2017 (12) TMI 577 - AT - Income Tax

Addition towards suppression of gross profit - stock valuation - Held that - In the instant case, the assessee filed monthly VAT returns based on the same books of accounts and the same was accepted without making any additions. Neither the bank authorities nor the A.O. made any effort to verify the actual stock to prove that there is existence of unaccounted stock under these circumstances and consistent with the view taken by the ITAT and various High Courts, we hold that the A.O. has not made out a case for making an addition referable to unaccounted stock as well as determining the profit on the alleged sale of such unaccounted stock. Under the circumstances, we uphold the order passed by the Ld. CIT(A). Similarly, with regard to the estimate of gross profit, there cannot be any uniform basis for estimating gross profit. There is no dispute with regard to the fact that there were deficiencies in the maintenance of books of accounts. When the A.O. as well as CIT(A) agreed on this issue, it may not be proper to substitute the case of the A.O. by an Appellate Authority, without any cogent reasons. Since the A.O. followed an acceptable basis such as averaging the 3 years profit rate, we are of the view that the order of the Ld. CIT(A) on this aspect deserves to be modified and we uphold the order of the A.O. of estimating the average rate of 36.85%. - Decided partly in favour of revenue.

Issues Involved:
1. Erroneous order by CIT(A).
2. Verification of stock by bank authorities.
3. Absence of stock register.
4. Application of legal precedents.
5. Evidence of motivated bank statements.
6. Addition of unaccounted investment in stock.
7. Suppression in gross profit.

Detailed Analysis:

1. Erroneous Order by CIT(A):
The revenue contended that the CIT(A)'s order was erroneous, but the Tribunal emphasized that under Rule 8 of the Appellate Tribunal Rules, 1962, the grounds should be concise and not argumentative. The Tribunal disallowed ground No.6 and the statement of facts filed by the revenue, granting the departmental representative full opportunity to present the case.

2. Verification of Stock by Bank Authorities:
The CIT(A) observed there was no evidence that the bank authorities verified the stock. The Tribunal noted that the stock shown to the bank was to satisfy the drawing power from the bank and that the A.O. did not provide corroborative evidence such as purchase/sale invoices not reflected in the books. The Tribunal upheld the CIT(A)'s decision, stating the A.O. did not prove the existence of unaccounted stock.

3. Absence of Stock Register:
The A.O. highlighted the absence of a stock register, certified by the auditor, and shifted the onus to the assessee to prove the unaccounted stock. The CIT(A) found that the A.O. should have brought corroborative evidence like abnormal increases in production costs or unaccounted purchase/sale bills. The Tribunal agreed, noting that the books of accounts were in line with VAT returns and no unaccounted stock was found.

4. Application of Legal Precedents:
The A.O. relied on the Supreme Court decision in Chuharmal Vs. CIT and the Madras High Court decision in Coimbatore Spg. & Wvg. Co. Ltd. Vs. CIT. The Tribunal acknowledged these precedents but emphasized that the burden of proof lies on the assessee to prove the correctness of the stock value in the books. The Tribunal found that the A.O. did not verify the actual stock and thus, the addition was not justified.

5. Evidence of Motivated Bank Statements:
The assessee argued that the stock statements given to the bank were inflated to avail higher overdraft facilities. The CIT(A) accepted this explanation, noting the lack of evidence of unaccounted stock. The Tribunal upheld this view, stating that the A.O. did not provide evidence of unaccounted stock or sales.

6. Addition of Unaccounted Investment in Stock:
The A.O. added ?23,59,339 as unaccounted investment in stock based on the difference in stock value reported to the bank and recorded in the books. The CIT(A) deleted this addition, stating the A.O. did not bring corroborative evidence. The Tribunal upheld this decision, noting the absence of unaccounted stock verification.

7. Suppression in Gross Profit:
The A.O. added ?2,74,153 and ?8,69,416 towards suppression in gross profit by averaging the gross profit rates of three years. The CIT(A) directed the A.O. to estimate the profit at 36.50%, in line with the previous year. The Tribunal modified this, upholding the A.O.'s method of averaging the gross profit rate at 36.85%, as it was a well-established procedure.

Conclusion:
The Tribunal partly allowed the revenue's appeal, upholding the A.O.'s method for estimating gross profit but agreeing with the CIT(A) on the deletion of the addition for unaccounted stock. The judgment emphasized the importance of corroborative evidence and proper verification in tax assessments.

← Previous Next →