Income Tax Appellate Tribunal - Delhi
Bahri Sons, New Delhi vs Department Of Income Tax on 18 June, 2010
ITA NO. 4269/Del/2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 4269/Del/2010
A.Y. : 2007-08
Assistant Commissioner of Income vs. M/s Bhari Sons,
Tax, Circle 31(1), Opposite Main Gate,
Room No. 217, CR Building, Arcade ABC, Khan Market,
New Delhi New Delhi
(PAN/GIR NO. : AAAFB0213C)
(Appellant ) (Respondent )
Asseessee by : Sh. Hiren Mehta, CA
Department by : Sh. Salil Mishra, Sr. D.R.
ORDER
PER SHAMIM YAHYA: AM This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 18.6.2010 pertaining to assessment year 2007-08.
2. The grounds raised read as under:-
"(A). That on the facts and circumstances of the case, Ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of ` 50,88,639/- on account of closing stock addition based on actual physical inventory during the survey proceedings.
(B). On the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) was wrong to conclude 1 ITA NO. 4269/Del/2010 that the assessee has been following a consistent system of accounting whereas in his remand report, the Assessing Officer has given a clear finding that the submissions made by the assessee do not in any manner show stock of the earlier year has been valued as per the basis claimed by the assessee.
(C). The appellant craves leave to add, alter or amend any / all the grounds of appeal before or during the course of hearing of appeal."
3. The assessee firm is engaged in the activity of trading in various varieties of books and magazines since last 55 years under a partnership firm. During the assessment year under consideration, the firm was engaged in retail sales of books, magazines, periodicals, stationery items etc. from its shop located at Khan Market, New Delhi. During the current year, a survey operation under section 133A of the Income Tax Act was undertaken at the business premises of the assessee firm on 19.12.2006. Statement of Shri Anuj Bahri, Partner of M/s Bahri Sons was recorded. As per the statement, surrender of ` 74 lacs was made, out of which, ` 65 lacs pertained to alleged undisclosed stock and ` 9 lacs pertained to excess cash found. However, in the return of income filed by the assessee such undisclosed stock was not shown. In the course of assessment proceedings for A.Y. 2007-08, the Assessing Officer asked the assessee to explain that as to why undisclosed investment in stock is not reflected in the Trading Account as well as in the return of income. In response to the above query, a reply vide letter dated 4.12.2009 was filed, inter alia, explaining that the surrender made at the time of survey operation was in respect of those items of stock which were not physically included in the stock 2 ITA NO. 4269/Del/2010 tally. The valuation of such items was incorrectly computed by valuing the stock on the basis of MRP less 15% trade discount less 22.5% gross profit margin on an estimated basis. As opposed to the same while drawing the audited balance sheet as on 31.3.2007, the closing value of stock was computed by adopting a consistent method of stock valuation being followed for last many years where in respect of those items of stock which are more than 2 years old the value is taken at NIL, for items of stock which are less than 2 years old but more than one year old, the valuation was done at 50% MRP less 15% trade discount less 22.5% profit margin and for those items of stock which are less than one year old, the valuation was done by reducing 15% discount and 22.5% profit margin. Thereafter, the Assessing Officer issued a show cause notice dated 4.12.2009 requiring the assessee to show cause as to why the value of entire closing stock as on 31.3.2007 may not be adopted by taking MRP value less 15% trade discount and 22.5% gross profit margin. A reply dated 11.12.2009 was filed in response to the show cause notice. It was emphasized in the said reply that the assessee has been consistently following a method of stock valuation which should not be arbitrarily rejected. In the alternative and without prejudice it was contended that if the method of stock valuation for closing stock was being sought to be changed, then on the same footing opening stock should also be valued by applying the same yardstick. The Assessing Officer did not agree with the submissions of the assessee firm and reworked the value of closing stock as on 31.3.2007 resulting into an addition of ` 50,88,639/-.
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) elaborately considered the issue. Ld. Commissioner of Income Tax (Appeals) observed that the germane issue for deciding 3 ITA NO. 4269/Del/2010 the appeal is what should be the method of valuation of stock, in order to determine whether there was any excess quantity of unexplained stock with the assessee firm as on the date of survey on 19.12.2006. On one hand, the assessee claims that he has been consistently following a system of valuation of closing stock, by which books that are older than 2 years are valued at NIL value, while books that are 1 year old are valued at 50% of the value. On the other hand, the Assessing Officer does not find merit in this explanation, as in his view the partner of the firm had conceded at the time of survey that there was excess unexplained stock of ` 65.88 lacs as on the date of survey and that at that time he had not furnished this explanation about the age wise method of valuation of stock. Thereafter, Ld. Commissioner of Income Tax (Appeals) gave a finding that from the perusal of the detail of stock valuation for the Financial year ended 31.3.2002, 31.3.2003, 31.3.2004, 31.3.2005 alongwith copies of respective audited balance sheets, he found that the assessee has followed the same method of stock valuation for last many years. Ld. Commissioner of Income Tax (Appeals) observed to this extent the contention of the assessee is found to be correct. Ld. Commissioner of Income Tax (Appeals) further observed that in the assessment year 2004-05, the Assessing Officer had verified and acknowledged the method of valuation of stock being followed by the assessee and no adverse comments were offered thereon. Ld. Commissioner of Income Tax (Appeals) further found that the assessee has elaborately explained that the consistently adopted method of valuation presents a true and correct picture of its profit and taxable income since the stock items, which are not having realizable value and which have become obsolete are not included in the value of stock, in view of the 4 ITA NO. 4269/Del/2010 fact that there exists hardly any realizable value of unsold old books. Ld. Commissioner of Income Tax (Appeals) further observed that moreover he found that so long as this method is being consistently followed by the assessee the Assessing Officer, ought not to have any grievance against the method of valuation on two folds - firstly, the closing stock of a particular year will automatically become opening stock of the subsequent year; secondly, if at all any sale takes place out of stock items which are more than 2 years old or between 1 to 2 years, the same gets duly accounted for in the books of accounts and increases the taxable income of the assessee to that extent.
4.1 Ld. Commissioner of Income Tax (Appeals) further observed that the statement of the assessee which is being used as the sole evidence for establishing the fact of existence of excess tock was recorded on oath at the time of survey u/s 133A on 19.12.2006. Ld. Commissioner of Income Tax (Appeals) held that the provision of section 133A do not empower the officer to record the statement on oath. In this regard, Ld. Commissioner of Income Tax (Appeals) referred to the Hon'ble High Court of Kerala decision in the case of Paul Mathews and Sons vs. C.I.T. 263 IRE 101.
4.2 Ld. Commissioner of Income Tax (Appeals) also found that the Assessing Officer has in effect rejected the trading results of the assessee, without however rejecting the books of accounts and without giving any adverse finding on the correctness and completeness or without holding that method of accounting as provided in section 145 or as per the Accounting Standards is not being followed by the 5 ITA NO. 4269/Del/2010 assessee regularly. Ld. Commissioner of Income Tax (Appeals) further found that on the other hand assessee has argued that the method of valuation of closing stock being followed has been regularly and consistently followed. Thus, Ld. Commissioner of Income Tax (Appeals) found that in the absence of the cogent adverse finding, trading results of the assessee cannot be disturbed without rejecting the books of accounts in the circumstances mentioned in section 145(3). Further Ld. Commissioner of Income Tax (Appeals) observed that in such a case, where the Assessing Officer decides to deviate from the trading results, he is required to follow the method for the best judgement assessment u/s 144, in terms of the provisions of section 145(3). Ld. Commissioner of Income Tax (Appeals) further observed that that he agreed that if the valuation of closing stock is distributed by upwardly recomputing the same, then on the same yardstick the value of opening stock as on 1.4.2006 also needs to be increased by following the same method of valuation. Accordingly, Ld. Commissioner of Income Tax (Appeals) allowed the assessee's appeal.
5. Against the above order the Revenue is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that assessee has been 6 ITA NO. 4269/Del/2010 following the same method of stock for the last many years consistently. Accordingly, to this method of valuation, the books are two years old, the value is taken at NIL. In respect of those items of stock which are less than 2 years old but more than 1 year old, the valuation is done at 50% of MRP less 15% trade discount less 22.5% profit margin. For those items of stock which are less than 1 year, the valuation is done by reducing 15% discount and 22.5% profit margin from the MRP. Ld. Commissioner of Income Tax (Appeals) has further found that on the basis of the stock detail of financial year ended 31.3.2002, 31.3.2003, 31.3.2004, 31.3.2005, that the assessee has followed the same method of stock valuation for last many years.
The divergence in the valuation on the date of survey arose because the surrender of the unaccounted stock was made at MRP after reducing 15% discount and 22.5% gross profit margin in respect of all the stock items irrespective of their age. As against this issue of stock which remained unsold as on 31.3.2007 were valued by adopting consistent method of stock valuation. We further find merit in the Ld. Commissioner of Income Tax (Appeals)'s observation that the statement obtained at the time of survey u/s 133A is the sole basis for addition in this regard. Ld. Commissioner of Income Tax (Appeals) has rightly observed that the provisions of section 133A do not empower 7 ITA NO. 4269/Del/2010 the Assessing Officer to record the statement on oath. We further agree with the finding of the Ld. Commissioner of Income Tax (Appeals) that the Assessing Officer has in effect rejected the trading results of the assessee, without however rejecting the books of accounts and without giving any adverse finding on the correctness and completeness on the method of accounting adopted by the assessee. In the background of the aforesaid discussions, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals). Accordingly, we uphold the same.
7. In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced in the open court on 16/12/2011.
SD/- SD/-
[ R.P. TOLANI]
TOLANI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 16/12/2011
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
8