2021 (11) TMI 323 - AT - Income Tax

Excess stock found during the search - one of the partner of the firm categorically admitted the excess stock in the statements recorded during the search u/s 132(4) of the IT Act - CIT- A deleted the addition - HELD THAT - We found that in search proceedings the authorized officer found no excess stock in quantity and no excess stock in quantity was determined. Total value of stock of all the items of gold jewellery and gold jewellery studded with precious semi-precious stones was determined by the valuer at the prevailing rate of gold and precious stones as on 28-01-2016 i.e. as on the date of search. Correct excess value of closing stock as on the date of search works out to ₹ 2,83,49,302/- in place of ₹ 5,64,20,450/- determined and mentioned in the statement recorded u/s 132 (4) - statement of assessee recorded u/s 132 (4) is wrong to the above extent i.e. instead of correct excess stock of ₹ 2,83,49,362/- the wrongly calculated excess stock of ₹ 5,64,20,450/- by authorized officer in search was admitted as excess stock as additional income of the year and surrendered to tax. Thus there is no retraction but what assessee firm did is simply to correct calculation mistake and accepted his statement u/s 132 (4) in toto. AO is wrong in not allowing gross profit margin @ 9.50% which was claimed as per last year G.P. rate. The assessee has not specifically asked for allowance of discount element but as a general trade practice referred to bargaining discounts being allowed which Ld. A.O. not accepted. As for reduction of G.P. margin from market value of stock the. A.O. has not stated any thing in assessment order which is allowable in law to assessee and in fact the authorized officers in search and A.O. in assessment themselves in various similar cases (Bhura Mal Raj Mal Surana P. Ltd., Bhuramal Raj Mal Surana (Mfg.). Chandra Kumar Surana A.Y. 2015-16 passed by same AO - appeals heard by ld. CIT(A)-iv, Jaipur has allowed deduction of margin of G.P. from valuation made by approved valuer. A.O. is therefore wrong and incorrect in law in not allowing the said deduction of said G.P. margin of 9.50% from valuation of stock done by valuer at market value on the date of search. The allowance of said G.P. margin will result in excess stock as on date of search as given above which assessee declared as its additional income in return filed and paid tax. AO has not held that there was any difference in quantity of stock as per valuation report and as per hooks of accounts. There can be no addition simply on the basis of valuation unless excess quantity of stock is found. If such addition is somehow made on account of said valuation of stock and sustained in assessment than credit of same has to be allowed in year end while computing profit at year end which has not been allowed and as assessing officer accepted declared closing stock as on 31-3-2016 in books of accounts the addition of difference in value as on 28-01-2016 will got set off the assessee carried forward the closing stock of this year end as declared in books of accounts as on stock for next year. A.O. neither allowed credit of difference while accepting closing stock at year end but accepted closing stock declared by the assessee which has been taken as op. stock in next year. In next year also no credit allowed for enhanced stock and even if it is done it will be revenue neutral exercise. Considering the totality of facts and circumstances, we are of the view that the ld. CIT(A) has passed a well-reasoned order and no new facts or circumstances have been brought before us by the ld DR in order to controvert or rebut the factual findings so recorded by the ld. CIT(A), therefore, we see no reason to interfere into or deviate from the findings so recorded by the ld. CIT(A) qua this issue and we uphold the same. A.O. has not held that there was any difference in quantity of stock as per valuation report and as per hooks of accounts. There can be no addition simply on the basis of valuation unless excess quantity of stock is found. If such addition is somehow made on account of said valuation of stock and sustained in assessment than credit of same has to be allowed in year end while computing profit at year end which has not been allowed and as assessing officer accepted declared closing stock as on 31-3-2016 in books of accounts the addition of difference in value as on 28-01-2016 will got set off the assessee carried forward the closing stock of this year end as declared in books of accounts as on stock for next year - A.O. neither allowed credit of difference while accepting closing stock at year end but accepted closing stock declared by the assessee which has been taken as op. stock in next year. In next year also no credit allowed for enhanced stock and even if it is done it will be revenue neutral exercise. CIT(A) has passed a well-reasoned order and no new facts or circumstances have been brought before us by the ld DR in order to controvert or rebut the factual findings so recorded by the ld. CIT(A), therefore, we see no reason to interfere into or deviate from the findings so recorded by the ld. CIT(A) qua this issue and we uphold the same. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of ?2,12,54,055/- on account of excess stock found during the search.
2. Correctness of the valuation method used for stock during the search.
3. Application of Gross Profit (G.P.) margin to the market value of stock.
4. Revenue neutrality of stock valuation adjustments.

Issue-wise Detailed Analysis:

1. Deletion of ?2,12,54,055/- on account of excess stock found during the search:
The Revenue challenged the deletion of ?2,12,54,055/- by the CIT(A), arguing that one partner admitted to excess stock of ?5,64,20,450/- during the search. The Tribunal upheld the CIT(A)'s decision, noting that the valuation of the stock should consider the G.P. margin, which the Assessing Officer (A.O.) failed to do. The CIT(A) found that the correct excess stock was ?2,83,49,362/- after applying the G.P. margin, which the assessee had already included in its return.

2. Correctness of the valuation method used for stock during the search:
The Tribunal observed that the valuer determined the stock's market value as of the search date, which included the dealer's profit margin. The A.O. did not adjust this market value to reflect the cost price, leading to an inflated excess stock value. The CIT(A) corrected this by applying a G.P. margin of 9.5%, aligning the valuation with the cost price method used in the assessee's books.

3. Application of Gross Profit (G.P.) margin to the market value of stock:
The Tribunal agreed with the CIT(A) that the market value should be reduced by the G.P. margin to determine the cost price. The A.O. failed to provide reasons for not allowing this deduction. The CIT(A) applied a G.P. margin of 9.5%, based on the assessee's historical G.P. rates, resulting in a corrected excess stock value of ?2,83,49,362/-, which the assessee had already declared.

4. Revenue neutrality of stock valuation adjustments:
The Tribunal noted that even if the addition was made based on the stock valuation, it would be revenue-neutral. Any increase in closing stock value would be offset by an increase in opening stock value in the following year, as supported by precedents in cases like Manoj Kumar Johari and Paras Mal Jain. The CIT(A)'s decision was consistent with these principles, ensuring no unjustified tax burden.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the correct excess stock value was ?2,83,49,362/- after applying the G.P. margin. The A.O.'s addition of ?2,12,54,055/- was deleted, as it was not supported by proper valuation adjustments and would result in revenue neutrality. The appeal by the Revenue was dismissed.