2018 (12) TMI 1206 - AT - Income Tax

Addition on account of deficit in stock - addition was made by the AO by taking the MRP of stock lying at the business premises - difference in computerized sheet as well stock as per physical inventory - Held that - CIT(A) adopted gross profit rate of 55.68% and worked out the cost price at ₹ 13.71 Crores from this calculation cost price of physical inventory taken by the Survey team works out to ₹ 9,01,35,304/- and cost price of computerized sheet as maintained by the assessee comes to ₹ 13,71,90,491/-. Thereafter there remains a difference of ₹ 4,70,55,187/- (Rs.13,71,90,491 - ₹ 9,01,35,304) being deficit in the stock between stock as per assessee s noting in computerized sheet as well stock as per physical inventory taken by the Survey team. CIT(A) further observed that difference between the physical stock of inventory and stock as per notings on computerized sheets was due to various articles given on approval to various parties like Shopper s shop, Promart, Waman HariPethe. The stock given to the above parties . account for about to ₹ 3.22 crores which includes the stock of assessee s shops at R. City Ghatkopar and Borivli worth around ₹ 50 lakhs. Apart from that it was found that the assessee has given articles of ₹ 96 lacs for framing. CIT(A) further observed that complete name and addresses of invoices of all the parties to whom assessee had given goods on approval basis were also given to the Survey Officer on 19/10/2010. Accordingly, after having a detailed calculation, the CIT(A) reached to the conclusion that assessee has explained the difference to the extent of ₹ 4.18 Crores (Rs.3.22 0.96) out of total difference of ₹ 4.70 Crores. Accordingly, the CIT(A) has deleted addition of ₹ 10.07 Crores and upheld addition of ₹ 52.55 Lakhs. It is clear from the order of CIT(A) that all the calculations of deficit in the stock was made are as per material on record. The detailed finding so recorded by CIT(A) has not been controverted by learned DR by bringing any positive material on record. Accordingly, we confirm the action of CIT(A) for deleting the addition and upholding part of the addition to the extent of 52.55 lakhs. There is no infirmity in the finding so recorded by CIT(A), which is as per material on record and therefore do not require any interference on our part - Appeal of the assessee as well as Revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of deficit in stock by CIT(A).
2. Method of valuation or inventory as per 3CD Report.
3. Difference in stock valuation based on MRP versus cost price.
4. Verification and reliability of stock inventory prepared during the survey.
5. Explanation and substantiation of stock deficit by the assessee.

Detailed Analysis:

1. Deletion of Addition on Account of Deficit in Stock by CIT(A):
The Revenue contended that the CIT(A) erred in deleting the addition of ?10,07,03,903/- due to a stock deficit without proper documentary evidence or confirmations from third parties. The CIT(A) observed that the stock difference of ?10,61,71,434/- was based on computerized MRP sheets and not on the actual books of accounts. The CIT(A) noted that the inventory was prepared by the survey team with the help of sales employees who were not authorized to certify the stock value. Furthermore, there was no material evidence of purchases or sales outside the books, and the AO accepted the audited opening stock, closing stock, purchases, and sales without finding any faults. Hence, the CIT(A) concluded that the addition made on mere doubt could not be upheld.

2. Method of Valuation or Inventory as per 3CD Report:
The Revenue argued that the assessee did not explain the method of valuation or inventory as mentioned in the 3CD Report, i.e., cost or net realizable value, whichever is lower under FIFO. The CIT(A) found that the survey party incorrectly calculated the gross profit percentage at 127%, whereas the correct percentage was 55.68%. The CIT(A) adopted the correct gross profit ratio to work out the cost price of the stock, which led to a revised calculation of the stock deficit.

3. Difference in Stock Valuation Based on MRP Versus Cost Price:
The CIT(A) highlighted that the survey team used MRP for stock valuation, which was not reliable. The approved method is to subtract the gross profit from the saleable value/MRP to determine the cost price. The cost price of the physical inventory taken by the survey team was ?9,01,35,304/-, while the cost price as per the computerized sheet was ?13,71,90,491/-, resulting in a difference of ?4,70,55,187/-.

4. Verification and Reliability of Stock Inventory Prepared During the Survey:
The CIT(A) noted that the survey team did not compare the items in the computerized sheet with the physical inventory taken during the survey. The AO did not find any defects in the audited books of accounts, and no material evidence suggested any excess amount passed to the assessee. The CIT(A) emphasized that proper verification and reliable methods were not employed by the survey team and AO, leading to incorrect stock valuation.

5. Explanation and Substantiation of Stock Deficit by the Assessee:
The assessee explained the stock deficit by stating that various articles were given on approval to parties like Shopper's Shop, Promart, and Waman Hari Pethe, accounting for ?3.22 crores, and additional articles worth ?96 lakhs were given for framing. The CIT(A) acknowledged that the assessee provided complete details and invoices of the parties to whom goods were given on approval. The CIT(A) accepted the explanation for the deficit to the extent of ?4.18 crores and treated the remaining ?52,55,187/- as unexplained.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the addition of ?10,07,03,903/- and confirmed the addition of ?52,55,187/-. The tribunal found no infirmity in the CIT(A)'s findings, which were based on material evidence and proper calculations. Both the assessee's and Revenue's appeals were dismissed. The judgment emphasized the importance of reliable stock valuation methods and proper verification during surveys.