found that the addition was based solely on statements without corroborative evidence. It noted that the stock-taking process and accounting practices were misinterpreted, and there was no evidence of unaccounted sales. The Tribunal concluded that the addition could not be sustained and allowed the appeal in favor of the assessee.

5. Valuation of stock at lower of cost or net realizable value:
The assessee argued that the stock should be valued at the lower of cost or net realizable value, not market value. The CIT(A) did not explicitly address this issue, but the Tribunal's decision to allow the appeal implies that it considered the assessee's valuation method acceptable.

6. Quantitative reconciliation of stock and evidence of sales/purchases outside books:
The assessee provided quantitative reconciliation details, which were ignored by the AO and CIT(A). The Tribunal highlighted that the inventory prepared by the search team was based on product descriptions rather than actual measurements, and there was no evidence of sales/purchases outside the books. The Tribunal found the addition unsustainable due to the lack of corroborative evidence and misinterpretation of the accounting system.

7. Charging of interest under Section 234B:
The assessee contested the charging of interest under Section 234B. The CIT(A) upheld the AO's action, and the Tribunal did not provide a separate analysis on this issue, suggesting that the CIT(A)'s decision was maintained.

Conclusion:
The Tribunal allowed the appeal of the assessee, primarily on the grounds that the addition of Rs. 4,82,58,537/- was based on statements without corroborative evidence and due to misinterpretation of the accounting system. The Tribunal emphasized the lack of evidence for unaccounted sales and the improper inventory process by the search team. The decision highlights the importance of corroborative evidence and proper interpretation of accounting practices in tax assessments.