No further inventory additions for unaccounted items that are already recorded in the books

Fact and issue of the case

The facts in brief are that the assessee in the present case is an individual and engaged in the business of manufacturing of Guvar gum under the proprietary concern namely M/s Bhavani Chemical. The premises of the assessee was subject to survey operation under section 133A of the Act carried out on 06.03.2012 wherein the unaccounted/ undisclosed inventory of ₹ 1,92,78,814.00 was found. The assessee during the survey operation agreed to make a disclosure of the impugned amount of undisclosed inventory in the income tax return.

However, the AO during the assessment proceedings found that the assessee on one hand has increased closing stock by the amount of ₹1,92,78,814 representing the unaccounted inventory found as on the date of survey and on the other hand it has also debited the purchase account in the trading and profit and loss account by the same amount. Thus, as per the AO, the effect of unaccounted inventory found as on the date of survey has become NIL in so far as the taxable income of the assessee is concerned. Thus, the AO made the addition of ₹ 1,92,78,814.00 representing the unaccounted inventory to the total income of the assessee.

Aggrieved assessee preferred an appeal to the learned CIT-A.

The assessee before the learned CIT-A submitted that he has already offered unaccounted inventory of ₹ 1,92,78,814 as other income in the profit and loss account. Besides the impugned income, the assessee to bring unaccounted inventory in the books of accounts has shown purchases and closing stock in the books of accounts.

The assessee before the learned CIT-A further submitted that at the time of survey there were two kinds of inventories i.e. disclosed inventory and unaccounted inventory. However, the assessee post survey has unaccounted all the undisclosed inventory in the books of accounts. Furthermore, the assessee post survey has returned unaccounted inventory for the amount of ₹ 34,06,150.00 and disclosed inventory worth of ₹ 9,24,350.00 and at the same time there was the consumption of the inventory in the year under consideration post survey. To this effect, the assessee has prepared the summary showing the inventory of ₹ 1,26,70,501.00 as closing stock in the books of accounts. This summary of the stock is reproduced in the order of the learned CIT-A. The assessee in support of the return of inventory has also furnished the details of the invoices, transport details, debit notes, transporters receipt etc. Thus the assessee contended that he has disclosed the income as the unaccounted inventory in the books of accounts. The learned CIT-A, after considering the submission of the assessee and remand report of the AO has deleted the addition made by the AO.

Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.

Observation by the tribunal

The tribunal has heard the rival contentions of both the parties and perused the materials available on record. On perusal of the profit and loss account of the assessee placed on page 29 of the paper book, we find that the assessee has shown other income of ₹1,92,78,814.00 which is representing the unaccounted stock found during the course of survey operation under section 133A of the Act . To this effect, the assessee in the notes to account has also made the disclosure as detailed below:

1.01 From the above disclosure, there remains no ambiguity to the fact that the assessee has duly offered other income for the amount of ₹ 1,92,78,814.00 on account of unaccounted inventory found at the time of survey. Admittedly, the assessee has disclosed net profit before tax in the profit and loss account amounting to ₹ 1,85,40,742 which transpires that if other income as discussed above is excluded, then there will be a loss in the profit and loss account of the assessee. However that loss may be on account of various reasons such as suppression of sales, higher amount of expenditure etc. but nobody has looked into this aspect. In other words the AO has not pointed out anything wrong in the books of accounts of the assessee except the unaccounted inventory found during the course of survey operation which to our understanding has been duly accounted for and therefore the same cannot be made subject to addition again.

Before parting, it is equally important to note that the assessee while valuing the closing stock has reduced the goods return therefrom which has not been disputed before us. However, the question arises whether the assessee has also given effect in the value of purchases shown in the profit and loss account on account of such return of the goods. If it has not been done so, then it means that the assessee has shown less amount of inventory without adjusting the purchases which will certainly have the impact on the less income disclosed by the assessee to the tune of ₹43,30,500.00 only. However, at the time of hearing neither the learned AR nor the DR has brought anything to our notice about the fact that the purchase shown by the assessee in the books of accounts was adjusted on account of purchase return. In the absence of such information, we are setting aside the issue to the file of the AO to the extent of verifying whether the purchases shown by the assessee has been adjusted on account of purchase return. If it has been adjusted, then no addition is warranted. In the event it has not been adjusted, then an addition of 43,30,500.00 on account of purchase return is liable to be added to the total income of the assessee. With this observation, we direct the AO to pass the suitable order as per the provisions of law. Hence the ground of appeal of the Revenue is partly allowed subject to the direction as discussed above.

In the result, the appeal of the Revenue is partly allowed subject to the direction.