M/s Sportking India Ltd., Ludhiana V. DCIT, CC-II, Ludhiana

ITA 696/CHANDI/2018

AI Insights

The case involves M/s Sportking India Ltd., which appealed against the order of the CIT(A)-2, Jalandhar, concerning the assessment year 2014-15. The primary contention was the incorrect valuation of closing stock during a search operation, where the stock was valued at sale price instead of cost price, leading to an inflated income assessment. The Tribunal agreed that the closing stock should be valued at cost or market value, reducing the gross profit margin, and remanded the matter back to the Assessing Officer for re-evaluation.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127786 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-05-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 14-05-2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained investment; Business income; Depreciation; Unabsorbed depreciation
• Section: 145; 132; 143(3)

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी आकाश द प जैन, उपा य! एवं ी %व&म (संह यादव, लेखा सद-य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM ITA NO. 696/Chd/ 2018 Assessment Year : 2014-15 M/s Sportking India Ltd. Village Kanech, G.T. Road Ludhiana The DCIT Central Circle-II, Ludhiana PAN NO: AAACS3037Q Appellant Respondent ! " Assessee by : Shri Ashwani Kumar, CA # ! " Revenue by : Shri Sarabjeet Singh, CIT, DR $ % ! & Date of Hearing : 02/05/2023 '()* ! & Date of Pronouncement : 08/05/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-2, Jalandhar dt. 05/03/2018 for Assessment Year 2014-15, wherein assessee has raised the following revised grounds of appeal: 1. That the order passed u/s 250(6) of the Income Tax Act, 1961 by the ld. Commissioner of Income Tax (Appeals)-2, Jalandhar is against law and facts of the file in as much as he was not justified to uphold the action of the Ld. Assessing Officer in computing the total income at Rs. 30.76 Crores as against income declared at Rs. 30.07 Crores. 2. That the Ld. Commissioner of Income Tax (Appeals) gravely erred in not appreciating the various discrepancies pointed out by the appellant in the valuation of closing stock while coming to the above conclusion. 2. During the course of hearing, the ld AR submitted that briefly the facts of the case are that the assessee is a limited company engaged in the manufacturing of yarns. Return of income for A/Y 2014-15 was filed on 29.11.2014 at Nil after set off of brought forward loss/unabsorbed depreciation of the earlier year amounting to Rs. 30,07,70,670/-. Assessment u/s 143(3) was framed by the Assessing Officer vide order dated 31.03.2016 at a total income of Rs. 2 30,76,14,157/-. Search u/s 132 of the Income Tax Act, 1961 was conducted at business premises and residential premises of the directors of the company on 24.10.2013. During the course of search, the assessee made a declaration u/s 132(4) of the Income Tax Act and declared a sum of Rs. 2.00 crores for A/Y 2013- 14 and a sum of Rs. 4.00 crores for A/Y 2014-15 as additional income which was duly included in the returns of income filed. 2.1 The case of the assessee was taken up for scrutiny and the same was assessed vide order dated 31.03.2016 passed u/s 143(3) of the Income Tax Act, 1961 as follows:- Row Particulars Amount (Rs) 1 Addition on account of Unaccounted Cash Sales 2,05,652/- 2 Addition on account of Physical Stock Found Short (at business premises of M/s Sportking India Limited, Village Kanech, Sahnewal, Ludhiana) by applying Gross Profit Rate 51,40,000/- 3 Addition on account of Physical Stock Found Excess (at business premises of M/s Sportking India Limited, Village Jeeda, Bathinda) 6,14,97,835/- 4 Total Additions 6,68,43,487/- 5 Less : Amount surrendered in A/Y 2013-14 2,00,00,000/- 6 Amount surrendered in A/Y 2014-15 4,00,00,000/- 7 Balance addition made at returned income of the appellant 68,43,487/- 8 Add: Income as declared in return of income 30,07,70,670/- 9 Business income as assessed 30,76,14,157/- 10 Less: Brought forward unabsorbed depreciation 30,76,14,157/- 1 1 Total income as assessed Nil 2.2. Aggrieved by the order dated 31.03.2016, the assessee filed an appeal before the Learned Commissioner of Income Tax (Appeals) which was dismissed by him vide order dated 05.03.2018. 2.3. It was submitted that the main issue which the assessee is agitating before the Tribunal is the difference in valuation of closing stock during the course of search & as per trading account in as much as the assessee is of a very strong view that while valuing the closing stock on the date of search, the rates of various items were adopted at the sale price whereas for the purposes of 3 valuation of closing stock, the same should have been valued at cost in accordance with relevant accounting standards and section 145 of the Act. 2.4 The assessee has filed a paper book consisting of pages 1 to 51 on 19.09.2018. The assessee has drawn a chart at page 5 of the paper book vide which it has been sought to be explained that the rates of various items adopted at the time of valuation of closing stock on the date of search are at sale price whereas they should have been actually valued at cost price or at least after deduction of G. P. margin. For example, the first item in the chart is cotton yarn which has been inventorised at page 12 of the paper book. Item No. 2 at page 12 is 441 cartons of cotton yarn which have been valued at Rs. 242/- per kg and the same is the sale rate as can be seen from perusal of sale bill No. 272 dated 18.10.2013 which finds place at page 19 of the paper book. Likewise, is the position with respect to various other items. For the purpose, reference may kindly be made to page numbers 12 & 19, 14 & 21, 15 & 24, 16 & 25, 17 & 26 of the paper book. The total value of such stock taken by the Department works out to Rs. 9,23,52,944/-. The assessee has furnished detailed explanation at page 6 of the paper book that from this working, the margin of profit should be reduced. As per the submissions of the assessee (page 7 of the paperbook), the gross profit of about 19% to 20% should be reduced and if such credit is given for the G. P. margin, the value of such stock should come down substantially and, in any case, much more than the sum of Rs. 68.43 lacs (refer row 7 of the Table at page 1). 2.5 It was submitted that as the assessee has already included the sum of Rs. 6.00 crores in the returns of income filed and for which due credit has also been given by the Learned Assessing Officer and if credit for the margin profit in the valuation of stock as on the date of search is allowed, the value of such closing stock as on the date of search would come substantially down. But as already submitted above, the assessee is agitating the addition of only an amount of Rs. 68.43 lacs. 4 2.6 It was accordingly submitted that the addition made by the Assessing Officer and upheld by the Ld. Commissioner (Appeals) be kindly deleted. 3. The Ld. CIT/DR has relied on the findings of the Ld. CIT(A) in para 5.2 to 5.4 which read as under: “5.2 I have gone through the assessment order passed by the AO, submissions filed / by the appellant and find that an addition of Rs. 6,14,97,835 has been made by the AO on account of unaccounted money/investment found in excess Physical stock found. During the course of survey at the premises of the appellant at Village Jeeda, Bhatinda stock was found to be in excess by an amount of Rs. 6,98,55,975 as compared to the stock as per the books of accounts. The appellant was asked to furnish an explanation on this account and after examining the reasons furnished, the excess stock was worked out at Rs. 6,14,97,835 by the AO. 5.3 The appellant has in the course of present proceedings given various reasons and submitted that the variation in the excess stock was on account of different sales rate adopted by the survey team. It is stated that sales rate applied by the AO were on account of invoices issued before 24.10.2013. It is also stated in the course of present proceedings that excess stock found at this premises has to be adjusted against the stock shortage found at other premises. The appellant has further stated the closing stock of consumable stores and spares available in the books was not taken into consideration while working out the quantum of excess stock found at the time of physical verification. 5.4 I have carefully considered the contentions of the appellant and find that trading account had been prepared by the survey team at the time of survey based on the bills, vouchers available and books of accounts. Further, in the course of assessment proceedings an opportunity was given to the appellant to explain the variation in the quantum of stock actually found at the premises and the amount of stock available in the books of accounts. Thus, after considering the reasons given by the appellant and explanation furnished along with evidence, I find that AO has been just and fair in computing the amount of unaccounted investment in excess stock found at Rs. 6,14,97,835 for the period under consideration. Accordingly, I confirm the addition of Rs. 6,14,97,835 made by the AO on this account.” 4. We have heard the rival contentions and purused the material available on record. It is noted that the Assessing officer has made an addition of Rs 6,14,97,835/- towards excess physical stock found at the premises of the assessee during the course of survey. The physical stock has been found and valued at Rs 32,60,50,670/- as against the value of the stock as per books of account amounting to Rs 26,45,52,835/- resulting in differential of Rs 6,14,97,835. 5 The assessee carried the matter in appeal before the ld CIT(A) and it was contended that quantity of finished goods lying in the godown of the assessee weighing 4,09,955.71 kgs have been valued at Rs 9,23,52,944/- by applying the sale value as per sale invoices issued prior to the date of survey and the same should be valued at cost by reducing the gross profit margin of 19.01% of the previous year 2012-13 or the gross profit margin of 14.27% as determined at the time of survey. As per ld CIT(A), the trading account had been prepared by the survey team at the time of survey based on the bills, vouchers available and books of accounts and given that during the course of assessment proceedings, an opportunity was given to the assessee to explain the variation in the quantum of stock actually found at the premises and the amount of stock available in the books of accounts, it was held that the AO was fair in computing the amount of unaccounted investment in excess stock so found and the addition so made was sustained. 5. During the course of hearing, similar contention was advanced before us relating to valuation of closing stock of finished goods. We find merit in the contention so advanced by the ld AR that the closing stock of finished goods has to be valued at lower of cost or market value as per well accepted accounting principles to arrive at the true and correct profits and in the instant case, it is manifest from records that the closing stock of finished goods has been valued basis the sale invoices raised by the assessee as against the cost of producing such finished goods. Given that trading account at the time of survey was drawn up and no adverse finding has been recorded by the ld CIT(A) in respect of gross profit margin of 14.27% determined at the time of survey and which has been accepted by both the sides, we deem it appropriate to set-aside the matter to the file of the AO for the limited purposes of re-computing and determining the value of closing stock of finished goods weighing 4,09,955.71 kgs at cost by reducing the gross profit margin of 14.27% 6 from the sale value of Rs 9,23,52,944/- and provide appropriate relief to the assessee. 6. We make it clear that the relief so determined shall not result in an amount exceeding the addition originally made amounting to Rs 68,43,487/- and shall thus be restricted to the said amount of Rs 68,43,487/-. 7. In the result, the appeal of the assessee is disposed off in light of aforesaid directions. Order pronounced in the open Court on 08/05/2023 Sd/- Sd/- आकाश द प जैन %व&म (संह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा य! / VICE PRESIDENT लेखा सद-य/ ACCOUNTANT MEMBER AG Date: 08/05/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File ( + $ By order, ; # Assistant Registrar