Statement of person not connected with business has no evidentiary value

Madhur Jain Vs ITO (ITAT Delhi)

In this case the valuation was done based on the statement of assessee’s son who is no way connected with assessee’s business except his occasional visits. Therefore, the statement of Sh. Rajat Jain has no evidentiary value.

Facts-

The assessee Late Sh. Rakesh Kumar Jain was an individual carrying on his business activity in trading of utensils, flat steel putta and manufacturing of utensils. The assessee filed ROI for AY 2014-15 on 29.11.2014 declaring income of Rs.4,07,660/-. Assessee also declared stock of Rs.88,16,413/- in his audited financials as on 31.03.2014. The case was selected for scrutiny and in the course of assessment proceedings the assessee Rakesh Kumar Jain died and assessment order was passed in the name of Sh. Madhur Jain the son of the assessee as legal heir. The assessment was completed u/s 143(3) on 29.12.2016 determining the income of the assessee at Rs.27,05,510/-. AO added Rs.22,72,050/- as difference in valuation of stock and Rs.25,800/- was disallowed on account of labour charges paid by the assessee for making furniture for his godown.

AO valued the stock at a price of Rs.230/- and the basis for adopting this rate of Rs.230/-was the statement taken from the son (Rajat Jain) of the assessee in the course of survey proceedings. The assessee submits that the assessee has valued the stock at Rs.190/- and whereas the AO valued the stock at Rs.230/-. Hence, the total stock value was determined at Rs.1,12,22,070.00.

The survey team took opening stock and took all purchase and sale as per book and to compute stock as per the record of the assessee applied 8% Gross Profit rate to the sale value and derived closing stock of Rs.89,50,000.00 of the assessee. Hence, the difference between the 1,12,22,070.00 and 89,50,000.00 amounting to Rs.22,72,050.00 was added in the hand of the assessee.

Conclusion-

On perusal of the statement given by Sh. Rajat Jain it is noticed that he has stated that he is not associated with his father’s proprietary business conducted in the name of Jain Trading Company. In the statement Sh. Rajat Jain also stated that no specific duties have been entrusted to him. However, he occasionally comes to the premises and looks after day to day business. In this case the valuation was done based on the statement of assessee’s son who is no way connected with assessee’s business except his occasional visits. Therefore, the statement of Sh. Rajat Jain has no evidentiary value and cannot be relied on to value the stocks at Rs.230/- as was stated by him in the very same statement that the exact valuation i.e. gauge wise, weight wise etc. would be made available by his father Sh. Rakesh Kumar Jain. However, it appears that there is no proper statement recorded from Sh. Rakesh Kumar Jain in the course of survey proceedings. No statement was recorded from the assessee late Shri Rakesh Jain during survey operations. Therefore, there is no justification for adopting the value of Rs.230/- to value all the stocks of the assessee including the scrap at this rate. Therefore, I direct the AO to delete the addition of Rs.22,72,050/-made on account of difference in valuation of stocks as there is no basis for such valuation at all.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-20, New Delhi dated 29.06.2018 for the AY 2014-15. The assessee has raised the following grounds: –

1. “That CIT(A)-20 has erred in law and on facts in sustaining the addition of Rs.21,62,182.00 on illegal and untenable term and hence the addition as such may be deleted.

2. That CIT(A)-20 has erred in law and on facts in sustaining the demand of Rs.8,29,200.00 on illegal and untenable grounds ignoring the facts that demand has been raised in the name of dead person. Hence, the demand as such may be deleted.

3. That CIT(A)-20 has erred in law and on facts in sustaining the addition of Rs.21,36,382.00 out of Rs.22,72,050.00 on account of difference in stock value on illegal and untenable grounds. Hence, the addition as such may be deleted.

4. That CIT(A)-20 has erred in law and on facts in sustaining the addition of Rs.25,800.00 on account of illegal and untenable grounds. Hence, the addition as such may be deleted.

5. The appellant craves leave to add, substitute, modify or delete any grounds of appeal on or before the date of hearing. All the above grounds of appeal are without prejudice to each other.”

2. In so far as the ground nos. 1 & 3 are concerned, the Ld. Counsel for the assessee submits that the assessee Late Sh. Rakesh Kumar Jain was an individual carrying on his business activity in trading of utensils, flat steel putta and manufacturing of utensils having factory premises at Shalimar Village, Delhi and shop and godown at Deputy Ganj at Sadar Bazar, Delhi. The Ld. Counsel submits that assessee filed return of income for AY 2014-15 on 29.11.2014 declaring income of Rs.4,07,660/-. Assessee also declared stock of Rs.88,16,413/- in his audited financials as on 31.03.2014. Ld. Counsel submits that the case was selected for scrutiny and in the course of assessment proceedings the assessee Rakesh Kumar Jain died and assessment order was passed in the name of Sh. Madhur Jain the son of the assessee as legal heir. The assessment was completed u/s 143(3) on 29.12.2016 determining the income of the assessee at Rs.27,05,510/-. The Ld. Counsel submits that while completing the assessment the Assessing Officer added Rs.22,72,050/- as difference in valuation of stock and Rs.25,800/- was disallowed on account of labour charges paid by the assessee for making furniture for his godown.

3. In so far as the valuation of difference in valuation of stocks is concerned the Ld. Counsel submits that the AO valued the stock at a price of Rs.230/- and the basis for adopting this rate of Rs.230/-was the statement taken from the son of the assessee in the course of survey proceedings. The Ld. Counsel for the assessee submits that the assessee has valued the stock at Rs.190/- and whereas the AO valued the stock at Rs.230/-. The Ld. Counsel submits that there was no stock register maintained at the premises of the assessees at the time of survey. The survey team took physical survey of stock at three locations and for two locations at deputy gang, value of stock was done differently depending upon its nature. However, at factory, Shalimar Bagh, the variety of stock like raw material, finished goods, semi finished goods, and scrap were all valued at the maximum sale price that is @230 instead of accepted accounting standard method on valuation of stock i.e. cost or net releasable value whichever is lower. Hence, the total stock value was determined at Rs.1,12,22,070.00.

The Ld. Counsel submits that Comparative/stock as per books of account computed by survey team in the following manner:

The survey team took opening stock and took all purchase and sale as per book and to compute stock as per the record of the assessee applied 8% Gross Profit rate to the sale value and derived closing stock of Rs.89,50,000.00 of the assessee. Hence, the difference between the 1,12,22,070.00 and 89,50,000.00 amounting to Rs.22,72,050.00 was added in the hand of the assessee.

It is submitted that:

• Both the valuation has been done by the survey team as per their wisdom.
• There is no difference or dispute with regard to opening stock value, purchase value, direct cost value and sale value and then how there could be dispute on closing stock value as it is simply derived figure.
• There is no dispute with regard to quantity as such and only dispute is in valuation of stock at factory which has been done by applying maximum sale price at Rs.230.00 on the ground that this price has been stated by Rajat Jain in his statement recorded on 07.10.2013.

With regard to the statements of Rajat Jain and its evidentiary value, it is submitted that it is settled law that there is no evidentiary value of statement recorded on oath during the survey as the law does not authorize the Officer to record statement on oath and further, this is the statement of Rajat Jain and not the assessee. Rajat Jain has no locus stand with respect to the business of the assessee as he is not in any way authorized person in the case.

The Ld. Counsel further referring to page 36 of the Paper Book which is the statement recorded u/s 133A from Sh. Rajat Jain submitted that Rajat Jain in his statement in response to question no. 2 that in what capacity he is associated with Jain Trading Company stated that Jain Trading Company is a proprietorship concern of his father Sh. Rakesh Kumar Jain and he is not associated with this concern. He has also stated that sometimes he do visit at the premises occasionally.

3.1 The Ld. Counsel further referring to question no. 8 of the said statement which was posed to him as to what type of duties he has been interested Shri Rajat Jain stated that he is not associated with Jain Trading Company, however, sometimes he looks after the day to day business and occasionally come to the premises. He has stated that no specific duties have been interested to him. Therefore, the Ld. Counsel submits that since Rajat Jain had stated in his statement that he is not associated with Jain Trading Company and he only occasionally visits the premises the statement of Rajat Jain that the value of the stock would be around 80 lakhs by taking the average value of 225 to 230 per kg cannot have any evidentiary value. It is further submitted that the Hon’ble Delhi High Court in the case of CIT vs. Dhingra Metal Works ITA No. 1111/2010 held that:

1. Sec. 133A does not permit recording of statements on oath.

2. Material collected and statements recorded during survey is not conclusive piece of evidence itself.

3. It is open to the person who made admission to show that statement is correct.

4. If the assessee is able to explain the discrepancy in the stock found during the survey by production of relevant record, the AO cannot make the addition solely on the basis of statement made by the assessee during survey.

Further it is submitted that there cannot be any addition as there is no case of revenue that there is any difference in purchase value, sale value, opening stock value or direct cost value. Therefore, the Ld. Counsel submits that the lower authorities are not justified in adopting the valuation at Rs.230/- as against Rs.190/- adopted by the assessee and, therefore, request that the addition be deleted.

4. Coming to the disallowance of Rs.25,800/- made by the AO and confirmed by the Ld.CIT(A) the Ld. Counsel submits that during the assessment year under consideration the assessee purchased wood and wooden materials and employed the labour to make furniture for the godown. The AO allowed the cost of wood and wooden material purchased by the assessee, however, the labour charges of Rs.25,800/- incurred by the assessee was disallowed on the ground that AR of the assessee has not submitted any bill and justification. The ld. Counsel submits that having allowed the cost of wood and wooden materials there is no justification in not allowing the labour charges paid by the assessee for carpenters for making the furniture as deduction.

5. On the other hand, the Ld. DR strongly supported the orders of the authorities below.

6. Heard rival submissions, perused the orders of the authorities below. The main dispute in appeal is regarding valuation of stocks found in the premises of the assessee in the course of survey. The stocks were valued by the Assessing Officer on the basis of statement given by Sh. Rajat Jain son of assessee Late Sh. Rakesh Kumar Jain, wherein Sh. Rajat Jain had stated that the valuation was made taking the average value of Rs.225 to 230/- per kg. The assessee valued the stocks at Rs.190/- per kg. On perusal of the statement given by Sh. Rajat Jain it is noticed that he has stated that he is not associated with his father’s proprietary business conducted in the name of Jain Trading Company. In the statement Sh. Rajat Jain also stated that no specific duties have been entrusted to him. However, he occasionally comes to the premises and looks after day to day business. It is observed that there was no proper statement recorded from assessee Late Sh. Rakesh Jain at the time of survey operations. It is the submission of the Ld. Counsel that all the stocks like raw material, finished goods, semi finished goods and also including the scrap were all valued at maximum sale price of Rs.230/- per kg. In this case the valuation was done based on the statement of assessee’s son who is no way connected with assessee’s business except his occasional visits. Therefore, the statement of Sh. Rajat Jain has no evidentiary value and cannot be relied on to value the stocks at Rs.230/- as was stated by him in the very same statement that the exact valuation i.e. gauge wise, weight wise etc. would be made available by his father Sh. Rakesh Kumar Jain. However, it appears that there is no proper statement recorded from Sh. Rakesh Kumar Jain in the course of survey proceedings. No statement was recorded from the assessee late Shri Rakesh Jain during survey operations. Therefore, there is no justification for adopting the value of Rs.230/- to value all the stocks of the assessee including the scrap at this rate. Therefore, I direct the AO to delete the addition of Rs.22,72,050/-made on account of difference in valuation of stocks as there is no basis for such valuation at all.

7. Coming to labour charges paid for the carpenters it is noticed from the assessment order that the AO disallowed the difference between the addition to furniture and fixtures of Rs.95,459/- and the copy of bill produced by the assessee for purchase of furniture amounting to Rs.68,659/-. The difference between Rs.95,459/- and Rs.68,659/- amounting to Rs.25,800/- was disallowed by the AO. It is the contention of the assessee that the difference represents the labour charges paid by the assessee to carpenters for making the furniture at godown. It appears that this amount was disallowed for want of bills. The AO having allowed the cost of wood and wooden materials there appears to be no justification in disallowing the entire labour charges. It is not in dispute that the assessee purchased wood and wooden materials and made furniture for the godown. In such circumstances, the entire labour charges cannot be disallowed. Therefore, taking the totality of facts and circumstances into consideration to meet the ends of justice the disallowance is restricted to Rs.5,000/- as against Rs.25,800/-. This ground is partly allowed.

8. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 25/05/2022.