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TMI Blog2013 (11) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Main Warehouse and a Service Centre at Rajkot in the State of Gujarat. It also conducts its trading business through boutiques situated at prime locations in main cities of India and a service centre at Rajkot. The entire stock, dead stock, defective stock and discarded stock are handled at the aforesaid Head Office, Main Warehouse and Service Centre at Rajkot. The stock consists of more than 30,000 pieces in more than 1000 different Indents. The centralized stock records are accordingly maintained at the Head Office situated at Rajkot. The Additional Director of Income-tax (Inv.), Rajkot carried out survey operation under section 133A of the Income-tax Act 1961 (the Act) at the five business premises of the assessee including Boutiques at Mumbai, Bangalore and New Delhi and two premises at Rajkot on 29/30th November 2005 during the course of which the survey team verified the stocks at Central Warehouse at Rajkot as well as at Boutiques at Mumbai, Bangalore and New Delhi. Based on the said verification, the discrepancy was ascertained at Central Warehouse at Rajkot between the book balance as per computer records and physical balance. No discrepancy was ascertained in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and managing director of the company and the same is binding on us". Mr. Pankaj R. Shah, Executive Director of the assessee company thus agreed to declare unrecorded income of Rs. 2 crores (net of expenses) in his statement recorded on account of the aforesaid discrepancy in stock for the financial year 2005-2006 relevant to assessment year 2006-2007 in addition to income as reflected as per books of account. 4. The assessee company however did not include the aforesaid additional income in the Return of Income furnished for the year under consideration. It was therefore called upon by the AO to explain the reasons for the same. In reply, the assessee vide letter dt. 15.11.2008 offered its explanation as under:- Survey Proceedings: I.T department carried out survey on 29th/30th November 05. We were informed by the survey team that objective and main focus of the survey being carried out through out the country was to acquire information about the customers who are high spenders purchasing high value luxury products. In accordance with said aim and intention, I.T survey team investigated all documents at our head office at Rajkot and also at our busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of goods supplied on consignment basis. c) The effect in respect of the goods booked as purchase but not arrived at warehouse. d) The effects of stock transfer memos. e) The survey team had not gone to our service centre just adjacent to our Head Office where many products were lying for repairs, rectification and servicing from stock. Discrepancy in MRP Discrepancy calculated in MRP is not correct as MRP on certain out-dated, non-moving, slow moving and damaged products becomes rather redundant. Such products are offered at an unusual higher discount for bulk corporate orders. For example, entire collection of Jungle Eye model, MRP shown in price list is much more higher as compared to a price at which we offer the same for sale. Income considered un-accounted: We had requested the survey team to allow us to reconcile discrepancy in stock that they observed and recorded. However, this request was not considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 about all the documents seized during the survey and each document was co-related with the books of accounts & records maintained by us. Legal reliance In the context of above submissions, our legal reliance may kindly be considered on the following cases (Retraction of statement): 1. Deepchand & Co. v/s ACIT 51 TTJ (Bom) 421 2. Govind Ram Chhugani v/s ACIT (2002) 7 TTJ (Jd) 339. 3. Kerala High Court 263 ITR 101 4. Baldev Krishna Kapoor v/s ACIT 68 ITD 37 (Ahd) 5. CIT v/s Christian Mica Ind. Ltd. 109 ITR 324 6. ACIT v/s Shushiladevi Agarwal 50 ITD 524 (Ahd). 7. Maganbhai Bacharbhai Patel v/s ITO 51 TTJ (Ahd) 215. I.T Return for A. Y. 2006 - 07: In view of the facts and submission stated hereinabove, an additional income disclosed during the course of survey was not take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k not verified by the survey team as per letter dated 7th December, 2005 of the assessee 4,45,33,400/- (c) Difference being unaccounted income 1,84,83,990/- (d) MRP value of excess stock represented by unrecorded purchases 25,45,670/- Total addition made 2,10,29,660/- 6. The addition made by the AO on account of deficit in stock as above was disputed by the assessee in the appeal filed before the ld. CIT(A) and a detailed submission was made by the assessee before the ld CIT(A) on this issue vide letter dated 18th February, 2010 which was as under: (a) The AO has ignored reconciliation submitted by the assessee in a summary manner. (b) The AO has given weightage only to the statement recorded of Mr. Pankaj R. Shah in the course of survey action for declaration of unrecorded income of Rs. 2 crores. (c) Retraction made by Mr. Pankaj R. Shah of the said declaration of income, within reasonable time, is rejected without assigning reasons. (d) Opinion formed by the AO that "Discrepancy" ascertained in the course of survey action represents unrecorded sales and purchases made by the assessee. The said opinion is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Many a times the products are sold at a price lower than the MRP on account of numerous reasons inclusive of the scheme offered from time to time for sale of regular products/ products which are out of demand and other business compulsions. (d) Respective Boutiques are attended and managed by the employees of the assessee. Collection made at Boutiques is transferred to Head Office through banking channels by use of centralized collection mechanism of the Bank. (e) Looking to the number of Boutiques the assessee has all over India, it is impossible for any business man to indulge into malpractice of making unrecorded purchases and unrecorded sales. (f) Neither the survey team nor the A.O. has demonstrated/ established to substantiate that the deficit/excess ascertained in the course of survey action of the inventory balances upon its physical verification represents undisclosed income of the assessee. (g) Hence, the addition made to income is based on surmises and conjectures. (h) Even in the normal circumstances, undertaking of physical verification of inventory can result into ascertainment of discrepancy. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted, it is observed that several consumable items were discarded prior to the survey action in terms of the guidelines given by Montblanc (the supplier), but remained to be accounted for in the inventory records. I fail to get convinced with this explanation given by the assessee. Normally, when the items of inventory which are determined as unserviceable and are discarded, prudence requires of incorporating such act in the inventory records if not immediately, but within a reasonable time. Further, the assessee is in the business of these products since many years past. Discarding of consumable items as explained by the assessee is business necessity. Hence, I failed to understand why Mr. Pankaj R. Shah, an Executive Director of the assessee whose statement was recorded by the survey team did not bring this aspect to the notice of the survey team. No satisfactory answer has emerged in this regard. Hence, the Reconciliation covered by Annexure-H forming part of Annexure - IID of the Compilation No.1 is rejected. B. Items consumed at free service camp: On a consideration of the documents submitted, it is observed that the items shown under reconcil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of above reasons, the ld. CIT(A) worked out the quantum of un-reconciled/unexplained deficit in stock found during the survey as under: Sl No. Particulars MRP (Rs) Cost (Rs) 1 Unserviceable consumable items discarded 24,84,920/- 6,74,967/- 2 Consumed at free service camps 86,79,300/- 27,61,471/- 3 Shortages ascertained during 08- 12-2005 to 14-12-2005 63,14,950/- 19,75,757/- 4 Unreconciled-as per annexure IID 8,56,150/- 17,364/- Total 1,83,35,320/- 54,29,559/- The ld. CIT(A) then proceeded to consider the impact which the aforesaid discrepancy could have in assessing the income of the assessee for the year under consideration. In this regard, he did not agree with the stand of the assessee that the impact of rejection of the Reconciliation of the nature under reference has to be by way of disallowance of cost of the products covered by the said rejected Reconciliation. He held that the explanation of the assessee as regards discarding of certain unserviceable items and consumption of certain items at free service camp having been rejected, the only alternate in deciding the impact consequent to such rejected Reconciliation in assessing the income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and furnished by the assessee was not accepted by the ld. CIT(A) giving specific reasons in support of his decision, no such justification or reason was given by the ld. CIT(A) in support of his action in accepting the other part of the reconciliation prepared and furnished by the assessee. The ld. D.R. contended that when the reconciliation prepared and furnished by the assessee was not accepted by the A.O. keeping in view the categorical admission of the assessee in the statement recorded during the course of survey accepting the deficit in stock and offering Rs. 2 crores as additional income for such deficit with which the ld. CIT(A) did not agree, the later should have given an opportunity to the A.O. to verify the said reconciliation by calling for the remand report. He contended that the ld. CIT(A) however has failed to do so and has also not given any justification for accepting the reconciliation prepared and furnished by the assessee substantially. 15. The ld. Counsel for the assessee, on the other hand, submitted that the assessee is dealing in international brand where no purchase outside the books of account is possible. He submitted that inventory of 30,000 items was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the A.O. on this issue to the extent of Rs. 1,08,59,120/-, the ld. Counsel for the assessee submitted that the reasons given by the ld. CIT(A) to justify the rejection are contradictory with his own findings. In this regard, the ld. Counsel for the assessee invited our attention to the relevant portion of the elaborate submission made before the ld. CIT(A) and strongly relied on the same. She also contended alternatively that even if the assessee's explanation about the items consumed in service camp, the items discarded etc. is not found acceptable, only the cost thereof should be added to the total income and not the selling price as done by the ld. CIT(A) especially when there is no evidence found during the course of survey to show any sales made by the assessee outside the books of account. 16. We have considered the rival submissions on this issue and also perused the relevant material placed on record. It is observed that the discrepancy of Rs. 6,30,17,390/- (on MRP basis) was found in the stock during the course of survey carried out in the case of the assessee. Although Shri Pankaj R. Shah, Director of the assessee company accepted the huge difference between the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed by the assessee to explain the discrepancies should be looked into. He also found that the documentary evidence produced by the assessee in support of the said reconciliation was inclusive of certain external documents issued by the third parties. He therefore considered the reconciliation statement furnished by the assessee and treated the deficit in stock found during the course of survey to the extent of Rs. 5,21,58,270/- as explained by accepting the explanation offered by the assessee as contained in Annexures B,C,D,E,F,G,L and M of the reconciliation statement. Although we agree in principle with the ld. CIT(A) that when the reconciliation statement was prepared and furnished by the assessee after the survey to explain the deficit in stock found during the course of survey and the same was supported by third party evidence, the same should be considered on merit after necessary verification. We are however of the view that when the said reconciliation statement furnished by the assessee was not at all looked into by the A.O. keeping in view the categorical admission of the assessee in the statement recorded during the course of survey, the ld. CIT(A) ought to have either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r verifying the reconciliation statement furnished by the assessee as well as the documentary evidence brought on record in support of the same. The A.O. is also directed to afford sufficient opportunity of being heard to the assessee who shall be free to support its case on this issue by making alternative claims as raised specifically in the grounds taken in the appeal filed before the Tribunal. Ground No. 1 of assessee's appeal as well as that of the appeal of the Revenue is accordingly treated as allowed for statistical purpose. 18. In ground No. 2 of its appeal, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 24,45,670/- made by the A.O. on account of excess stock found during the course of survey. 19. During the course of survey, certain items of stock valued at Rs. 25,45,670/- were found to be in excess on physical verification than the stock recorded in the computerized books of account maintained by the assessee. Since the assessee could not offer any satisfactory explanation in respect of the said excess stock, the A.O. treated the same as unexplained expenses in the form of purchases made by the assessee and the amount of Rs. 25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on account of excess stock u/s 69-B of the Act. The ld. counsel for the assessee has submitted in this regard that the excess stock found during the course of survey was fully explained by the assessee by making a detailed written submission, but the same has not been considered either by the A.O. or by the ld. CIT(A). We therefore consider it fair and proper to set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. for deciding the same afresh after taking into consideration the explanation offered by the assessee in respect of excess stock found during the course of survey. Ground No. 2 of the Revenue's appeal is accordingly treated as allowed for statistical purpose. 21. The issue raised in ground No. 2 of the assessee's appeal relates to the disallowance made by the A.O. on account of delayed payment of employees contribution to provident fund which has been sustained by the ld. CIT(A) to the extent of Rs.1,81,753/-. 22. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has made delayed payments of employee's contribution towards PF after the due dates prescribed in the relevant Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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