2013 (12) TMI 1167 - HC - Income Tax

Addition on account of unverified stock - Held that - The CIT has observed the report of auditor - The Auditor has pointed out that the stores have not been physically verified in the constituent units and reconciled with the book value exhibited in the balance-sheet - There has been no adverse comments as regards the purchases from the consumption disclosed - The addition was deleted by CIT(A) as well as Tribunal. Addition on account of value of scrap recorded in books - Held that - The assessee has not maintained any details of scrap and its value - The availability of the scrap was not denied - The assessee has regularly been following the particular method of accounting, the addition made on the basis of the estimates and conjectures cannot be justified - Both the additions were made on estimate basis - Estimation is a question of fact - No question of law is emerging from both the proposed questions by the Department - Decided against Revenue.

Summary

Issues:
1. Interpretation of additions made by Assessing Officer (AO) on estimate basis.
2. Justification of deletions by first appellate authority and confirmation by Tribunal.
3. Rejection of reference application by High Court based on well-settled legal position.

Analysis:

1. The case involves a State Government Undertaking being assessed as a Public Limited Company under the mercantile method of accounting for the assessment year 1977-78. The AO made additions of Rs.2,00,000 for unverified stocks and Rs.70,00,000 for the value of scrap. The first appellate authority deleted both additions, citing lack of physical verification of stocks and absence of details for scrap valuation. The Tribunal upheld these deletions.

2. Regarding the addition of Rs.2,00,000 for unverified stocks, the AO based the estimate on non-verifiable nature of store items and expenses. However, the first appellate authority noted that the Auditor did not raise concerns about purchases from disclosed consumption, leading to the deletion of this addition. Similarly, the Rs.70,00,000 addition for scrap value was made by the AO due to the lack of detailed records. The CIT(A) found that the availability of scrap was not disputed and the issue was related to accounting methods. Since the assessee consistently followed a specific accounting method, the addition based on estimates was deemed unjustified. The Tribunal concurred, emphasizing that the additions were speculative.

3. The High Court rejected the reference application by the Department, as no legal issues arose from the proposed questions. The Court affirmed the Tribunal's decision, highlighting that both additions were made on an estimate basis. Citing established legal principles from various judgments, the Court concluded that estimation is a factual matter. Therefore, the Court upheld the Tribunal's order from 26.06.1989, confirming the rejection of the reference application.

In summary, the judgment delves into the assessment of additions made by the AO on an estimate basis, the subsequent deletions by the first appellate authority, and the Tribunal's confirmation of these deletions. The High Court ultimately rejected the Department's reference application, emphasizing the factual nature of estimations and the absence of legal issues warranting further consideration.