DCIT, CENTRAL CIRCLE-19, NEW DELHI V. .PUNIHANI INTERNATIONAL , NEW DELHI

ITA 2429/DEL/2022

AI Insights

The case involves appeals by both the assessee, M/s. Punihani International, and the revenue against the order of the Commissioner of Income Tax (Appeals)-27, New Delhi. The primary issues revolved around the addition of alleged excess stock valued at Rs 91,08,879 and disallowances related to car running, maintenance expenses, and depreciation. A search and seizure operation under section 132 of the Income-tax Act, 1961, led to these disputes. The Tribunal examined the valuation of inventory and the application of gross profit rates in determining the correct financial figures for the assessee.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 36848 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2019-2020
• Other Referred Cases: PCIT vs Rameshwar Textile Mills Limited
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BANITA DEVI NAOREM
• Assessee Lawyers: R.S. SINGHVI
• Keywords: Unexplained cash credit; Depreciation; Search and seizure; Valuation report
• Section: 143(3); 153; 132; 153A; 68; 69B; 69A

Judgement Text

"Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “F”: NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI VIMAL KUMAR, JUDICIAL MEMBER ITA No. 2429/Del/2022 (Assessment Year: 2019-20) DCIT, Central Circle-19, New Delhi Vs. M/s. Punihani International, W-143, South Delhi, Greater Kailash, Part-II, New Delhi (Appellant) (Respondent) PAN:AAAFP6858K ITA No. 1748/Del/2022 (Assessment Year: 2019-20) M/s. Punihani International, W-143, South Delhi, Greater Kailash, Part-II, New Delhi Vs. DCIT, Central Circle-19, New Delhi (Appellant) (Respondent) PAN:AAAFP6858K Assessee by : Shri R. S. Singhvi, CA Shri Rajat Garg, CA Revenue by: Ms. Banita Devi Naorem, CIT DR Date of Hearing 21/10/2024 Date of pronouncement 18/12/2024 O R D E R PER M. BALAGANESH, A. M.: 1. These appeals in ITA No. 2429/Del/2022 and 1748/Del/2022 for AY 2019-20, arises out of the order of the Commissioner of Income Tax (Appeals)- 27, New Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. 27/10823/2018-19 dated 04.07.2022 against the order of assessment passed u/s 153A r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 2 ‘the Act’) dated 16.08.2021 by the Assessing Officer, DLC, Central Circle-4(1), New Delhi (hereinafter referred to as ‘ld. AO’). 2. The Ground Nos. 1, 2, 3 raised by the assessee are challenging the restriction of addition to Rs 91,08,879/- under section 69B of the Act on the alleged ground of undisclosed stock. 3. We have heard the rival submissions and perused the materials available on record. The assessee is a partnership firm. A search and seizure operation under section 132 of the Act was carried out in the case of the assessee along with other cases of Punihani group of cases at various residential and business premises on 04.01.2019. The return of income for the assessment year 2019- 20 was filed by the assessee on 31-10-2019 declaring total income of Rs 14,86,54,400/- in response to notice issued under section 153 A of the Act. The assessee firm is engaged in the business of manufacturing and export of leather goods and is running a hotel under the name and style of Dia Park Premiere in Gurgaon. At the time of search, the search party valued the inventory of finished goods, raw materials and accessories found physically at the premises of the assessee firm at Rs 11,12,45,367/-. During the course of assessment proceedings, the Learned AO calculated the recorded value of closing stock at Rs 5,67,92,915/- by making reverse calculation on the basis of gross profit at the rate of 19.67 percent which was the gross profit rate of earlier year and arrived at the closing stock as on 4-1-2019 on the date of search. Accordingly, the Learned AO proceeded to make an addition of Rs 5,44,07,085/- on the ground of excess stock. 4. The assessee always submitted that there is no excess stock at all and the entire basis of addition is arbitrary and not appreciating the facts of the case. The valuation of inventory prepared by the search party suffered from factual inaccuracies in as much as the certain finished goods have been ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 3 valued by the search team by applying market rates instead of weighted average cost or market price whichever is lower. Accordingly, it was pleaded that the valuation of closing stock on the date of search arrived by the search team cannot be accepted as sacrosanct. The assessee also submitted before the Learned CIT(A) that the gross profit of the current year was 28.10 percent and hence in any case, the Learned AO adopting the gross profit of earlier years at 19.67 percent as incorrect. The assessee gave the workings of gross profit of 28.10% as under:- Turnover for the year under consideration -Rs 69,75,83,660/- Gross profit earned - Rs 19,60,40,569/- Gross profit rate - 28.10 % 5. As stated above, we find that the search party had indeed considered the value of finished goods for certain prices by valuing them at market prices. The learned AR before us placed on record the workings of the correct value of physical stock after adjusting the profit element in finished goods as on the date of search as under :- TABLE A - Error in the Working of value of Physical Stock found during the Search Particulars Amount Value of Physical Stock found as per Search Party based on Sales Value {Refer Page 7 - 8 of the Assessment order} 11,12,45,367 Less: Gross Profit to be reduced from the Sale value of Finished Goods. {Note: The Valuation Officer has computed the value of Finished Stock at Sale Price without reducing the profit element embedded in such sale price} [Refer Valuation Report at Paper Book Page 84-85] 99,91,631 Correct Value of Physical Stock after adjusting the Profit element in Finished Goods as on the date of Search 10,12,53,736 ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 4 6. Further, we find that elimination of profit element embedded in the value of finished goods in the sum of Rs 99,91,631/- has been worked out as under:- TABLE B - Working of the Profit included in Physical Stock Particulars Amount Finished Goods (Sale Price) : Unit A (P. B. Page 59) - 3,00,86,0177- Unit B (P. B. Page 58) - 1,48,63,618/- Gurgaon Premise (P. B. Page 98) - 5,99,400/- 4,55,49,035 Profit embedded in the Sale value of Finished Goods computed after making Reverse calculation [Rs. 4,55,49,035 / 128.10% * 28.10%] 99,91,631 ♦ 7. We find that the learned CIT(A) by applying the gross profit rate of the current year at the rate of 28.10% had arrived at the closing stock figure of Rs 10,20,91,121/- as on the date of search by working as under:- Particulars Amount (Rs.) Particulars Amount (Rs.) Opening stock 1,05,72,330/- Export sales 53,63,87,279/- Purchases 33,61,82,881/- Local sales 9,57,874/- Estimates unbookes purchases 7,00,00,000/- Closing stock 10,20,91,121/- Fabrication charge 3,47,61,635/- Labour charge 3,11,73,139/- Job work 56,47,746/- Finishing charge 1,04,555/- Gross profit 28.1% of sales 15,09,93,988/- 8. Taking the closing stock figure of Rs 10,20,91,121/- on the date of search as worked out above, the Learned CIT(A) concluded that the excess stock works out to Rs 91,08,879/- only (11,12,00,000 – 10,20,91,121) as against Rs 5,44,07,085/- worked out by the Learned AO. Aggrieved by this order, both assessee as well as the revenue are in appeal before us. 9. From the above, it could be seen that the closing stock worked out by the learned CIT(A) was Rs 10,20,91,121/- and the correct closing stock ought to have been worked out by the search party as per Table A supra was Rs 10,12,53,736/-. Hence, there is no deficit in stock at all. Accordingly, there is ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 5 no case for making any addition on the ground of excess closing stock by the learned CIT(A). Hence we have no hesitation in deleting the addition made in the sum of Rs 91,08,879/- on account of closing stock by holding that there is no excess stock at all even as per the workings of learned CIT(A) and by adopting the correct closing stock as on the date of search after eliminating the profit element on finished goods. Accordingly, the Ground Nos. 1 to 3 raised by the assessee are allowed and Ground No. 7 raised by the revenue is dismissed. 10. The Ground No. 4 raised by the assessee and Ground Nos. 1 and 2 raised by the Revenue are in connection with the disallowance of car running and maintenance expenditure and car depreciation thereon. Hence all these grounds are taken up together for adjudication. 11. We have heard the rival submissions and perused the materials available on record. The assessee claimed car depreciation of Rs 45,91,970/- and car running and maintenance expenses of Rs 34,87,351/- as deduction in the return of income. The learned AO in the assessment observed that assessee had failed to prove that these expenses were incurred wholly and exclusively for the purpose of business and accordingly proceeded to disallow 15 percent thereon on an ad hoc basis amounting to Rs 12,11,898/-. The assessee preferred an appeal before the learned CIT(A). The main grievance of the learned AO was that assessee firm could have used the vehicle for the purpose of personal use of the partners also and accordingly 15 percent is estimated to be attributed to the personal portion or personal use of the vehicle. The assessee submitted before the learned CIT(A) that all the partners are already having their own personal vehicles and there is no need to use the firm's vehicle for the purpose of their personal usage. However, the learned CIT(A) proceeded to make an ad hoc disallowance of Rs 2 lakhs on account of car running and maintenance expenses as against the disallowance of Rs 5,23,103/- made by the learned AO. With regard to car depreciation, the ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 6 learned CIT(A) held that it is statutorily allowable allowance to the assessee and hence the same cannot be disturbed with on account of personal usage. Accordingly, he deleted the disallowance made on account of car depreciation in the sum of Rs 6,86,796/-. Against this order, both assessee as well as the revenue are in appeal before us. 12. At the outset, we find that the Learned CIT(A) had indeed accepted the fact that the car has been used for the purpose of business by the assessee firm. It is pertinent to note that the books of accounts of the assessee firm were not rejected by the Learned AO or by the Learned CIT(A). Hence, the book results declared cannot be disturbed unless certain deficiencies are found thereon and there is no need to make any ad hoc disallowance thereon. The partners have their own personal vehicles for their personal usage, which fact was brought to the knowledge of Learned CIT(A) and the same had not been disputed by the revenue. Hence the action of the Learned CIT(A) in restricting the disallowance on account of car maintenance expenses to Rs 2 lakhs on an ad hoc basis is devoid of merit and deserves to be deleted at once. 13. With regard to car depreciation, the Learned CIT(A) had rightly held that it is an allowance statutorily provided to the assessee in the Act and the same cannot be disturbed by alleging that there is personal usage of the vehicle. The element of personal usage of the vehicle had already been answered to be non-existent in the previous paragraph. Hence, we hold that the Learned CIT(A) had rightly granted relief to the assessee by allowing the depreciation on car, on which we do not find any infirmity. Accordingly, the Ground Nos. 1 and 2 raised by the revenue are dismissed and Ground No. 4 raised by the assessee is allowed. ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 7 14. No argument was advanced by the Learned AR before us with regard to Ground No. 5 raised by the assessee. Hence the same is treated as not pressed and dismissed. 15. Ground Nos. 6 and 7 raised by the assessee are general in nature and does not require any specific adjudication. 16. The Ground Nos. 3 to 6 raised by the revenue are challenging the action of the Learned CIT(A) in restricting the addition made under Section 69A of the Act to Rs. 8,30,861/- as against Rs. 29,56,800/- made by the Learned AO. 17. We have heard the rival submissions and perused the materials available on record. During the course of such proceedings, Page No. 97 Annexure A-11 was seized from the premises of the assessee. The Learned AO reproduced the scanned copy of the said seized document in Page 4 of the assessment order. The said scanned copy was confronted to the assessee’s partner while recording the statement on oath on the date of search on 4-1-2019 vide Question No. 28. In response to the same, the partner of the assessee responded that those documents were found from his wallet and belonged to him. He also acknowledged that he had made the entries on that document in his own handwriting. Later, he started explaining the contents of the said scanned seized document stating that firm had received cash from those three parties totaling to Rs. 29,56,800/-. The Learned AO showcaused the assessee as to why the same should not be treated as unexplained cash credit under Section 68 of the Act. The assessee clarified that the seized document contains rough jottings stating that the parties mentioned on the said paper were demanding payments on account of their bills. It was also clarified that in the case of B L leather, against the so-called bills mentioned in the seized document, neither any supplies were received nor any transactions were made after 31-03-2017. Consequently, there was neither any payment due nor ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 8 any cash or other payments were receivable by the said party from the assessee. Similarly, neither any amount due nor receivable existed in the case of some ‘Vinod’ mentioned in the said loose slip. Neither any purchase nor any supply/ service has either been received or availed by the assessee. Similarly, in the case of Malhotra leather export, it was stated that payment against bill no. 121 and 123 has been made to the extent of Rs 12,84,800/-, whereas full payment of such invoices amounting to Rs 13,47,110 was duly made on 21-12-2018. The assessee produced the copy of ledger accounts of the said parties in the books of the assessee firm to substantiate the contentions of the assessee. The Learned AO however disregarded these contentions of the assessee and proceeded to make an addition of Rs 29,56,800/-as unexplained money under section 69A of the Act in the assessment. 18. The Learned CIT(A) observed that the statement given by the assessee at the time of search was never retracted by it. In the statement under section 132(4) of the Act, the assessee's partner had admitted that the jottings mentioned in the seized document represent cash received from three parties totaling to Rs. 29,56,800/-. However, during the course of assessment proceedings, the assessee had taken a contrary stand by stating that those jottings were recorded by one of the employees of the assessee firm at the behest of another partner, Mr. Tarlok Singh, who happens to be brother of the partner who gave the statement originally under section 132(4) of the Act. The Learned CIT(A) took cognizance of the fact that both Mr. Narendra Singh and Mr. Tarlok Singh are partners of the assessee firm and the transaction mentioned in the seized document represent unaccounted sales made by the assessee out of books. Having said that, the Learned CIT(A) in paragraph 10.4 observed that for effecting this unaccounted sales, there must be some purchases also which should have been made by the assessee. He concluded that such purchases also should remain unaccounted and ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 9 accordingly, the Learned CIT(A) proceeded to estimate gross profit at the rate of 28.10% (being the gross profit declared by the assessee during the year under consideration) on the said unaccounted sales of Rs. 29,56,800/- and restricted the addition to Rs. 8,30,861/- as against Rs. 29,56,800/- made by the Learned AO. Aggrieved, only the revenue is in appeal before us and the assessee had accepted the said order of Learned CIT(A) for this issue. 19. The Learned CIT DR vehemently argued that the Learned CIT(A) had merely assumed that the purchases attributable to the corresponding unaccounted sales which were found in the seized document were also not accounted by the assessee and accordingly only the gross profit portion should be brought to tax in the case of the assessee. Per Contra, the Learned AR argued that the purchases and sales accounted in the regular books of accounts are duly supported by stock registers which were also found with proper quantitative tally at the time of search itself. That’s why the search team was able to make valuation of closing stock on the date of search with some minor deficiencies which were already addressed in the earlier grounds in assessee’s appeal. Hence, the Learned CIT(A) was duly justified in estimating only the gross profit portion to tax in the case of the assessee. Moreover, he argued that assessee had accepted the said order of Learned CIT(A) and had not contested further since the Learned CIT(A) had estimated the gross profit applying 28.10% (being the gross profit earned during the year) on the unaccounted sales portion found in the seized document. He also placed reliance on the decision of Hon’ble Gujarat High Court in the case of PCIT vs Rameshwar Textile Mills Limited in Tax Appeal Numbers 527 and 528 of 2015 dated 7-9-2015 in support of this contention. 20. We find that the arguments advanced by the Learned AR has lot of force in view of the fact that the quantitative tally of stocks were duly available at the time of search which enabled the search team to value the closing stock on ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 10 the date of search, taking into account the physical stocks available on the date of search. When there are unaccounted sales mentioned in the seized document, there should be obviously unaccounted purchases, as without purchases there cannot be any sales. Hence, only the profit element needs to be brought to tax. In the instant case, the Learned CIT(A) had estimated the gross profit at the rate of 28.10% by taking cognizance of the fact that the same rate has been offered by the assessee during the year under consideration. It is also pertinent to note that assessee has accepted to the Learned CIT(A) order by not preferring any further appeal. Hence, there is no other better gross profit rate that could be applied in the facts of the case. Hence we hold that the adoption of gross profit rate of 28.10% on the unaccounted sales is in order. The Learned CIT(A) had rightly applied the same, on which we do not find any infirmity. Accordingly, the Ground Nos. 3 to 6 raised by the revenue are hereby dismissed. 21. The Ground No. 8 raised by the revenue is general in nature and does not require any specific adjudication. 22. In the result, the appeal of the assessee is partly allowed and appeal of the revenue is dismissed. Order pronounced in the open court on 18/12/2024. -Sd/- -Sd/- (VIMAL KUMAR) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 18/12/2024 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) ITA No. 2429/Del/2022 ITA No. 1748/Del/2022 M/s. Punihani International Page | 11 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi "