2022 (6) TMI 223 - AT - Income Tax

Under valuation of closing stock of rice - improper maintenance of stock register by the assessee-firm - unable to produce quality-wise closing stock before the Ld. AO - as per AO Quality of rice is not mentioned in stock register maintained by the assessee, purchase bills, most of sale bills, stock statement furnished to the bank and audit report filed by the assessee - CIT-A deleted the addition - HELD THAT - The assessee-firm was unable to explain the valuation of quality wise closing stock of rice. The valuation of assessee-firm was submitted in Bank which was on basis of average rate of rice paddy. This valuation submitted in bank is not supported in books of accounts. Respectful observation in the case of CIT(Central) Gurgaon v. Sheena Exports 2012 (4) TMI 465 - PUNJAB AND HARYANA HIGH COURT that stock statement submitted in is unverified. The assessee later on through its regular books day to day stock register had substantiated its claim related valuation of stock. Here is the lack of explanation before the Assessing Authority. CIT(A) also failed plug of the lacuna in factual matrix. The Ld. CIT-DR pointed out the documents are accepted by the Ld. CIT(A) without allowing opportunity to the Ld. AO. The additional evidence was accepted without considering legal provision. He prayed for sending back the matter to the Ld. Assessing Authority for proper verification of stock. On other hand, the method of valuation was adopted by the Ld. AO in closing stock that should be considered to opening stock also. So, both the valuation of opening and closing stock will be in the order. The asses see-firm should get proper opportunity to explain its method of valuation before the Ld. AO. The impugned order is set aside and the matter is restored back to Ld. AO for denovo adjudication after considering the assessee's evidences. The assessee, in turn, is directed to substantiate its case - Appeal of revenue allowed for statistical purposes.

Issues Involved:
1. Justification of deletion of the addition of Rs. 4,23,32,795/- on account of under-valuation of closing stock of rice.
2. Maintenance and verification of quality-wise stock details.
3. Acceptance of additional evidence by the CIT(A) without allowing the Assessing Officer (AO) to verify.
4. Use of bank stock statements for valuation purposes.
5. Consistency in the method of valuation of opening and closing stock.

Issue-Wise Detailed Analysis:

1. Justification of Deletion of Addition:
The Revenue challenged the deletion of the addition of Rs. 4,23,32,795/- made by the AO for under-valuation of closing stock of rice. The AO revalued the closing stock based on the average rate of rice in stock statements furnished to the bank, leading to an addition of Rs. 4,23,32,795/- to the total income of the assessee. The CIT(A) deleted this addition, stating that the closing stock of the previous year, which was accepted by the department, could not be challenged without supporting evidence.

2. Maintenance and Verification of Quality-wise Stock Details:
The AO contended that the assessee did not maintain quality-wise stock details of rice, which made it difficult to ascertain the quantity and quality of stock at any point in time. The AO argued that the stock register, purchase bills, and stock statements furnished to the bank did not mention the quality of rice, which led to the conclusion that the assessee under-valued its closing stock.

3. Acceptance of Additional Evidence by CIT(A):
The CIT(A) accepted additional evidence submitted by the assessee without providing the AO with a reasonable opportunity to verify the documents. The CIT-DR argued that this denied the AO a fair chance to examine the evidence, and the order of the CIT(A) was non-reasoned and lacked basis for valuation.

4. Use of Bank Stock Statements for Valuation Purposes:
The AO used the average rate of rice reported in stock statements furnished to the bank for valuation purposes. The CIT(A) rejected this approach, citing judicial precedents that held stock statements submitted to banks as unreliable for income tax purposes. The CIT(A) referenced several court decisions, including CIT vs. Veerdip Roller (P) Ltd. and CIT vs. Sidhu Rice & General Mills, which supported the view that bank stock statements should not be used for valuation.

5. Consistency in Method of Valuation of Opening and Closing Stock:
The CIT(A) emphasized that the closing stock of the previous year, which was accepted by the department, should be consistent with the opening stock of the current year. The CIT(A) held that the AO could not reject the opening stock valuation without supporting evidence, and the method of valuation adopted by the AO for closing stock should also apply to opening stock.

Conclusion:
The Tribunal found that the assessee-firm failed to explain the valuation of quality-wise closing stock of rice and that the valuation submitted to the bank was not supported in the books of accounts. The Tribunal noted that the CIT(A) did not address the factual discrepancies pointed out by the AO and accepted additional evidence without allowing the AO to verify it. Consequently, the Tribunal set aside the impugned order and restored the matter to the AO for a denovo adjudication, directing the assessee to substantiate its case with proper evidence and ensuring that the AO is given adequate opportunity to verify the stock valuation. The appeal of the Revenue was allowed for statistical purposes.

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