SPG RAMASAMY NADAR & SONS,VIRUDHUNAGAR V. ACIT, CENTRAL CIRCLE-2, MADURAI

ITA 3341/CHNY/2024

AI Insights

The case involves S P G Ramasamy Nadar & Sons, a partnership firm engaged in the export of various goods, including cardamom. A survey conducted under section 133A of the Income Tax Act, 1961, revealed a significant shortfall in the physical stock of cardamom compared to the book stock. The assessee claimed this shortfall as a loss in their return, while also agreeing during the survey to declare additional income based on the shortfall. The AO added the amount of the shortfall as unaccounted sales and disallowed the claimed loss, leading to an appeal by the assessee. The CIT(A) upheld the AO's decision, which was then challenged in the Tribunal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 714289 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2020-2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS; C.I.T
• Assessee Lawyers: G. BASKAR
• Keywords: Set aside; Business expenditure; Income from undisclosed sources; Onus to prove; Agreed addition
• Section: 69; 234B

Judgement Text

" आयकर अपीलीय अधिकरण, ‘बी’ न्यायपीठ, चेन्नई IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI श्री मनु क ुमार गिरर, न्यागिक सदस्य एवं श्री एस. आर. रघुनाथा, लेखा सदस्य क े समक्ष BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.:3341/Chny/2024 धनिाारण वर्ा / Assessment Year: 2020-21 S P G Ramasamy Nadar & Sons, 77/1, South Car Street, Virudhunagar - 626 001. vs. The Assistant Commissioner of Income Tax, Central Circle -2, Madurai. [PAN:AAFFS-3162-E] (अपीलाथी/Appellant) (प्रत्यथी/Respondent) अपीलाथी की ओर से/Appellant by : Shri. G. Baskar, Advocate प्रत्यथी की ओर से/Respondent by : Shri. Shiva Srinivas, C.I.T. सुनवाई की तारीख/Date of Hearing : 02.07.2025 घोर्णा की तारीख/Date of Pronouncement : 05.08.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, AM : This appeal by the assessee is filed against the order of the Commissioner of Income Tax, Appeal, CIT(A), Chennai, for the assessment year 2020-21, vide order dated 25.11.2024. 2. The assessee has raised the following grounds of appeal:- 1.1 The order of CIT(A) is erroneous and bad in law and is liable to be set aside as itis opposed to facts of the case and the provisions of the Act. 1.2. The CIT(A) erred in passing the order without considering the merits of the case and submissions made before him. Printed from counselvise.com :-2-: ITA. No.:3341/Chny/2024 2.1 The CIT(A) erred in upholding the order of AO arrived at solely on the basis of the Sworn statements recorded during survey operation without any corroboration 2.2 The CIT(A) erred in upholding the findings of the AO in treating the shortfall of 55,930 kgs valued at Rs.15,11,81,493 Crores as unaccounted sales. He failed to see the nature of Business and that purchases were made in bulk quantity without any grading, supported by certificate issued by Indian cardamom Merchants Welfare association. 2.3 The CIT(A) failed to consider the shortfall occurred in the regular course of business and the details were furnished along with the comparison chart, expenses incurred in sending samples and loss connected to it. 2.4 The entire purchase having already been accounted in the books; disallowing the expenses and adding the purchases to the income, only results in double addition and CIT(A) erred in not deleting the addition. 3.1 The CIT(A) erred upholding the average purchase value of Cardamom of Rs.2,703/- Kg arrived during the Survey proceedings, which is arbitrary and not scientific. 3.2 The CIT(A) ought to considered the average value adopted by the revenue in the previous assessment years, which was far less than the value adopted this year. 4. Alternatively, the CIT(A) ought to have directed the AO to tax only the Net profit from the alleged unaccounted sales. 5. The CIT(A) erred in upholding the levy of interest u/ss. 234A & 234B of Rs. 2,27,715 and 22,77,150 respectively. 6. Any other grounds that may be raised at any time of the hearing. 3. The brief facts of the case are that the assessee is a partnership firm, engaged in the exports of cardamom, pepper, coffee seeds, kasini powder, cloves, etc. A survey was u/s.133A of the Income Tax Act, 1961 (the Act) was conducted on 07.02.2020 in the premises of the assessee. The available cardamom stock as per books was at 63,990 Kg but the physical stock was found was only 8,060 kgs. The shortfall of 55,930 kg @ Rs.2,703 was quantified at Rs.15,11,81,493 per kg. during the survey. 4. Later the assessee filed its return of income on 04.01.2021 declaring a loss of Rs.25,32,68,567/- in which the sum of Rs.15,11,81,493 was claimed as \"stock written off”. Subsequently, the Return of income filed by the assessee Printed from counselvise.com :-3-: ITA. No.:3341/Chny/2024 was selected for scrutiny. During the assessment proceedings the assessee furnished the audited financial statements as on 31.03.2020, showing a loss of Rs.25,32,68,567/-. The AO observed that the assessee has reduced the shortfall of physical stock found compared to the book stock of 55,930 Kgs on the date of survey from the closing stock as on 31.03.2020 and also debited the amount of Rs.15,11,81,493/- to the Trading account as ‘loss of stock on account of dust, moisture etc.,’ as an expenditure. Hence, the AO proceeded to disallow the claim of write off of shortfall of Rs.15,11,81,493/- which has been claimed as an expenditure. Further he also added Rs.15,11,81,493/- as unaccounted sales on account of reduction of stock made by the assessee due to shortage of stock found at the time of survey. The Assessment was completed by arriving at total income of Rs.4,90,94,419/- against the loss of Rs.25.32 crores declared in the return of income by passing an order u/s.143(3) of the Act dated 30.09.2022. Aggrieved by the order of the AO the assessee preferred an appeal before the ld.CIT(A), Chennai - 19. The assessment order of the AO was upheld by the Ld. CIT (A) by passing an order dated 25.11.2024 by holding as under: 6.11 The appellant attributed the stock deficit found during the course of survey to factors such as:  Moisture Loss : Loss due to evaporation during storage  Sorting Loss: Discarding of impurities or defective items  Sample Distribution: Stock given to potential buyers as samples. 6.12 The appellant claimed that the stock discrepancy reflected cumulative losses over several years due to accounting errors and not unaccounted sales. As evident in the assessment order, the Assessing Officer rejected the claim, asserting that annual stock adjustments already accounted for such losses. Further, if the deficit was cumulative over years, it should have been reflected in past reconciliations and audits. The Assessing Officer viewed the explanations as afterthoughts, unsupported by credible evidence. The undersigned is of the view that the appellant’s claims of invisible losses and cumulative discrepancies lack merit without substantiating documentation, such as, records of stock adjustments for moisture, sorting, or samples. Reconciliation of prior years’ stock statements. Further the appellant firm in its written submission has claimed that most of the purchases were sold in the same year itself. Therefore, the AO’s conclusion that the deficit represented unaccounted sales is supported by the absence of alternative explanations. 6.13 During the course of appellate proceedings, the AR strongly contended that the AO’s treatment of the deficit stock as unaccounted sales, asserting that the shortfall could not be conclusively linked to actual sales or income. As evident in the assessment order, the AO held that the stock deficit Printed from counselvise.com :-4-: ITA. No.:3341/Chny/2024 logically implied unaccounted sales, as no evidence was provided to explain the disappearance of the goods. The AO highlighted that the firm’s business operations involved quick turnover of stock, making prolonged retention of goods unlikely. The undersigned is of the view that in no cases involving stock discrepancies, the presumption of unaccounted sales arises if no credible alternative explanation is provided. The appellant’s failure to reconcile the deficit strengthens the AO’s inference. 6.14 Further the appellant has claimed Re. 15.12 crore under “Other Expenses” in its Profit and Loss account, by contending that the deficit stock was already included in its accounts. As evident in the assessment order, the Assessing Officer disallowed the claim, stating that the addition of Rs. 15.12 crore as unaccounted sales and its simultaneous claim as an expense would result in a double deduction. The Assessing Officer reasoned that the deficit stock represented concealed income and could not be treated as an allowable expense. The undersigned is of the view that the Assessing Officer’s approach aligns with the principle of taxation, which prohibits double deduction of the same amount. Allowing the claim would effectively nullify the addition, defeating the purpose of the assessment. 6.15 The AR strongly contended that the burden of proving the existence of unaccounted sales rested on the Assessing Officer, who failed to provide conclusive evidence beyond the stock deficit. As evident in the assessment order, the Assessing Officer maintained that the initial burden to explain the stock discrepancy lay with the appellant, as the discrepancy arose from its own records. The failure to provide a credible explanation shifted the burden back to the appellant. The undersigned is of the view that as per the provisions of section 69 of the Act, unexplained discrepancies in stock are deemed as unaccounted income unless satisfactorily explained by the taxpayer. The appellant’s inability to provide such an explanation justifies the Assessing Officer’s action. 6.16 In light of the above discussions, it can be stated that the legal and factual contentions revolve around the evidentiary value of survey statements, the valuation of stock discrepancies, and the burden of proof. The appellant’s arguments were largely unsupported by evidence, while the Assessing Officer’s findings were backed by logical inferences and established principles of taxation. The treatment of the deficit stock as unaccounted sales and the disallowance of the expense claim are legally sustainable and therefore and total income determined by the Assessing Officer amounting Rs. 4,90,94,419/- is hereby sustained. Accordingly, all the grounds raised are hereby treated as dismissed. 5. Aggrieved by the order of the ld.CIT(A) the assessee challenged order in this appeal before us. 6. The ld.AR for the assessee (ld.AR) submitted that the assessee used to purchase cardamom from the Auctioneers and some private entities Some were purchased in a specific size range of 7 to 8 mm to meet export requirements. The Cardamom was also purchased from auctioneers in lots, Printed from counselvise.com :-5-: ITA. No.:3341/Chny/2024 which contain impurities, husk, broken cardamom and seeds, mostly brought in an ungraded form and in various sizes. These, were subsequently graded and segregated at the Appellants' premises using machinery and manual methods [Photographs are at pages 217 to 221 of Paper Book-2]. 7. The ld.AR also stated that only at the time of survey, the assessee actually came to know about the shortfall of 55,930 Kgs of cardamom. The assessee explained that this discrepancy was due to various factors, losses in the nature of impurities during grading, spillage, samples given to promoters in foreign countries, and a reduction in weight due to moisture loss, handling loss, loss from sorting of cardamom, husk and broken seeds. These losses were not actually accounted for in a scientific manner in the stock register, due to which the same was accumulated in the stock register over the past few years. 8. He further explained that every year the assessee accounted or reduced stock shortage on an adhoc basis, without accounting for the actual physical inventory losses/shortages. The amounts declared were minimal in comparison to the total quantity of cardamom purchased during the respective assessment years 2011-12 to 2019-20. 9. The ld.AR submitted that during the survey, in question No.13 was posed to the senior Partner [Page 06 of PB and translated version in page 11] regarding cardamom stock and an explanation with regard to the shortfall was sought. The partners admitted the shortfall and pointed out that they are not in a position to provide an explanation for the difference at that time. The ld.AR further pointed out that, at no point of time, the partners have stated that the discrepancy/shortage of stock was due to unaccounted sales. 10. Further, the ld.AR took us through the complete Audited financials from A.Ys.2010-11 to 2019-20 which are attached at Page No 01 to 156 of PB-2. According to the audited financials, the assessee has bifurcated and tabulated the opening stock, purchases, export and local sales, closing stock, shortage Printed from counselvise.com :-6-: ITA. No.:3341/Chny/2024 claimed in the Return of income for the respective years along with the Certification of Chartered Accountant [Page 157 and 158 of the PB-2] 11. The ld.AR shown that the assessee has claimed only 29,852.750 Kgs of loss/write of stock over the A.Ys.2011-12 to 2020-21 on a total purchase of 69,20,627 Kgs. as tabulated at Page 157 of PB-2, which works out to 0.43% of total purchases. 12. In support of the loss claimed the assessee the ld.AR submitted 2 certificates, one from the Association to which he belongs and the other from the Auctioneers, where he buys cardamom. Both of them certified that there will be typically 2% shortage/ loss in the purchase of ungraded cardamom lots from the auction sale or directly brought through Cardamom Plantations. These losses are generally due to the process of grading, removing impurities, dust and seeds. 13. Further, the ld.AR submitted an estimated working of shortfall/loss of stock compare to total purchases of the assessee, based on the aforesaid certificates at the rate of 1%, 1.5% and 2% loss at Page 159 of PB-2. It could be seen that the invisible losses claimed (including what has already been written off of 29,852.750 Kgs) is about 0.43% only, when generally 2% is the normal waste / loss of weight. This is because they personally do the purchases mostly from reputed sellers. 14. The ld.AR stated that, the majority of the sales are exports to Kuwait, Saudi Arabia and Qatar, the customers typically request samples before placing orders for cardamom. These samples allow them to assess the quality, grade, and size of the cardamom. Accordingly, samples ranging from 0.5 kg to 3 kg are sent through couriers. It is pertinent to note that, these samples were not recorded and reduced in the stock register. Furthermore, not every sample sent by the assessee results in a confirmed order by the parties and these samples sent are never received back. Printed from counselvise.com :-7-: ITA. No.:3341/Chny/2024 15. The ld.AR submitted bills and invoices related to courier charges for the samples sent for the period from 2015 to 2020 [Pages 176 to 223 of PB-1]. The export invoices are also submitted at Pages 224 to 237 of PB-1. Additionally, the ld.AR submitted year-wise breakup of exports from A.Ys. 2011-12 to 2020-21, along with cardamom export ledgers [Pages 161 to 216 of PB-2] 16. He further stated that based on the total exports made during these years and the corresponding consignments, the assessee has estimated the total weight of samples sent to be 1,061 Kgs for the period A.Y.2010-11 to A.Y.2020-21. This export summary chart is provided in Page 160 of PB-2. 17. Further, the ld.AR submitted that the AO having accepted the book results of the assessee there is no reason for him to reject the loss claimed. The action of the AO again adding Rs.15,11,81,493/- on the premise that it represents proceeds of unaccounted sales, is liable to be deleted without there being any evidence to support such premise. The ld.AR vehemently argued that during the survey, no cash nor any cash trail was found to support the theory of unaccounted sales. No loose sheets or supplementary books were found/seized to even allege unaccounted sales. Hence, the addition on account of unaccounted sales cannot be justified in the eyes of law and liable to be deleted. 18. In the Assessment order dated 23.09.2021 for the A.Y.2019-20 the closing stock as on 31.03.2019 was valued at Rs.1229.96 per Kilogram. The Survey team arrived at the average purchase value of Rs.2,703/- per Kg. this year in an arbitrary manner. This made the assessee to fix the loss at Rs.15,11,81,493/- and this again prompted the AO to add an equivalent sum as unaccounted sale proceeds. 19. The ld.AR submitted that the losses were actually ascertained during the survey, and no corresponding income was realised from the sale of these Printed from counselvise.com :-8-: ITA. No.:3341/Chny/2024 stocks. Since the losses of Rs.15,11,81,493/- has crystallised in the year of the search, they were accordingly written off. 20. The ld.AR stated that the purchases made in the prior years were properly recorded and have not been disputed by the Revenue. The assessee had brought the stock into the business through legitimate means and duly recorded in the books. As no subsequent sales took place in respect of these stocks, and the stocks were ultimately lost in the normal course of business, the loss crystallised during the financial year 2020-21. Therefore, the ld.AR stated that the same was treated as a business expenditure and written off under the head \"cardamom losses”. In light of the above arguments and submissions, the ld.AR prayed for deleting the additions made by the AO which has been confirmed by the ld.CIT(A). 21. Per contra the ld.DR supported the orders of the AO and that of the ld.CIT(A) and submitted that the assessee has failed to show the correct books of accounts by recording the proper inventory to arrive at the net profit of the organization. On the one hand the assessee claims the actual stock found at the time of survey as correct stock and reduces the closing stock as on 31.03.2020 to the extent of Rs.15,11,81,493/- and on the contrary the assessee also claims the same amount as expenditure as loss of stock by debiting to the Trading account. Since, the assessee has not explained anything about the shortage of stock, the ld.DR submitted that the action of additions made by the AO needs to be confirmed. Further, the ld.DR submitted that during the survey the assessee had agreed to declare as an additional income of Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/- (55,931 Kgs. Of cardamom @ Rs.2,703/- per Kg.) while filing the return of income. However, the assessee had filed a return of income by showing the net loss Rs.25.32 crores, and has failed to declare the agreed additional income of Rs.2,08,17,692/- as stated in his sworn statement recorded during the survey. Printed from counselvise.com :-9-: ITA. No.:3341/Chny/2024 22. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. It is an admitted fact that during the survey at the place of the assessee’s business premises on 07.02.2020, the department found shortage of cardamom physical stock (8,060 kgs) compared to the book stock (63,990 Kg) of 55,930 kg @ Rs.2,703/- per kg valued at Rs.15,11,81,493/-. During the survey the assessee in his sworn statement recorded, had agreed to declare an additional income of Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/- (55,931 Kgs. Of cardamom @ Rs.2,703/- per Kg.) while filing the return of income. However, the assessee filed its return of income on 04.01.2021 declaring a loss of Rs.25,32,68,567/- in which the sum of Rs.15,11,81,493 was claimed as \"stock written off”. The AO observed that the assessee has reduced the shortfall of physical stock found compared to the book stock of 55,930 Kgs on the date of survey from the closing stock as on 31.03.2020 without declaring the Gross profit of Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/-. Further, the assessee had also debited an amount of Rs.15,11,81,493/- to the Trading account as ‘loss of stock on account of dust, moisture etc.,’ as an expenditure. Hence, the AO proceeded to disallow the claim of write off of shortfall of Rs.15,11,81,493/- which has been claimed as an expenditure. Further he also added Rs.15,11,81,493/- as unaccounted sales on account of reduction of stock made by the assessee due to shortage of stock found at the time of survey. 23. The Assessment was completed by arriving at total income of Rs.4,90,94,419/- against the loss of Rs.25.32 crores declared in the return of income by passing an order u/s.143(3) of the Act dated 30.09.2022. On appeal, the assessment order of the AO was upheld by the Ld. CIT(A). 24. On perusal of the audited Balance sheet and Trading and profit and loss account as on 31.03.2020 filed by the assessee, we find that the assessee has already reduced the shortage found during the survey conducted in the physical stock of 55,930 kgs of cardamom from the closing Printed from counselvise.com :-10-: ITA. No.:3341/Chny/2024 stock which was worked out at Rs.15,11,81,493/-. Further, the same amount of Rs.15,11,81,493/- has been debited to the Trading account as ‘loss of stock written off’. 25. Therefore, it is very much clear from the audited financials filed by the assessee that the shortage of stock to the tune of Rs.15,11,81,493/- has been claimed as an expenditure on the one hand by debiting to trading account and on other hand in the income side reduced the closing stock as on 31.03.2020 with the same amount of Rs.15,11,81,493/-. Therefore, the assessee has claimed a double deduction for the same loss of stock. 26. We find that the during the survey assessee had stated and agreed in his sworn statement to declare an additional income of Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/- (55,931 Kgs. Of cardamom @ Rs.2,703/- per Kg.). However, the assessee claimed a loss of Rs.25.32 crores in his return of income filed without declaring the additional income. During the assessment proceedings, in our opinion, the AO also has misunderstood the financials and has disallowed both the reduction of closing stock claimed of Rs.15,11,81,493/- as unaccounted sales and also the expenditure claimed on account of loss / shortage of stock Rs.15,11,81,493/-. We also find that the ld.CIT(A) also confirmed the same without analysing the financials and the return of income filed by the assessee. Therefore, in our considered opinion, the AO and also the ld.CIT(A) have erred in concluding the total income of the assessee. 27. In the present facts of the case, the assessee should have reduced the stock as there was a shortage of physical stock compared to the book stock on the date of survey conducted to the tune of Rs.15,11,81,493/-. Apart from that the assessee as agreed should have declared Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/-. Apart from that the assessee has also claimed the said amount as an expenditure, which lead to double deduction. Printed from counselvise.com :-11-: ITA. No.:3341/Chny/2024 28. The AO also has erred in disallowing both the amounts, instead of disallowing the expenditure of loss of stock to the tune of Rs.15,11,81,493/- which is wrongly claimed by debiting to the trading account. Further, the AO also erred in denying the reduction of stock and adding it as unaccounted sales of the assessee to the tune of Rs.15,11,81,493/-, instead of making an addition of Rs.2,08,17,692/- @ 13.77% of Gross profit on purchase value of deficit stock i.e. Rs.15,11,81,493/- to the declared income. 29. In view of the above discussion, we direct the AO to recompute the income of the assessee as detailed below: Net loss declared in the return of Income (-) Rs.25,32,68,567/- Add: Expenditure claimed as loss/shortage of stock (Not eligible as the assessee has already reduced (+)Rs.15,11,81,493/- The same amount from the closing stock) Add : Closing stock reduced on account of loss of Stock as on 31.03.2020 (including the GP of 13.77% Of Rs.15,11,81,493/-) (+) Rs. 2,08,17,692/- Net loss allowable (-) Rs. 8,12,69,382/- 30. In light of the above discussion and facts, we are setting aside the order of the ld.CIT(A) and delete the addition made by the AO to the tune of Rs.13,03,63,801/- and sustain the addition of Rs.17,19,99,185/-. 31. In the result the appeal of the assessee is partly allowed. Order pronounced in the open court on 05th August, 2025 at Chennai. Sd/- Sd/- (मनु क ुमार गिरर) (MANU KUMAR GIRI) न्यागिक सदस्य/Judicial Member (एस. आर. रघुनाथा) (S. R. RAGHUNATHA) लेखासदस्य/Accountant Member चेन्नई/Chennai, धदनांक/Dated, the 05th August, 2025 Printed from counselvise.com :-12-: ITA. No.:3341/Chny/2024 RL आदेश की प्रधतधलधप अग्रेधर्त/Copy to: 1. अपीलाथी/Appellant 2. प्रत्यथी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. धवभागीय प्रधतधनधि/DR 5. गार्ा फाईल/GF Printed from counselvise.com "