It is unsustainable to add to the undervaluation of closing stock without also adjusting opening stock
Fact and issue of the case
The present appeal is directed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeal)-11, Kolkata, (hereinafter the “ld. CIT(A)”) dt. 30/08/2019, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2013-14 which is arising out of the assessment order framed u/s 143(3) of the Act dt. 23/02/2016.
The assessee has raised the following grounds of appeal:-
That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in confirming the action of AO who disallowed claim of assessee for weighted deduction u/s 35(1)(ii) amounting to Rs. 26,25,000/- @ 175% in respect of donation of Rs. 15,00,000/- to School of Human Genetics and Population.
That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in partly allowing the addition on account of under valuation of closing stock made by AO and confirming the addition of Rs. 8,77,921/- by making his own calculation.
That on the facts and circumstances of the case, Ld. CIT(A) has erred in confirming the addition of Rs. 1,05,57,773/- u/s 69 of the Income Tax Act, 1961 on account of gold loan obtained from partner Mr. Pradip Kumar Gupta and carried forward from earlier years.
That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in confirming the disallowance of Rs.1,74,745/- made by AO u/s 40A(3) of Income Tax Act, 1961
That on the facts and in the circumstances of the case, Ld. CIT(A) erred in not adjudicating the additional grounds raised in course of hearing in respect of addition on account of making charges of Rs.3,39,000/- included in closing stock by AO.
That the appellant craves leave to add, alter, adduce or amend any ground or grounds on or before the date of hearing of the appeal.”
Brief facts of the case as culled out from the records are that the assessee is a partnership firm engaged in the business of manufacturing and sale of gold jewellery through showroom located at Bowbazar and Garia. Return of income, e-filed for Assessment Year 2013-14 on 29/09/2012 declaring income of Rs. 2,31,95,241/-. Case selected for scrutiny through CASS followed by issuing notice u/s 143(2) and 142(1) of the Act. Various informations were called for in the questionnaire issued u/s 142(1) of the Act. Submissions were filed and income assessed at Rs. 5,87,39,440/- after making following
|Add: As discussed above|
|1. Add: u/s 35 of||Rs.26,25,000/-|
|2. Valuation of closing stock||Rs.98,35,996/-|
|3. Making charges in closing stock||Rs.3,39,000/-|
|4. u/s. 40A(3)||Rs.1,74,745/-|
|5. Unconfirmed asset u/s 69||Rs.1,05,57,773/-|
|6. Unconfirmed asset u/s 69||Rs.1,20,11,690/-|
|Assessed total Income||Rs.5,87,39,444/-|
|Assessed Total Income (R/O)||Rs.5,87,39,440/-|
Aggrieved the assessee preferred appeal before the ld. CIT(A) challenging various grounds and partly succeeded.
Now, the assessee is in appeal before this Tribunal.
At the outset, the ld. Counsel for the assessee requested for not pressing Ground No. 1 relating to disallowance u/s 35(1)(ii) of the Act made towards donation given to School of Human Genetics and Population stating that the issue stands squarely covered against the assessee by the decision of this Tribunal in the case of Hiralal Bhandari ITO in ITA No. 261/Kol/2020 and ors. dt. 07/03/2023. Copy of the order of this Tribunal is placed on record. Perusal of the same shows that the donations given to School of Human Genetics and Population, have been held as bogus by this Tribunal in the case of Hiralal Bhandari vs. ITO (supra). Accordingly, this ground is decided against the assessee. Ground No. 1 is dismissed.
So far as the remaining grounds are concerned, the ld. Counsel for the assessee argued referring to the written submission filed before the lower authorities. Particularly with regard to Ground No. 3 for the additions made u/s 69 of the Act at Rs.1,05,57,773/-, it was submitted that one of the partner of the assessee firm made declaration under the Voluntary Disclosure of Income Scheme, 1997 (VDIS Scheme) and gave a gold loan of 4132.20 gms to the assessee firm. The said loan is regularly appearing in the audited books valuing at the rate of gold which was existing at the point of time when the said loan was taken. It was further submitted that both the lower authorities have made an addition u/s 69 of the Act calculating the value of gold as on date stating it to be an unexplained income of the assessee. The ld. Counsel for the assessee further submitted that the said loan is repayable and whenever these transactions will take place the respective entries will be made in the books but there is no justification in making the addition in the hands of the assessee even when the loan is appearing in the books.
On the other hand, the ld. D/R vehemently argued relying on the detailed finding of the ld. CIT(A).
Observation of the court
We have heard rival contentions and perused the material placed before us as well as the details filed by the assessee.
Ground No. 2 relates to addition of Rs.8,77,921/- on account of valuation of closing stock. We notice that in the course of assessment proceedings, ld. Assessing Officer made an addition of Rs.98,35,996/- on account of under valuation of closing stock. Surrender of Rs.1 Crore was made during the course of survey conducted u/s 133A of the Act on 11/05/2009 & 12/05/2009 and ld. Assessing Officer while framing the assessment order for Assessment Year 2010-11 has observed that the appellant firm has increased the average value of gold per gram in every year hoping that it will be able to value the closing stock at the current rate provided that the growth rate in gold prices are steady. This approach was acceptable to Assessing Officer in earlier assessments made u/s 143(3) of the Act. It was claimed by the assessee that the effect of valuing the closing stock at high average value has taken place in the financial year 2009-10 itself and its effect has thereafter taken place in the opening stock and, therefore, if the Assessing Officer has increased the valuation of closing stock then it will be revenue neutral since necessary effect has to be given to the opening stock also. Based on this analogy, computation of closing stock was prepared by the assessee showing the details as per the return filed, the effect of valuing the closing stock has been assessed by the Assessing Officer without changing the value of opening stock, impacts on the accounts if simultaneously value of opening stock also changed and finally the increase/decrease in assessed value owing to change in the opening stock. As per this detail, the consequential effect came to Rs.8,77,921/-. We note that the ld. CIT(A) after examining the details found merit in the contentions of the ld. CIT(A) and sustained the addition only at Rs.8,77,921/-.
Before us, the assessee has raised the ground challenging the addition of Rs.8,77,921/- confirmed by the ld. CIT(A). We, however, fail to find any merit in this ground as ld. CIT(A) has sustained the addition of Rs.8,77,921/- based on the calculation provided by the assessee during the course of appellate proceedings and, therefore, assessee should not have any grievance. Thus, Ground No. 2 raised by the assessee is dismissed.
Ground No. 3 relates to the addition u/s 69 of the Act at 1,05,57,773/- on account of gold loan obtained from partner Mr. Pradip Kumar Gupta and brought forward from earlier years. We observe that Section 69 of the Act is applicable where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of such investments or the explanation offered is not found satisfactory to Assessing Officer. In the instant case, the facts giving rise to the said issue are that one of the partners of the assessee firm Mr. Pradip Kumar Gupta, gave gold loan weighing 4132.20 gms during the period 1997-98 and the said gold was declared by Mr. Pradip Kumar Gupta under the VDIS scheme. There is no dispute at the end of the revenue that loan in the form of pure gold of 4132.20 gms was received by the assessee firm from Mr. Pradip Kumar Gupta and the same is appearing as loan in the books of account valued at the rate of gold as on the date of receiving the said gold loan during financial year 1997-98.
Now during the course of assessment proceedings, the ld. Assessing Officer ascertained the value of the difference of the loan amount as per the prevailing rate of gold and observed that Mr. Pradip Kumar Gupta, has not reflected the said increase of gold loan in his income tax return nor any wealth tax return has been filed by Mr. Pradip Kumar Gupta. In reply, the assessee submitted that under the VDIS Scheme, 4132.20 gms of gold was declared and the value was calculated @204 per gram as per which the total value of gold loan was Rs.8,42,967/- and necessary entries/adjustments will be made in books when such gold loan is repaid and the mode of such repayment. The ld. Assessing Officer further observed that the gold belongs to the assessee firm and it is using it as a stock in trade since inception and hence the assessee firm is the owner of the stock in trade and difference in the valuation in VDIS declaration and the present value of gold i.e., Rs.1,05,57,773/- deserves to be added as income u/s 69 of the Act.
When the matter travelled before the ld. CIT(A), he supported the finding of the ld. Assessing Officer stating that the loan in terms of gold comes attached with the value and when the loan is returned to the partner, it will be in the form of gold or in terms of money as on the date when the said loan is repaid by him. The ld. CIT(A) further held that even if it is repaid in terms of gold itself, that gold will have the value as on the date of repayment and, therefore, the value of gold in terms of loan will be enhanced as on the date when the balance-sheet is drawn.
We notice that the assessee firm is regularly filing ITRs, books of accounts are regularly maintained and are duly audited and whenever applicable have been audited u/s 44AB of the Act. The genuineness of the loan taken from the partner valuing Rs.8,42,967/- gold weighing 4132.20 gms, has not been disputed at any stage by the revenue authorities. The said gold loan is still standing in the books of accounts. As far as the applicability of Section 69 of the Act is concerned, the first condition for invoking the said provision is if such investment/s are not recorded in the books of accounts and second is, the assessee offers no explanation about the nature and source of investment. In the instant case both these preliminary conditions are not satisfied because firstly, the alleged transactions of unsecured loans taken from partner is duly recorded in the books and secondly even if the same was recorded in the books, the ld. Assessing Officer could not have invoked Section 69 of the Act, since the assessee has given detailed explanation about the nature and source of the said gold loan, which in the instant case was in the form of declaration made in the VDIS scheme by the partner paying due taxes and giving gold loan to assessee firm.
So far as the other angle of the revenue authorities regarding the increase in value of gold received as loan is concerned, we observe that the assessee is maintaining the books of account on Historical Cost Concept Method (HCCM). When the loan was taken the value of the loan was Rs.8,42,967/- and it was in the form of gold. Even if one assumes that the assessee firm has utilised the gold loan as part of its stock in trade then there can be two possibilities, firstly being a part of stock in trade it has already been sold and the profit if any earned from the sale has been shared by the partners as per the profit sharing ratio and the second situation is that the gold is kept separately in the stock and the same is to be given back to the partners when it is been demanded. However, the details of closing stock do not have to mention about any such stock of gold which is to be given back to the partner.
Now the revenue is alleging that when the gold loan will be repaid the assessee firm will have to pay the amount as per the prevailing market rate of gold and the excess amount payable is out of the profit earned by the firm on account of increased valuation. We do not agree to this contention because this transaction has not happened till now and, therefore, making any addition in anticipation for the transactions which has still not taken place cannot be held to be justified. Even if the transactions are squared off in the future, the excess amount to be paid by the assessee firm will be in the form of expenditure allowable to the firm. But by no canon an addition can be made u/s 69 of the Act for unexplained investment.
We, therefore, under the given facts and circumstances are of the considered view that the alleged gold loan which is duly accounted for in the books and the nature and source thereto has been duly explained to the assessing officer and further the impact envisaged by the revenue authorities which might arise to the assessee firm at the time of repayment of loan cannot be converted into an addition in the hands of the assessee neither at this stage nor even at a subsequent stage because it will be income in the hands of partner and an expenditure in the hands of the firm. Thus, we set aside the findings of the ld. CIT(A) and delete the addition of Rs.1,05,57,773/- made u/s 69 of the Act Ground No. 3 raised by the assessee is allowed.
Ground No. 4 relates to disallowance u/s 40A(3) of the Act. The fact is that the assessee purchased ornaments and gold idols worth Rs.8,87,802/-. Part payment by account payee cheque was made at Rs.7,13,057/- and the balance payment was made in cash for taking immediate delivery for sale of idol to the customer. The ld. CIT(A) was not convinced about the arguments made by the ld. A/R of the assessee regarding the urgency of making the payment. It was also pleaded on behalf of the assessee that if the amount of cash purchase is disallowed the corresponding sale made and value of closing stock for balance quantity of 26.320 gms should not be considered for additions made in the assessment because this would lead to double taxation. The ld. CIT(A) did not find any merit in this contention and confirmed the disallowance u/s 40A(3) of the Act.
We, however, looking at the submissions filed by the assessee before the lower authorities are of the view that firstly the transactions were genuine and major part of the expenses were incurred by account payee cheque but since the remaining amount has been paid in cash being more than Rs.20,000/-, there is a violation of provisions u/s 40A(3) of the Act. It is also not in dispute that the said purchases of 48.900 gms have partly been sold and remaining quantity i.e., 26.320 gms is still appearing in the closing stock. So far as the quantity remaining in the closing stock is concerned the value of the same is around Rs.4,78,852/- and the quantity sold against the said purchase has already been accounted for in the books. Considering the situation and there being no mechanism to calculate the amount of closing stock to ascertain the amount sold out of the alleged cash purchases, we taking into consideration the genuineness of the transactions, delete the disallowance u/s 40A(3) of the Act. Accordingly, Ground No. 4 is allowed.
Ground No. 5 relates to the addition on account of making charges of Rs.3,39,000/- by the Assessing Officer alleging to have not been included by the assessee in valuation of closing stock. We notice that the assessee did not raise this ground before the ld. CIT(A) (as appearing in the grounds of appeal attached to Form No. 35). Before us it has been contended that the assessee raised it as an additional ground of appeal before the ld. CIT(A) who did not adjudicate the same. The assessee has filed no evidence to prove that any such additional ground has been filed. However, considering the smallness of the issue and going through the finding of the ld. Assessing Officer, we find that the said addition has been made on the basis of observation that making charges has not been added in the goods manufactured and, therefore, did not form part of the closing stock. It was stated by the assessee before the ld. Assessing Officer that making charges are not realizable. However, this fact remains undisputed that the assessee has not added making charges while valuing closing stock. Therefore, the same will be revenue neutral because closing stock will become the opening stock for the next year and similarly the opening stock for the year under appeal is also to be calculated considering the making charges in preceding year. Therefore, making the addition for under valuation of closing stock for not adding making charges specifically for the year under appeal cannot be held to be justified unless and until corresponding adjustment is made for the opening stock. It is also evident that the assessee is consistently maintaining books of account and not including making charges in opening stock. Thus we are of the considered view that the addition of ₹ 339,000/-, is uncalled for and the same is hereby deleted. Thus, finding of the ld. CIT(A) is set aside and accordingly, Ground No. 5 is allowed. 16. Ground No. 6 is general in nature.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the Court on 3rd July, 2023 at Kolkata.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee