2024 (12) TMI 1214 - AT - Income Tax

Valuation of Excess Stock found during Survey - addition u/s 69 - Assessee is in appeal objected to the excess quantity determined by the CIT(A) with the plea that the assessee was holding at the time of survey 213 gms. Of 22 K jewellery kept for repair work which was also included in the above said excess stock. He prayed that above said amount must be removed from the excess stock HELD THAT - CIT(A) has considered the difference in physical stock. After considering both the parties it is also a fact on record and the nature of business of the assessee that there are certain jewellery which may be kept for the purpose for repair purpose. In our view assessee should have brought to the notice of the officers at the time of survey itself. Since the nature of business demands that certain jewellery may be kept for repair purpose which could not be denied. For the sake of substantial justice, in our considered view, the difference claimed by the assessee is only Rs. 6,54,853/-, we are inclined to give the benefit of doubt to the assessee to the extent of 50% of the above value. Therefore, we direct the AO to reduce the same from the amount sustained by the CIT(A) i.e. Rs. 36,82,978/-. Short quantity found during the survey - CIT(A) has adopted gross profit at 25%, which, in our considered view, is excessive. We may have to determine the gross profit relevant to the assessee for the year under consideration. On careful consideration we observe from the Balance-Sheet submitted by the assessee wherein assessee has achieved Rs. 2,34,96,286/- over the sales of Rs. 18,46,56,857/- gross profit @ 12.72%. Since the AO has accepted the result furnished by the assessee and we are aware that the gross profit may differ from item to item, however, it is difficult to determine at this stage. Therefore, we are inclined to direct the AO to adopt the gross profit rate at 12.72% of the value of short stock determined by the CIT(A) i.e. at Rs. 9,19,350/-. With the above observation we are inclined to partly allow the grounds raised by the assessee. Appeal filed by the assessee is partly allowed.

Issues Involved:

1. Discrepancy in stock valuation during the survey.
2. Addition of unexplained investment under Section 69 of the Income Tax Act.
3. Estimation of gross profit on alleged undisclosed sales.
4. Valuation discrepancies and treatment of repair stock.

Issue-wise Detailed Analysis:

1. Discrepancy in Stock Valuation:

The primary issue in the case was the discrepancy found between the physical stock and the stock recorded in the books of the assessee during a survey conducted at the business premises. The physical stock was valued at Rs. 11,73,79,299/- by a Government Registered Valuer, whereas the stock as per the books was valued at Rs. 9,29,21,209/-, resulting in a difference of Rs. 2,44,58,090/-. The assessee provided explanations for this discrepancy, including unentered purchase bills, valuation differences due to current market rates, and stock held for repair work. However, the Assessing Officer rejected these explanations, citing a lack of evidence and discrepancies in the statements made by the assessee during the survey.

2. Addition of Unexplained Investment under Section 69:

The Assessing Officer added Rs. 2,44,58,090/- as unexplained investment under Section 69, which was contested by the assessee. Upon appeal, the CIT(A) partially accepted the assessee's explanations, particularly regarding the unentered purchase bills, and recalculated the excess stock. The CIT(A) determined the unexplained investment to be Rs. 40,10,403/- after adjusting for the 4 purchase bills that were not initially recorded in the books but were substantiated by confirmations and banking transactions. The CIT(A) also considered the valuation of excess stock at market value, as determined by the registered valuer, rather than the purchase price due to the inability to identify item-wise purchase dates.

3. Estimation of Gross Profit on Alleged Undisclosed Sales:

The CIT(A) observed a shortage of stock in the categories of diamonds and silver, indicating possible out-of-books sales. Consequently, the CIT(A) estimated the gross profit on these alleged sales at 25% and added Rs. 18,06,901/- as undisclosed income. The assessee argued against this estimation, suggesting that the gross profit rate was excessive and not reflective of actual business operations. The tribunal, upon reviewing the case, directed the Assessing Officer to adopt a lower gross profit rate of 12.72%, which was consistent with the gross profit rate achieved by the assessee in the financial year under consideration.

4. Valuation Discrepancies and Treatment of Repair Stock:

The assessee contended that a portion of the excess stock consisted of jewellery held for repair, which should not have been included in the excess stock valuation. The tribunal acknowledged the nature of the business and the possibility of holding stock for repair purposes. Therefore, it granted a partial relief by reducing the excess stock valuation by 50% of the claimed repair stock value. Additionally, the tribunal upheld the valuation rates applied by the Department's valuer for the short stock, rejecting the assessee's proposed average purchase costs due to lack of verification.

Conclusion:

The tribunal partly allowed the appeal, granting relief by adjusting the valuation of excess stock for repair items and reducing the gross profit rate applied to the alleged undisclosed sales. The tribunal's decision emphasized the importance of substantiating claims with evidence and the necessity of considering the nature of business operations in tax assessments. The appeal was thus partly allowed, with directions for the Assessing Officer to adjust the calculations as per the tribunal's findings.

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