Income Tax Appellate Tribunal - Ahmedabad
Natwarlal Shrichand Sanghvi, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before Shri N.S.SAINI, ACCOUNTANT MEMBER and
Shri MAHAVIR SINGH, JUDICIAL MEMBER
ITA No.2860/ Ahd/2010
Assessment Year:2007-08
Date of hearing:3.2.11 Drafted:4.2.11
Natwarlal Shirchand V/s. Income Tax Officer,
Sanghvi, 321, Anand W ard-11(3),
Cloth Market, Nr. Ahmedabad
Sarangpur Bridge,
Ahmedabad-38001
PAN No. ACIPS5717L
(Appellant) .. (Respondent)
Appellant by :- Shri A.C. Shah, AR
Respondent by:- Shri D.C.Chaudhry, DR
ORDER
PER Mahavir Singh Judicial Member:-
This appeal by the assessee is arising out of the order of Commissioner of Income-tax (Appeals)-XVI, Ahmedabad in appeal No. CIT(A)-XVI/ W 11(3) / 288/09- 10 dated 12-08-2010. Assessment was framed by ITO-Ward 11(3), Ahmedabad u/s143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 31-12-2009 for assessment year 2006-07.
2. The first issue in this appeal of assessee is against the order of CIT(A) in confirming the addition made by Assessing Officer on account of under valuation of stock. For this, assessee has raised the following ground No.1:-
"1. The learned CIT(A) has erred in confirming addition of Rs.28,23,250 on account of under valuation of stock in as much as the assessee follows the ITA No.2860/Ahd/2010 A.Y 2007-08 Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 2 method of valuation of stock on average rate basis consistently and that there is no undervaluation of stock.
1.1 The appellant says and submits that the learned AO has worked out the average rate on the basis of the purchases made in last three to four days and that he has ignored the basis of average rate worked out on the basis of the purchases made throughout the year."
3. The brief facts leading to the above issue are that assessee is engaged in the business of trading of MS iron & steel. The assessee has field his return of income for the assessment year 2007-08 on 23-07-2008 declaring total income at Rs.8,76,140/- and during the course of assessment proceedings, assessee has furnished requisites details from time to time along with the books of account. The Assessing Officer noted that books of account produced were test checked, details called for were verified and kept on record. The AO during the course of assessment proceedings required the assessee to file the details of closing stock and from verification of the closing stock, he noticed that assessee had shown closing stock of 1.15 lakh kg value @ 24 per kg amounting to Rs.27.60 lakhs. The assessee was required to furnish the details of closing stock including method of valuation and basis of valuation. According to Assessing Officer, the assessee could not file any explanation or any supporting documentary evidence to support the valuation of closing stock. According to Assessing Officer the assessee could not reach a correct valuation and ascertained the same. The AO noticed that assessee on the last two days of the year end as on 30-3-2007 and 31-03-2007 had made purchases ranging 48.30 lakh to 49.00 per kg and gave following details:-
Sr. Name of the Bill No. Date Rate per Amount
No Trader kg.(Rs) (Rs)
1 Dhanlaxmi 189 30.03.2007 48.50 6,71,861
Traders
2 Dhanlaxmi Steel 260 30.03.2007 48.40 8,31,551
Corporation
3 Hindustan 132 31.03.2007 49.00 4,93,548
Traders
4 Sayaji Steel 242 31.03.2007 48.50 7,24,571
5 Roshan Steel 263 31.03.2007 48.30 7,63,526
Corporation
ITA No.2860/Ahd/2010 A.Y 2007-08
Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 3
Accordingly, Assessing Officer taking average rate of 48.55 per kg valued closing stock at Rs.55,83,250/- but he is not touched or doubted the quantity of stock at 1.15 lakh kg. Accordingly, he made addition of under valuation of closing stock at Rs.28,23,250/- being the difference Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) confirmed the action of Assessing Officer by giving following findings in para-2.3 of his appellate order:-
"2.3 I have considered the submission made by the appellant and observation of the AO. It is true that the AO has valued the closing stock on the basis of invoices of last two days of March 2007. The AO has taken the average of these five invoices. The appellant has stated that these invoices pertain to only sheets, and the AO has not taken into account that there are several other items like plates, angles, channels, etc. The appellant has however not given detailed list of inventory matching the same with the invoices through which they were purchased. As can be seen from the above, the appellant also has valued the entire inventory on the basis of average of total purchases during the year. The appellant has also not tried to value the different items like sheets, plates, angles, beings et. Separately by taking their average separately. The appellant itself is following an average method of costing and the appellant has not given separate list of inventory. It is seen that the total closing stock in terms of quantity in is only 1,15,000 kgs whereas the total quantity including opening stock and purchases is 34,61,563 kgs. This shows that the inventory is only of last 12 days i.e. less than even half the month. Therefore, it would not be appropriate to value the closing stock on the average of the entire year especially when the assessee is no giving inventory of each item separately and he is not identifying as to which items in the closing stock pertain to which invoice. The assessee should provide closing stock list of each and every item separately physically taken at the end of the year. In the absence of the same the addition made by the AO is confirmed. This ground of appeal is dismissed.
Aggrieved, now assessee came in second appeal before us.
4. We have heard the rival contentions and gone through the facts and circumstance of the case. Before us Ld. Counsel for the assessee, Shri A.C. Shah filed paper book consisting of pages 1-23, which contains gross profit statement for the year along with audited accounts. Ld. counsel for the assessee has drawn our attention to the order of CIT(A) at page-3, where the assessee has given working of valuation on average rate basis and the same is reproduced as under:-
Kg. Amt. Rs.
ITA No.2860/Ahd/2010 A.Y 2007-08
Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 4
Opening stock 1845000 44,19,73,750
Purchase 1616563 5,34,53,081
3461563 9,54,26,831
Less: Sales 3343590
Shortage 2973
115000
3461563
Average rate = Rs.95426831 / 3461563 =
Rs.27.56/- per kg.
Closing stock = 115000 x 27.56 = Rs.31,69,400
The Ld. Counsel for the assessee has not disputed the average rate taken by the Assessing Officer in respect of valuation of closing stock but contested that average of last two days purchases of year ending cannot be taken as the average for valuation of closing stock rather the average of full year should be considered for taking average rate basis for valuation of closing stock. Ld. Departmental Representative on the other hand supported the order of Assessing Officer and stated that average of last two days has been taken by Assessing Officer is correct method for valuing closing stock. We find that that the Assessing Officer has adopted the average rate on the basis of only five invoices as given in the table prepared by him on page-2 of his assessment order. The assessee follows the method of valuation of stock, on average rate for the whole year consistently from several years i.e. Valuation of closing stock on average basis. The assessee deals in variety of items having different sizes, gauge of items like sheets, plates, angles, beam, channels, TMT and others. The assessee purchased the channels, angles, and TMT from Steel Authority of India in Feb'07 totaling to 39.098 metric ton at an average rate of Rs.20.43 per kg. The assessee sated that he also purchased angles and channels from other parties @ Rs.24.25 to Rs.27.24. The assessee further stated that the AO has followed the principle of FIFO in respect of only one item i.e. sheets and there are several other items in respect of which the AO has not taken the value. In view of the above facts and circumstances of the case, we are of the view that the valuation of the closing stock should have been done by taking the average of the ITA No.2860/Ahd/2010 A.Y 2007-08 Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 5 entire year and the assessee has rightly computed the differential in the stock at Rs.3,46,350/- i.e. (Rs.36,69,400 - Rs.28,23,250). Accordingly, we direct the Assessing Officer to make addition of Rs.3,46,350/- to the assessee's total income on this account. Accordingly, this issue of assessee's appeal is partly allowed.
5. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by Assessing Officer on account of Rs.17,10,033/- by making disallowance on ad hoc basis of non verifiable expenses at 30%. For this, assessee has raised the following ground No.2:-
"2. The learned CIT(A) has erred in confirming addition of Rs.17,10,033 out of total addition of Rs.18.25,149 being 30% of total expenses of Rs.60,83,831 on ad-hoc basis on the ground that the same is not verifiable in as much as the entire expenses are verifiable and that the ad-hoc disallowance should not be made.
2.1 The appellant further says and submits that the appellant produced books of accounts, bill, vouchers, details regarding the salary & commission etc. at the time of hearing. However, the learned AO failed to take into account the same."
6. The brief facts leading to the above issue are that Assessing Officer during the course of verification of profit and loss account noticed that the assessee has claimed expenses under various heads amounting to Rs.60,83,831/-. The assessee was requested to furnish the details i.e. bills and vouchers regarding these expenses, but as the assessee could not furnish any bill and voucher relevant to labour expenses and truck & lorry expenses, Assessing Officer after comparing the total turnover with the immediate proceeding year vis-à-vis expenses and made disallowance of Rs.18,25,149/- by comparing same as under:-
F.Y. 2006-07 F.Y. 2005-06
(Rs) (Rs)
Total Turnover 10,06,69,376 16,72,27,632
Gross Profit 13,87,231 5,56,762
Expenses:
Labour expenses 10,46,014 7,33,773
ITA No.2860/Ahd/2010 A.Y 2007-08
Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 6
Truck & Lorry expenses 33,17,047 0
Commission Expenses 11,62,265 4,48,519
Salary and Bonus expenses 5,58,505 1,78,834
Total expenses 60,83,831 13,61,126
According to Assessing Officer, assessee is failed to establish that he has incurred the above expenses absolutely and accordingly AO made disallowance to the extent of 30% by giving following finding in page-4 of his assessment order:-
"In view of the above, addition on account of the above excess expenses claimed by the assessee, to the extent of 30% of the total expenses of Rs.60,83,831/- which amounts to Rs.18,25,149/- is hereby made and the same is added to the total income of the assessee. Penalty proceedings u/s.271(1)© of the I.T. Act is initiated separately for furnishing inaccurate particulars and thereby concealment of income."
7. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) confirmed the disallowance by giving following findings in para-3.3.1 and 3.3.2 of his appellate order:-
'3.3.1 I have considered the submission made by the appellant and observation of the year. Only with respect to truck and lorry expenses the appellant has sated that these were classified under a different head in the last year, and these expenses amounted to Rs.23,66,947/-. In respect of the other expenses, namely labour expenses commission expenses and salary and bonus expenses the appellant has failed to explain as to why there is such a disproportionate increase especially when the turnover is only 60% of the last year. In the last year the turnover was Rs.16.72 crores whereas the turnover in the current year is only Rs.10.06 crores and still the labour expenditure is 40% more than last year. In the last year the labour expenses was Rs.7.33 lakh whereas in the current year this expenditure is Rs.10.46 lakh. Similarly, the commission expenditure was Rs.4.48 lakh in the last year, whereas in the current year it is Rs.11.62 lakh and still the appellant has not given any explanation as to why the expenditure has increased disproportionately. With respect to salary and bonus expenses also the appellant has failed to explain why the expenditure has increased 3.5 times as compared to last year, whereas the turnover has decrease to 60% of the last year.
3.3.2 In view of this reason, I agree with the AO that the disallowance of 30% of the expenses is correct. However, it is seen that in respect of commission and labour expenses some disallowance has been made which is part of Ground No.3. Since the labour expenses of Rs.56,663/- and commission ITA No.2860/Ahd/2010 A.Y 2007-08 Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 7 expenditure of Rs.58,602/- have already been disallowed under section 40[a][i], and the same has been confirmed, double disallowance of this cannot be made. Hence, the assessee gets a relief of Rs.1,15,116/- out of disallowance of Rs.18,25,149/-. This ground of appeal is therefore partly allowed."
Aggrieved, assessee came in second appeal before us.
8. We have heard the rival contentions and gone through the facts and circumstances of the case. The Ld. Counsel for the assessee drawn our attention to the assessee's paper book i.e. statement of audited account ending on 31-03-2007 at page-19, where comparative expenses are given under the heads octroi, freight and truck/lorry expenses. Ld. counsel for assessee narrated that in earlier years assessee has declared composite expenditure under the head octroi and freight as under:-
PARTICULARS CURRENT PREVIOUS
YEAR YEAR
EXPENDITURE
LABAOUR EXP. 1046014 733773
TRUCK & LORRY EXP. 3317047 0
He stated that assessee by putting the common expenditure under the head octroi, freight that of truck and lorry, also accounted the total expenditure at Rs.23,66,974/- and he referred to the current year's expenses at Rs.77,855 and R.33,17,047/-. According to Ld. Counsel for the assessee, Assessing Officer has not considered the last year's expenses under a different head octroi and freight and if given the credit for the same, assessee's over and above expenses will be at Rs.23 lakh only. We find that if we club the expenditure incurred during the immediate preceding year at Rs.13.61 + Rs.23.66 lakh incurred by assessee then both will come little over Rs.37 lakh and in case, we give rebate qua the expenditure incurred in this relevant assessment year at Rs.60.83 lakh, the difference will be almost Rs.23 lakh. In case, we estimate the disallowance, that we estimate at a reasonable rate at 10% qua this difference of Rs.23 lakh and accordingly we estimate the same. The Assessing Officer is directed to re-compute the income by taking disallowance of 10% of Rs.23 lakh and this issue of assessee's appeal is partly allowed as indicated above.
ITA No.2860/Ahd/2010 A.Y 2007-08Natwarlal S Sanghvi v. ITO Wd-11(3) A'bd Page 8
8. The next grounds No.3, 4 and 5 of this assessee's appeal is as regards to addition of commission expenses, labour expenses u/s.40(a)(i), telephone expenses and vehicle expenses.
9. At the outset Ld. Counsel for the assessee stated that he has instructions from the assessee not to press these issues. Accordingly, we dismiss these issues as not pressed.
10. In the result, assessee's appeal is partly allowed as indicated above.
Order pronounced in Open Court on 09/02/2011
Sd/- Sd/-
(N.S.Saini) (Mahavir Singh)
Accountant Member Judicial Member
Ahmedabad,
Dated : 09/02/2011
*Dkp
Copy of the Order forwarded to :
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-XVI, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad