2015 (9) TMI 907 - AT - Income Tax

Addition to the closing stock adopting cost of goods at the year end instead of adopting cost or realizable value followed by the assessee - Held that - The assessee has valued the unsold stock by discounting purchase price at fixed percentage considering the age of the stock. However, this method of reduction is not following year by year. As seen from the above table, in the assessment year 2009-10, the assessee adopted the reduction of value of purchase price at 25%, when the stock is one year old. However, for the assessment year 2008-09, it was 50%, for the assessment year 2007-08 again 25% and for the assessment year 2006-07, the same was 50%. There is no explanation for such kind of arbitrary reduction of either 25% or 50%. There is no consistency in the method followed by the assessee for valuing the closing stock. The closing stock is to be valued at market price or cost whichever is less and that should be consistent from year to year. The assessee is not disputed that it has been followed the same method. However, consequent to search action, the assessee wanted to change the method of stock valuation for the first time, which is nothing but an after-thought so as to reduce the income which cannot be permitted at this point of time. - Decided against assessee. Disallowance of lease commitment charges - Held that - tThough the assessee pleaded that the expenses were incurred for the purpose of business, absolutely nothing on record to indicate that the assessee did acquire any business advantage out of such expenditure. We do not find any expenses allowable under sec.37(1) of the Act and the assessee failed to explain that how it gained some business advantage by incurring that expenditure. Therefore, we are not inclined to uphold the argument of the ld. AR and we agree with the finding of the CIT(Appeals).- Decided against assessee. Regarding donations the assessee along with other partners paid ₹ 30 lakhs to two temples, viz., Mutharaman Temple, Palai and U & U Kattalai, Palai. The share of the assessee s donation out of these, is ₹ 40,024/- and it cannot be allowed, as the same is added and the CIT(Appeals) has confirmed the same. Since, the assessee has not paid lease commitment charges, we reject this ground.- Decided against assessee. Addition towards stock discrepancy - Held that - The physical stock of goods lying in Vannarapettai shop and also town shop was taken with the active participation of their staff under their own supervision and valuation thereof has also been checked, the same is found to be correct. Hence, subject to any duplicate entries or change in the dates as stated above, he accepted the value of excess stock found during the course of search to be out of their unrecorded income and agreed to pay the income-tax due on such income for the year. During the course of investigation vide letter dated 10.8.2009 submitted to the ADIT (Investigation) by Sri Shiva Kumar, no specific arguments relating to the figures of stock were raised except pointing out that the physical stock at Tirunelveli was mentioned in the tabulation reflecting the physical stock for the group as a whole. The said mistake was rectified by the AO while passing the order. The AO after considering the entire facts of the case, added ₹ 9,43,980/- as discrepancy found in the stock for this assessment year at Chennai Branch and determined at ₹ 1,11,827/- at Tirunelveli Branch and the same was brought to tax as unrecorded sales. No infirmity in the orders of the lower authorities - Decided against assessee. Allowing the claim of repairs on hired building - revenue expenditure or capital expenditure - Held that - n order to find out the nature of expenditure, it is necessary to find out the nature of construction put up, the purpose of construction/renovation and the use to which the construction put up and also if it is a case of repair, replacement, addition or improvement has to be gone into. It is only on the aforesaid material, keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act, that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the nature of civil works constructed, the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind, the assessing authority proceeded on the footing that the expenditure constituted capital expenditure. We remit the issue in dispute to AO to consider whether the expenditure is revenue or capital in nature and decide afresh - Decided in favour of assessee for statsitical purposes. Addition on account of expenditure by way of sundry supply to staff found to have been vouched by self-made vouchers - assessment u/s 153A - Held that - While making the above additions, the AO has not established that there is incriminating material discovered during the course of search. Being so, in our opinion, when the original assessment has been completed u/s.143(3), the addition can be made on the basis of incriminating material found during the course of search. Admittedly, in this case, there is no mention of any incriminating material discovered during the course of search warranting addition, placing reliance on the order of the Special Bench in the case of Cargo Global Logistics Ltd. vs. DCIT (2012 (7) TMI 222 - ITAT MUMBAI(SB)), we are inclined to uphold the argument of the ld. AR. - Decided in favour of assessee. Unexplained expenditure u/s.69C - Held that - This is a search assessment. The AO made an estimation of drawings. Without any incriminating material found during the search, the AO cannot make addition on account of poor cash drawings of the assessee. In such circumstances, it is not possible to sustain the addition made by the AO and confirmed by the CIT(Appeals). - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition to the closing stock adopting cost of goods at the year-end.
2. Disallowance of lease commitment charges and donations.
3. Stock discrepancy at the time of search.
4. Allowing the claim of repairs on hired building as revenue expenditure.
5. Validity of assessment in the absence of incriminating material.
6. Addition of unexplained expenditure.
7. Disallowance of expenditure towards repairs.
8. Claim of set-off of brought forward loss.
9. Addition towards unrecorded sales and unexplained investment.
10. Addition of unexplained money.
11. Addition of unexplained jewelry.

Detailed Analysis:

1. Addition to the Closing Stock Adopting Cost of Goods at the Year-End:
The primary issue was whether the closing stock should be valued at cost or realizable value. The assessee argued for valuation based on a fixed percentage reduction considering the age of the stock. However, this method was inconsistent year by year, and the court found no justification for such arbitrary reductions. The court held that the closing stock should be valued consistently at market price or cost, whichever is lower. The court rejected the assessee's ground and upheld the addition to the closing stock.

2. Disallowance of Lease Commitment Charges and Donations:
The assessee claimed lease commitment charges and donations as business expenditures. The court found that the assessee did not incur the expenditure itself and that the payments were made by an individual, Shri Mahesh. The court concluded that the expenditure was not incurred wholly and exclusively for business purposes and did not provide any business advantage. Thus, the court confirmed the disallowance of lease commitment charges and donations.

3. Stock Discrepancy at the Time of Search:
During the search, discrepancies were found between the physical inventory and the stock as per the books of accounts. The assessee admitted to a deficit stock and discrepancies in stock valuation. The court found that the discrepancies were due to unrecorded sales and unexplained investments. The court upheld the addition towards unrecorded sales and unexplained investments.

4. Allowing the Claim of Repairs on Hired Building as Revenue Expenditure:
The court considered whether the expenditure on repairs and renovation of a leased building was a capital or revenue expenditure. The court referred to the Explanation 1 to Section 32(1) and previous case laws, concluding that the nature of the expenditure should be determined based on the purpose and use of the construction. The court remitted the issue back to the Assessing Officer (AO) for fresh consideration.

5. Validity of Assessment in the Absence of Incriminating Material:
The assessee argued that the assessment for the year under consideration was a 'completed assessment' and could only be disturbed based on incriminating material found during the search. The court noted that the AO did not establish any incriminating material discovered during the search. Therefore, the court upheld the assessee's argument and allowed this ground.

6. Addition of Unexplained Expenditure:
The AO estimated the probable expenditure and found the withdrawals insufficient, leading to an addition for unexplained expenditure. The court noted that without any incriminating material found during the search, the AO could not make such an addition. The court deleted the addition for unexplained expenditure.

7. Disallowance of Expenditure Towards Repairs:
The lower authorities disallowed the claim of repairs due to a lack of supporting bills. The court found that most payments were made by cheque or draft and accepted by the AO during remand proceedings. The court remitted this issue back to the AO for fresh consideration.

8. Claim of Set-Off of Brought Forward Loss:
The assessee raised the issue of set-off of brought forward loss, which was not considered by the lower authorities. The court directed the AO to consider this issue afresh.

9. Addition Towards Unrecorded Sales and Unexplained Investment:
The court found discrepancies between the physical inventory and the books of accounts, leading to additions for unrecorded sales and unexplained investments. The court upheld these additions based on the evidence and statements recorded during the search.

10. Addition of Unexplained Money:
During the search, cash was found at the assessee's residence. The assessee explained part of the cash as gifts and savings. The court directed the AO to consider the opening balance and then decide on the excess cash. The court partly allowed this ground.

11. Addition of Unexplained Jewelry:
The court found no specific grounds raised by the assessee regarding unexplained jewelry. Therefore, the court dismissed this ground.

Conclusion:
The appeals were disposed of with various grounds being dismissed, partly allowed, or remitted back to the AO for fresh consideration based on the detailed analysis of each issue. The court's decision emphasized the need for consistency in stock valuation, proper justification for business expenditures, and the requirement of incriminating material for additions in search assessments.