2024 (11) TMI 887 - AT - Income Tax

Addition on account of difference between the value of closing stock shown in the return of income and in the statement made to the bank - HELD THAT - We note that the assessee, undoubtedly shown a different value of closing stock to the bank stating to be for availing credit facilities. Admittedly the said value is different from the statement of value of closing stock as annexed to the balance sheet. Neither the bank authorities nor the AO made any effort to verify the actual stock to prove that there is existence of unaccounted stock. In common parlance, under open loan system, the parties tend to inflate figures of quantity of stock as well as rate merely to enjoy higher cash credit limits. Hon ble High Court in N. Swamy 1998 (9) TMI 27 - MADRAS HIGH COURT held that the AO shall consider the material, which is required to be considered for the purpose of assessment. The Assessing Officer shall not consider any statement that might have given to a 3rd party unless there is any material to corroborate the statement given to a 3rd party. Admittedly, nothing was brought on record by the AO that any existence of corroborating value of closing stock given to the bank. We find the burden is on the AO to show that the assessee has undisclosed income and the said burden cannot be said to be discharged by merely referring to the statement given by the assessee to the 3rd party, which is not directly related to the assessment, making the sole foundation for finding merely the assessee has deliberately suppressed income. Thus, we hold the addition made by the Assessing Officer is not justified and the order of the ld. CIT(A) is justified in directing the Assessing officer to consider the value of closing stock of current year as opening stock of subsequent assessment year. Therefore, the Assessing Officer shall consider the value of stock as annexed to balance sheet. Thus, the ground raised by the Revenue fails and are dismissed.

Issues Involved:

1. Delay in filing the appeal by the Revenue.
2. Treatment of non-existing stocks claimed by the assessee for bank loans as opening stock for the next assessment year.
3. Addition of difference in closing stock as undisclosed investment under Section 69 of the Income Tax Act, 1961.
4. The principle of closing stock valuation for one year being the opening stock for the next year.

Issue-wise Detailed Analysis:

1. Delay in Filing the Appeal by the Revenue:

The appeal filed by the Revenue was delayed by 52 days. The Revenue argued that the amended provisions of sub-section (2) of section 158AB of the Income Tax Act, 1961, allow a time limit of 120 days from the date of receipt of the order from the CIT(A) to file an appeal before the Tribunal. The Revenue submitted Form No. 8 and Form No. 8A, which were accepted by the Tribunal, thereby acknowledging that there was no delay in filing the appeal.

2. Treatment of Non-existing Stocks for Bank Loans as Opening Stock for the Next Year:

The core issue raised by the Revenue was the direction given by the CIT(A) to treat the non-existing stocks claimed for bank loans as the opening stock for the next assessment year. The CIT(A) relied on the Supreme Court's decision in VKJ Builders and Contractors Pvt. Ltd. v. CIT, which established that the closing stock of one year should be the opening stock of the next year. The Tribunal noted that this principle is fundamental to accounting and must be followed to ensure consistency. The CIT(A) held that the judgment in VKJ Builders was applicable, despite the Revenue's contention that it was distinguishable due to the context of the KVSS-1998 scheme.

3. Addition of Difference in Closing Stock as Undisclosed Investment:

The Assessing Officer added the difference between the closing stock declared in the income return and that disclosed to the bank as unexplained investment under Section 69 of the Income Tax Act. The CIT(A) confirmed this addition, noting that the assessee had consistently used different stock valuations for bank credit purposes and for the audited balance sheet. The Tribunal, however, found that the Assessing Officer's addition was based solely on the statement given to the bank, a third party, without corroborating evidence of unaccounted stock. The Tribunal emphasized that the burden of proof lies with the Revenue to demonstrate undisclosed income, which was not met in this case.

4. Principle of Closing Stock Valuation:

The Tribunal upheld the principle that the closing stock of one year should automatically become the opening stock of the following year, as reiterated by the Supreme Court in VKJ Builders. The Tribunal found that the CIT(A) was correct in applying this principle, rejecting the Revenue's argument that the case law was not applicable due to the context of Section 69. The Tribunal emphasized that accounting principles must be consistently applied to prevent chaos in financial reporting.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to treat the closing stock of the current year as the opening stock for the subsequent year and rejecting the addition of Rs. 76,28,385 as unexplained investment. The Tribunal reiterated the necessity of adhering to fundamental accounting principles and the requirement for the Revenue to substantiate claims of undisclosed income with corroborative evidence.

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