2022 (7) TMI 550 - AT - Income Tax

Revision u/s 263 by CIT - Direction given by the CIT for making the addition on account of difference in the quantity of stock found as on 1 April 2009 viz a viz 31 March 2009 - HELD THAT - There is no ambiguity to the fact that as a result of survey operation at the premises of the assessee, the difference in the stock was found. Before we touch upon the issue involved on hand, it is pertinent to make a note of the fact that as a result of survey operation, there was found difference in the physical stock viz a viz the stock shown in terms of quantity in the books of accounts. Such difference in the stock was offered by the assessee as income in the income tax return.As far as the difference in the physically stock viz a viz books stock is concerned, the same has been duly adjusted and the same is not in dispute. Likewise, there was no whisper in the order of the ld. CIT to the effect that such stock was sold in the open market without recording the same in the books of accounts. Accordingly, we hold that such difference, in the stock in the case on hand, based on papers cannot be subject to further addition in the hands of the assessee in the absence of tangible materials - addition as made by the CIT is not warranted in the given facts and circumstances until and unless it is supported by the some corroborative evidences. As such the income does not depend on the piece of paper, rather it should be based on the tangible materials in the given facts and circumstances. The assessee in the given facts and circumstances has tried to explain the difference in the quantity of stock as discussed above by producing the agreements in support of his contention that he has borrowed gold loan from the relatives which was recorded in the stock register for the purpose of the quantity and without recording the same in the financial statements. CIT before rejecting the contention of the assessee, he should have called for the parties for the cross verification. But he has not done so. To our understanding, to meet the principles of natural justice, it is necessary upon the authorities before rejecting the claim of the assessee to carry out the necessary verification and due diligence. But in the given facts and circumstances, we find that no confirmation was received from the respective parties from whom the assessee has claimed to have borrowed the gold loan. Maybe, the argument/ the contention of the assessee is not based on the corroborative material and suffers from several infirmities, but to our understanding to meet the end of justice, it becomes qua sine none that the revenue authorities have to carry out the necessary inspection/ verification as deemed necessary before rejecting the claim of the assessee. In the case on hand, CIT has directed to make the addition but we are not inclined to confirm the same in the absence of necessary verification. Thus, in the interest of justice and fair play, we modify the direction of the learned CIT passed under section 263 of the Act. As such we are set aside the issue involved in the appeal before us to the AO for fresh/ de-novo examination of necessary verification without getting influenced by the finding of the learned CIT as well as our observation discussed above. Unaccounted stock found during the survey has been valued without incorporating the making charges/ labour expenses which the assessee must have incurred with respect to the unaccounted gold ornaments/jewelleries - As it seems to us that any addition in the unaccounted stock has tax neutral effect. It is for the reason that the unaccounted stock once has been brought in the books of accounts at a lesser value but corresponding sales would certainly be at a higher value which would offset the labour charges added by the learned CIT in the unaccounted stock. Out of 100 grams of gold, if the assessee makes of sale of 20 grams of gold in the year under consideration, then the assessee will naturally claim lesser expenses against the sale of 20 grams of gold which would result higher income to the assessee. Likewise, the remaining 80 gram of gold will be shown in the books of accounts which will certainly be at the lesser value as it was not inclusive of labour charges. But such closing stock will become the opening stock of the next year, which will reflect greater profit if such stock is sold. However, these facts have not been verified by the learned CIT while directing the AO to make the addition for Rs. 23,59,988.00 representing the labour charges/making charges attributable to such unaccounted stock. We also note that there is no direction given by the learned CIT to give effect of the amount enhanced by adding labour charges /making expenses in the unaccounted stock found during the course of survey while recording the same in the books of accounts. To our understanding, the claim of the assessee cannot be denied without carrying out the necessary independent verification/ examination of the facts and the records. In the case on hand, the learned CIT has directed to make the addition but we are not inclined to confirm the same in the absence of necessary verification. Thus, in the interest of justice and fair play, we modify the direction of the learned CIT passed under section 263 of the Act. As such we are set aside the issue involved in the appeal before us to the AO for fresh/ de-novo examination of necessary verification without getting influenced by the finding of the learned CIT. Addition on account of wrist watches - At the time of survey, the physical stock of the wristwatches were found which was not accounted in the books of accounts. Even the assessee has not recorded the same in the financial statement prepared as on 31.3.2010. As such, the assessee has neither shown the watches in the inventory nor in the schedule of fixed assets. Thus it was noted by CIT that the assessee has been sold in the open market. The assessee has not explained the source of investment in such watches. Therefore, the addition was sustained along with the profit in the hands of the assessee. The finding of the learned CIT has not been controverted by the learned AR for the assessee based on the documentary evidence. There is no force in the argument of the assessee that it does not deal into the business of the wristwatches. Assuming, the contention of the learned AR is to be true, then also the assessee is under the obligation to explain source of investment or prove that the same does not belong to him. But the assessee has failed to do so. No infirmity in the order of the learned CIT passed under section 263 of the Act with respect to the difference found in the physical quantity of stock for the wristwatches. Addition on conversion of capital asset as stock in trade - There remains no ambiguity that the conversion of capital asset into stock in trade is a transfer within the provisions of section 45 of the Act and therefore the same is subject to tax under the head capital gain. But the liability for the tax rises in the year in which such converted stock in trade is sold out. There is no finding of the CIT about the fact whether converted stock in trade was sold. In the absence of such information, the finding of CIT is not sustainable by making the addition in the hands of the assessee. Accordingly, we modify the direction of the learned CIT to the extent that the question of capital gain will arise in the year in which such quantity of converted stock is sold out. Thus, we set aside the finding of the learned CIT and direct the AO to compute the capital gain on the conversion of capital asset into stock in trade in the year in which such stock in trade is sold out to the customers as per the provisions of law. Addition allocating the expenses to the Windmill business - We find that the assessee is claiming that he is maintain the separate books accounts whereas the learned CIT held that the assessee is not maintaining the books of accounts. Thus we find contradiction in the submission of the assessee and the finding of the learned CIT. It is also important note that the assessee has declared the profit respect of windmill business amounting to Rs. 40,10,342.00 which is not possible to workout without maintaining the books of accounts. However, in the interest of justice and fair play we are inclined to set aside the issue to the AO for fresh adjudication as per the provisions of law. Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Difference in the quantity of inventories.
2. Valuation of unaccounted stock including making charges.
3. Valuation of closing stock as per Accounting Standard 2.
4. Unaccounted wristwatches.
5. Conversion of capital asset into stock-in-trade.
6. Allocation of expenses to windmill business.

Detailed Analysis:

Issue 1: Difference in the Quantity of Inventories

The learned CIT identified a discrepancy of 21,590.402 grams of 22 karat gold between the stock register and the financial statements. The assessee explained this difference as gold received from relatives, which was recorded in the stock register but not in the financial books. The CIT rejected this explanation, citing the lack of evidence that the gold was returned and inconsistencies in the assessee's statements during the survey. The Tribunal found that the difference in stock had already been taxed and that the CIT's addition was not warranted without tangible evidence. The Tribunal directed the AO to re-examine the issue with necessary verification.

Issue 2: Valuation of Unaccounted Stock Including Making Charges

The CIT noted that the unaccounted stock found during the survey was valued without considering making charges, which constitute a significant portion of the value. The assessee argued that the valuation was done by a government-approved valuer and included making charges. The Tribunal observed that any addition in the unaccounted stock has a tax-neutral effect, as the corresponding sales would offset the added value. The Tribunal directed the AO to re-examine the issue with necessary verification.

Issue 3: Valuation of Closing Stock as per Accounting Standard 2

The CIT found that the assessee valued the closing stock based on average cost, which is not in line with Accounting Standard 2. The Tribunal noted that the assessee's AR did not contest this direction and agreed with the CIT's decision to set aside the issue for fresh verification by the AO.

Issue 4: Unaccounted Wristwatches

The CIT identified wristwatches worth ?1,78,060 in the inventory during the survey, which were not recorded in the books. The CIT concluded that these were sold without being recorded, adding ?50,250 as gross profit. The Tribunal upheld this addition, noting that the assessee failed to explain the source of investment or prove that the wristwatches did not belong to him.

Issue 5: Conversion of Capital Asset into Stock-in-Trade

The CIT found that the conversion of gold received as a gift into stock-in-trade was not taxed as short-term capital gain. The Tribunal referred to Section 45(2) of the Act, which taxes such conversions when the stock is sold. The Tribunal directed the AO to compute the capital gain in the year the stock is sold, not in the year of conversion.

Issue 6: Allocation of Expenses to Windmill Business

The CIT noted that the assessee did not maintain separate books for the windmill business and allocated only direct expenses, ignoring fixed and variable overheads. The Tribunal found contradictions in the submissions and directed the AO to re-examine the issue, verifying if separate books were maintained and if expenses were correctly allocated.

Conclusion:

The Tribunal partially allowed the appeal for statistical purposes, directing the AO to re-examine several issues with necessary verification and ensuring compliance with legal provisions. The Tribunal emphasized the need for tangible evidence and proper verification before making additions to the assessee's income.