CIT and Another vs Sri Lakshmi Cloth Stores

N. Kumar, J.—Sri S. Parthasarathi takes notice to the respondent. Four weeks time granted to file Vakalath.

The Revenue has preferred these appeals challenging the order of the Tribunal deleting the additions made by the CIT(A). The assessee-firm filed its return of income for the assessment year 1996-97 declaring the income of Rs. 27,22,710 which was processed u/s 143(1)(a) of the IT Act, 1961 (hereinafter referred to as Act for brevity) on 25-2-1997. Subsequently, the case was taken up for consideration. Notices u/s 143(2) and 142(1) were issued. The assessee in pursuance of the notices, appeared and furnished all the clarifications sought for. There was a survey u/s 133A in the premises of the assessee on 13-12-1995.

During the course of the survey, the stock of the material was taken. The stock of the trade includes valuables in the premises which were in excess of the book figures to the extent of Rs. 38,16,754. This excess stock was assessed for the assessment year 1995-96 and brought to tax during that assessment year. Aggrieved by the said order, the assessee preferred appeal to the CIT(A) who allowed the appeal and set aside the order of the assessing authority and remanded the matter back to the assessing authority for redoing the entire matter afresh. After such remand, again the assessing authority took up the matter for assessment on the ground that the assessee did not co-operate. He passed the very same order. Again the assessee challenged the same before the CIT(A). The CIT(A) held that the addition made by the AO u/s 69B of the Act for a sum of Rs. 38,16,754 which should have been for a sum of Rs. 44,70,943 on the basis of the excess/unaccounted stock worked out by the Asstt. CIT, Circle-2(1), Mangalore, cannot be sustained. However, he did not agree with the assessees case in its entirety. On verification of the entire material, he was of the view that the rate of gross profit ranges from 16.66 per cent to 25.25 per cent. The same also varies in respect of the similar category of items such as suiting which is found to be ranging from 19.43 to 25.25 per cent. The assessee was able to achieve a higher rate of gross profit. The rate of overall gross profit was shown at 17.51 per cent by the assessee in respect of the wholesale and retail businesses as they are on the lower side for the year under consideration. Accordingly, he estimated the gross profit @ 21.5 per cent on the gross turnover of Rs. 2,71,27,242 which comes to Rs. 58,32,357. The assessee had shown the gross profit @ 17.51 per cent on the above turnover which comes to Rs. 47,51,870. Thus, he was of the view that the sum of Rs. 10,80,487 is the addition to be made in place of Rs. 38,16,754 made by the AO and thus he partly allowed the appeal of the assessee. Aggrieved by the said order, both the Revenue as well as the assessee preferred appeals before the Tribunal.

The Tribunal after hearing both the parties held that the computation of value of stock by reducing the gross profit to 12 per cent was not proper. The accounts of the assessee are audited. The gross profit cannot remain constant during the whole year. The books of accounts maintained by the assessee were not rejected by the AO. Therefore, the Tribunal held that it did not find any specific reason for not accepting the gross profit @ 17.51 per cent as shown by the assessee. The issue of gross profit arrived at by the learned CIT(A) at 21.5 per cent is not supported by any material, while the books of accounts were not rejected. The aforesaid addition of Rs. 10,80,487 made on the basis of calculation of the gross profit at 21.5 per cent, if it is reduced to 17.51 per cent as claimed by the assessee, the amount of addition sustained by the CIT(A) requires to be deleted and accordingly, the Tribunal has allowed the appeal of the assessee and dismissed the Revenues appeal. Aggrieved by this order, the Revenue has preferred these two appeals.

IT Appeal No. 979 of 2006 was admitted on 9th Aug., 2009 to consider the following substantial questions of law:

Whether the Tribunal was correct in holding that computation of value of stock by reducing the gross profit when the value of the unaccounted stock has been added under s. 69B of the IT Act, 1961?

Whether the Tribunal was correct in directing deletion of amount of Rs. 10,80,487?"

IT Appeal No. 980 of 2006 was admitted on 11-10-2007 to consider the substantial questions of law at serial Nos. 1 and 2 framed in the appeal.

The learned counsel for the Revenue assailing the impugned order contends that the assessee himself has admitted the excess stock at the time of survey. The AO was justified in treating the value-of the undisclosed income under s. 69B of the Act and bringing the same to tax. The CIT(A) though not accepted the case of the Department, was in total error in holding that the addition is only to the extent of Rs. 10,80,487. Therefore, he submits the impugned order requires to be set aside.

Per contra, the learned counsel for the assessee supported the impugned order. From the facts set out above, it is not a case where during survey the authorities found stock which is not accounted in the books maintained by the assessee. The stock which was found in the premises is reflected in the books of accounts maintained. In the books maintained, the assessee has given the value on the basis of the cost price. According to the authorities, if the said stock is valued on the basis of the selling price, there is a difference. That difference according to the Department is the excess stock. In relation to the said question, they have calculated the profit margin at 12 per cent and thus, the said excess stock was treated as an undisclosed income u/s 69B of the Act. The CIT(A) on random verification of the stock has recorded a categorical finding that the stock inventory in this case as on the date of the survey has been admittedly valued on the basis of the selling price after making adjustment for the gross profit element included therein @ 12 per cent. The AO has admittedly not made any attempt to verify and examine the assessees claim that the stock should have been valued on the basis of the cost price which is the regular method adopted by the assessee for valuation of the closing stock on a consistent basis. He further recorded a finding that the AO has also not taken into account the stock found at the time of survey substantially comprised all the purchases made during the current year. The basis of the stock valuation done by the AO on the date of survey is the GP rate ranging from 16.66 per cent to 25.25 per cent in respect of the items verified. Thus, adoption of the GP rate @ 12 per cent for working out the cost of goods sold as done by the AO does not give a correct picture. This has not only resulted in quantifying the profit in respect of the stock in hand, which cannot be brought to tax, but it has equally given a distorted picture in respect of the stock found as on the date of survey. After holding that finding of the assessing authority is not based on the facts, he estimated the gross profit @ 21.5 per cent on the gross turnover which is again without any basis. It is under these circumstances, the Tribunal took the gross profit @ 17.51 per cent as claimed by the assessee and found that there is no excess stock. It is on that basis, even the addition made by the CIT(A) was set aside, where the value of the stock as per books was found by the ITO by application of GP rate to be less than the GP rate as shown in the inventory found during the course of search. Sec. 69B of the Act is not attracted. Therefore, the Tribunal has rightly interfered with the finding recorded by the CIT(A) and allowed the appeal. The said order is legal and valid and does not suffer from any legal infirmity. Hence, we pass the following:

ORDER

The appeals are dismissed and the substantial questions of law framed are answered in favour of the assessee and against the Revenue.