Valuation of finished goods after following stock ageing effect justifiable

DCIT Vs Zari Silk (India) Pvt. Ltd. (ITAT Jaipur)

ITAT Jaipur held that valuation of finished goods at lower of cost or net realizable value after following stock ageing effect is justifiable as the same is already allowed by AO in earlier years. Accordingly, addition towards difference in valuation of stock due to ageing effect not sustainable.

Facts- The assessee is engaged in the business of Manufacturing & Trading of Sarees, Salwar Suites and Dress Materials. A survey u/s 133A of the Act was carried out on the business premises of the assessee on 26.11.2014. Notably, the value of inventory available with the assessee was determined by the survey team at Rs. 31,38,42,649/- as on 26.11.2014, whereas inventory reported on accounting software (Tally) was at Rs. 27,95,30,977/-. The assessee also maintained inventory in the separate software (named MISSBS) where in the figure of stock was reported at Rs. 31,24,00,586/-. Considering the differences in the stock while in the assessment proceeding the assessee was asked to show cause vide notice dated 30.11.2017 as to why the difference of Rs. 3,43,11,672/- not considered as income.

AO did not consider the explanation furnished by the assessee in stock for an amount of Rs. 1,98,88,536/- and Rs. 1,29,81,073/-. For the balance amount of Rs. 14,42,063/- assessee failed to furnish any justification. Based on said observations, ld. AO added the difference in inventory of Rs. 3,43,11,672/- as income in the hands of the assessee as undisclosed investment.

CIT(A) held that out of total addition of Rs 3,43,11,672/- the addition for Rs 3,75,913/- is hereby confirmed and the major part of addition due to wages expenses, ageing effect and totaling effect mistake total of Rs 3,39,35,759/- is hereby deleted. Being aggrieved, revenue has preferred the present appeal.

Conclusion- The appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect and the AO had passed the assessment order for AY 2012-13, 2013-14 and AY 2017-18 and had accepted the ageing effect while calculating the stock. Considering the above discussion, the arguments and contention of the appellant is found to be correct and the reconciliation / difference of Rs 1,29,81,073 is hereby explained due to ageing effect on valuation of stock.

Held that at the time of hearing ld. DR did not find any fault with the observations of the ld. CIT(A) and on the facts placed on record upon which ld. CIT(A) has given his finding in favour of the assessee-appellant, the decision cannot go in favour of the revenue, without pointing out that how that finding is incorrect or inconsistent. Thus, on this aspect of the matter we do not find any merits on the ground of ‘valuation’, and therefore, the same deserves to be dismissed.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

Both the present cross appeals are filed because revenue and assessee feel aggrieved by the order dated 11.03.2024 by the ld. Commissioner of Income Tax (Appeals), Jaipur- 5 [ for short CIT(A) ], for the Assessment Year 2015-16. The said order of the ld. CIT(A) was passed because the assessee challenged before him the assessment order passed by DCIT, Circle-2, Jaipur [ for short AO ] u/s 143 (3) of the Income Tax Act, 1961 [ for short “Act”] on 26.12.2017.

2. At the outset of hearing, the Bench observed that there is delay of 05 days in filing of the appeal by the revenue for which the ld. DR representing the revenue relied upon the condonation petition filed by AO vide letter dated 14.05.2024. In that condonation petition ld. AO pleaded that he was busy with additional pressure of work related to pending SLPs to be filed which were over hundred in number. Thus, he could not attend the work of the filling of the appeal in due time.

2.1 On the other hand, ld. AR of the assessee did not raise any objection to the prayer of the ld. AO.

2.2 We have heard rival contentions. As we note that the reasons advanced by the ld. AO in the prayer was that he was under pressure of filling 100 plus SLPs and therefore, he could not attend to the work of filling the present appeal in time. We note that though the appeal is to be filed within 60 days’ time and the appeal filed was reasoned to be delayed that the ld. AO was busy. We consider the peculiar facts of the case and condone the delay but at the same time expect that revenue should be vigilant while adhering to the timeline for filling of the appeal.

3. As is evident that the cross appeal relates to one assessee, involving the same assessment year and it deals with the one order of the Assessing Officer as well as one order of ld. CIT(A). We have heard the parties on the same day and by way of this consolidated order proceed to deal both the cross appeals.

3.1 The grounds of appeal taken by the revenue in ITA No. 693/JP/2024 for A.Y 2015-16 read as under;

(i) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,98,88,536/- made on account of value of stock found without appreciating the fact that during the assessment proceedings, the assessee claimed that, wages paid to labour in the Tally was recorded as indirect expense, however, the same is direct expense and therefore, the closing stock will increase by 1,98,88,536/- and hence added to the total income of the assessee.

(ii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs.1,29,81,073/- made on account of value of stock found without appreciating the fact that assesse claimed that it is usual practice to value stock at 100% of the cost if purchased in same year, 90% of cost if purchased in immediate preceeding year and 80% of cost for all previous year stock, thus, the difference to the extent of Rs.1,29,81,073/ is nothing but ageing effect only. However, on the date of survey, the physical stock was valued at Rs. 31,38,42,649/- and valuation was done keeping in view both net realizable value of the stock and the cost that would have been incurred by the Therefore, any difference due to ageing will automatically be subsumed in the valuation so made.

(iii) The appellant craves leave to add, amend or withdraw any of the ground of appeal during the course of appellant proceeding.”

3.2 Whereas the grounds appeal raised by the assessee in appeal 631/JPR/2024 for assessment year 2015-16 read as follows:

“1. That on the facts and in the circumstances of the case the Id CIT(A) is wrong, unjust and has erred in law in confirming addition to the extent of Rs. 375913/- made by the ld AO an account of difference in value of stock as per book and as per physical verification at the time of survey u/s 133A of the IT Act, 1961 as undisclosed income. While confirming the said addition of Rs. 375913/-, the Id CIT (A) did not accepted submission of the appellant that the said difference is very insignificant/meager considering total stock of Rs. 27.95 corers and turnover of Rs. 32.00 corers and so deserves to be ignored.

2. That on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in confirming lump sum disallowance of Rs. 300000/- made by the Id AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability thereof and/or not being incurred wholly/exclusively for business purpose

3. The appellant craves permission to add to or amend to any of grounds of appeal or to withdraw any of them.”

4. First, we deal with the appeal filed by the revenue in ITA 693/JP/2024. The brief facts as culled out from the records are that return of income declaring ‘Nil total income’ was filed by the assessee on 30.9.2015.

Upon filing of the ITR the case was selected for scrutiny and notice u/s 143(2) & 142(1) were issued from time to time and served upon the assessee. Books of accounts were produced which were examined on test- check basis by the ld. AO. The assessee is engaged in the business of Manufacturing & Trading of Sarees, Salwar Suites and Dress Materials.

4.1 In the case of the assessee a survey u/s 133A of the Act was carried out on the business premises of the assessee on 26.11.2014 and the survey team took the inventory of stock found at the business premises which reads as under :-

As is evident that the value of inventory available with the assessee was determined by the survey team at Rs. 31,38,42,649/- as on 26.11.2014 (as indicated in store wise details reproduced in the above table), whereas inventory reported on accounting software (Tally) was at Rs. 27,95,30,977/-. The assessee also maintained inventory in the separate software (named MISSBS) where in the figure of stock was reported at Rs. 31,24,00,586/-. Considering the differences in the stock while in the assessment proceeding the assessee was asked to show cause vide notice dated 30.11.2017 as to why the difference of Rs. 3,43,11,672/- not considered as income. The content of the show cause notice reads as under :

“A survey has been conducted at various business premises on 26.11.2014. During the survey proceedings, the physical stock was taken and determined at Rs. 31,38,42,649/-. Further, it was also noticed that the assessee company was maintaining its stock on its internal software-MISSBS. Moreover, the figures of opening & closing stock are also fed manually on the accounting software- TALLY. Accordingly, there were three figures of closing stock as on date of survey i.e. 26.11.2014:-

(i) Stock as per physical inventory- 31,38,42,649/-

(ii) Stock on MISSBS- 31,24,00,586/-

(iii) Stock on TALLY- 27,95,30,977/-

In view of the above, it is amply clear that there is excess stock found during the survey proceedings to the tune of Rs. 3,43,11,672/- ((i) (iii)). Accordingly, you are hereby showcause as to why the excess stock difference of Rs. 3,43,11,672/-shall not be added back to your income.”

Vide submission dated 11.12.2017 the assessee filed a detailed reply opposing the addition and explained as to why there was the alleged difference. The reply along with the documents furnished by the assessee were given thoughtful consideration by ld. AO, however, it was found that the claim of the assessee that stock was matching completely and there was no difference / variation in the stock reported on its accounting software (Tally) with that of stock reported on its inventory software (MISSBS) as well as physical inventory was not considered as acceptable due to the reasons as indicated in the order of the assessment, which reads as under :-

“First of all vide para 3 of the reply to Q. No. 1 of show cause the A/R contended that how the figure of Rs. 31,38,42,649/- was derived. During the course of hearing dated 21.12.2017 A/R Shri R.K. Bhatra and Shri Virendra Dhadhich was confronted with Annexure-A-8 page no 70 and 71 wherein the details of stock inventory were provided. As per this document the following description is written by Shri Rajesh Jain

“this report is generated by me from MISSBS software and data base of ZSPL on the basis of barcode. This represents the stock position of all stores/ factory of ZSPL as on 26.11.2014 for flagship store”

These pages were signed by, Siri Rajesh Jain who is the employee of the assessee company and Manager of EDP. The physical inventory was taken by the Department with the help of employees/ incharge of stores/ factories. A/R Shri R.K. Bhatra and Shri Virendra Dhadhich also admitted this position of physical stock as on 26.11.2014. Hence the objection raised by the assessee through his reply to show cause dated 11.12.2017 that the assessee does not know how the figures of Rs. 31,38,42,649/- is arrived by the Department does not hold good.

Grouping of wages Expenses

In the subsequent part assessee claimed that, wages paid to labour in the Tally was recorded as Indirect Expense, however, the same is Direct Expense. Therefore, if the same is considered as direct expenses the closing stock will increase by Rs. 1,98,88,536/-. The reply of the assessee is found not only vague but contrary to the facts of the case of the assessee, because;

(a) Assessee is maintaining stock records and there exist a method based on which Sale Price of each item is fixed and accordingly Price Tags are tagged. The method for arriving at MRP of the items has been explained by Shri Shri Virendra Dadhich, in-house Chartered Accountant of assessee in his statement recorded u/’s 131 on 26.11.2014. Further, the said procedure has also been acknowledged by Shri Arun Palawat in his statement recorded u/s 131 dated 26.11.2014.

(b) Perusal of the statement shows that the Sale Prices is determined by inflating the cost of that particular item by a certain percentage. It is relevant to mention here that the percentage is also fixed based on the type of trade i.e. for wholesale there is a fixed percentage and for retail percentage is different.

(c) Since, Sale Price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had assessee not considered the wages expenses as costing of such items beforehand it would have not been able to determine the sale price.

(d) Therefore, the claim of assessee that wages paid to labour were not included while reporting the closing stock in its accounting software is contrary to the fact.

(e) It is relevant to mention here that, in the parallel inventory software (MISSBS) maintained by the assessee stock on the date of survey stood at 31,24,00,586/-, which is very close to the physical inventory found during the survey.

(f) However, the trading results of the assessee are prepared on the basis of the accounting software and not on the basis of inventory software. The inventory reflected by the assessee in trading account prepared as on 31.03.2015 is short by Rs. 1,98,88,536/-.

(g) It is relevant to add here that since, nssessee is maintaining stock records and the trading results are not based on reverse calculation of gross profit ratio. The claim of the assessee that, if the wage expenses of 1,98,88,536/- is considered as direct expense the stock on the date of survey will increase by that same amount i.e. Rs. 1,98,88,536/- and the Gross profit will remain same, cannot be accepted as it is against the facts of the case and contrary to the accounting principles.

In view of these observation ld. AO noted that the stock is undervalued/ understated by Rs. 1,98,88,536/-.

Ageing of Stock Item

Assessee also claimed that, it is their usual practice to value stock at 100% of cost if purchased in same year, 90% of cost if purchased in immediate preceding year and 80% of cost for all preceding year stock. Therefore, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. The reply of the assessee was considered, but however, the same was not found tenable by the AO due to following reasons:-

(a) On the date of the survey the physical stock was valued at Rs. 31,38,42,649/- The valuation has been done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made.

(b) Further, assessee has not brought even a single instance on record to show that the physical inventory taken on the date of survey was not in accordance to its net realizable value.

(c) It is relevant to mention here that, assessee neither challenged the valuation of physical inventory nor comments or reconciliation was made or w.r.t. the physical inventory taken at the time of survey.

(d) In view of the above it is clear that that, argument put forward by the assessee is not only vague but also not corroborated with any documentary evidence. Therefore, the same is not acceptable and thus, the stock is undervalued/ understated by Rs. 1,29,81,073/-.”

Based on the above reasons, ld. AO did not consider the explanation furnished by the assessee in stock for an amount of Rs. 1,98,88,536/- and Rs. 1,29,81,073/-. For the balance amount of Rs. 14,42,063/- assessee failed to furnish any justification. Based on said observations, ld. AO added the difference in inventory of Rs. 3,43,11,672/- as income in the hands of the assessee as undisclosed investment.

4.2 During the course of assessment proceedings, the ld. AO noticed that the assessee had claimed various expenses as detailed here under:

On perusal of bills/vouchers produced, it was noticed that some of the expenses were not fully vouched and not supported by any documentary evidence & most of these expenses had been incurred in cash, without the identification of recipients. It was also noticed that the expenses had been incurred not wholly and exclusively for the purpose of business u/s 37(1) and 38(2) of the Act. As such, the expenses incurred were not proved wholly for business purpose. Considering that observation, a lump-sum disallowance of Rs. 3,00,000/- was made in respect to the above- mentioned expenses by ld. AO.

Accordingly, income was assessed at total income of Rs. 2,56,84,080/- u/s 143(3) of the Income Tax Act, 1961.

5. Aggrieved by the order of Assessing Officer, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised the relevant findings of the ld. CIT(A) are reiterated here in below:

“Decision [ for the stock valuation addition ]

4.2 I have considered the facts of the case and written submission of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. After carefully going all the above the point wise discussion is as under;

• The issue is related to excess stock found during the course of
• During the course of survey the physical stock was calculated and valued at Rs 31,38.42.649/-.
• The survey team had also valued the physical stock as per inventory software (MISSBS) maintained by assessee at Rs. 31,24,00,586/-.
• The survey team had also calculated and valued the physical stock as per accounting software (Tally) at Rs. 27,95,30,977/-.
• The AO had made addition of excess stock of Rs 3,43,11,672/- by reducing stock as calculated on tally software from physical stock (31,38,42,649 less 27,95,30,977).
• The appellant had explained this difference/ reconciliation in 4 categories which are as under:

• Wages Expesnes
• The survey team had calculated the valuation of stock on “Tally software” by applying last year GP rate at 28.11% and did reverse calculation of stock.
• While preparing this trading account, first step is to take opening stock as on first day of financial year which is same as closing stock of last year. Second step to take actual sale. Third step to debit purchase. Fourth step to debit all direct expenses. Fifth step is to apply GP rate and calculate gross Now the last step to calculate balance in credit side which will be the closing stock as on date.

This is reverse calculation of stock as on date of survey which the survey team had calculated the stock as per accounting software (Tally) at Rs. 27,95,30,9771-.

• Now the appellant had taken one plea that while debiting direct expenses in this trading account, the survey team had not taken the wages expenses Rs 1,98,88,356/- incurred during the year which was classified as Indirect Expenses under the head “Employee Welfare & Other Benefits” total of Rs 3,80,72,334/-. Had the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by the
• It is important to mention here the survey team had themselves calculated the Employee Welfare & Other Benefits” total of Rs 3,80,72,334/- and had taken into consideration as Indirect expenses while preparing trading and P&L a/c.
• Thus it is an undisputable fact that the expenses under the head Employee Welfare & Other Benefits was of Rs 3,80,72,334/-. The dispute is only related to
• Now to verify this, it is necessary to check whether the appellant had taken this wages expenses in earlier/last year because the survey team had taken GP rate of 28.11% from last year.
• On verification of trading account prepared by survey team, the direct expense had taken into consideration for the year under consideration are as under;

• The survey team had taken GP 28.11% from last year to prepare the trading account on tally software on the date of The last year (i.e. for AY 2014- 15) the GP was Rs 14,13,17,765/- and turnover was Rs 50,27,70,697 which leads to GP at 28.11%.

• In last AY (i.e. for AY 2014-15) the direct expenses had taken into trading account was as under:

• From the above facts the plea taken by the appellant is found to be correct that wages expense of Rs 1,98,88,536/- was not taken in trading account prepared for the year under consideration.
• Now to further strengthen this issue, it is necessary to compare the figures of year under consideration and preceding years which is as under:-

• The argument of the appellant is on merit that from the bare perusal of the table it is evident that wages expenditure of Rs. 1,98,88,536/-was inadvertently classified under head “Employee Welfare and other benefit”. Because of which total direct expense of Rs. 3,80,72,334/- recorded under head” Employee Welfare and other Benefit” as on date of survey are seen to be comparatively higher than that of actual direct expenses of Rs. 3,06,03,813/- for the full year under consideration. Also, the error of wrong classification is also evident from the fact from comparison of correct ratio of Employee Welfare and Other Benefit Expenses to Sales, which is seen to be at 15%, as against the actual ratio of 7%, which is consistent and in line with the past history. The significantly higher ratio as indicated before correction as above also justifies the explanation of the Appellant that due to wrong classification of wages expenses under the head “Employee Welfare and Other Benefit” at the time of survey, the same were not considered under trading account.
• From the above discussion the argument of the appellant is correct that wages expense of Rs 1,98,88,536/-. Thus, if the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by the same and the difference up the extent of Rs 1,98,88,536/- is hereby explained.
• Stock Ageing Effect
• It is pertinent to mention here that the stock as on date of survey in quantitative terms was not disputed as it was the same as found in the books. The dispute is only related to valuation of stock as per tally software and as per MISSBS software
• For financial reporting and accounting purpose the appellant uses accounting software-Tally but the appellant maintains MISSBS inventory software for keeping records of inventory. The Survey Team valued the stock as per MISSBS inventory software at Rs 31,24,00,586/-
• The inventory details/valuation taken from MISSBS software are subject to adjustment for ageing effect and determination of Net realizable value of the stock which provides inventory to be valued at lower of cost and Net Realizable Value(NRV) as per AS-2. The value of the stock which is recorded in Tally software is at net realizable value because the same is lower than the cost
• The Appellant is valuing its stock by making necessary adjustment of stock ageing in its stock valued at 100% of cost price on MISSBS inventory software. The appellant had stated that even during the course of survey as well as during assessment proceeding that the basis of calculating the net realizable value (NRV) is that the same year stock including the purchases of the current year is valued at 100% of cost price, one year old stock valued at 90% of cost price, two years old stock is valued at 80% of cost price and stock purchased before that third year, is value at 50% of cost It was because of valuation of inventory at net realizable value by giving effect to stock ageing calculated separately, and recorded in Tally only.
• The survey team, during the course of survey proceeding had valued the stock by giving effect to stock ageing and taken printout of valuation sheet at page no 64 of Annexure A-8. From this impounded document it is evident that on 31.03.2014 (ie. on last day of preceding year) cost arrived from MISSBS software was Rs 21,88,73,000/-, however, after considering the ageing effect, NRV was taken at Rs. 20,54,30,000/-
• Thus, while preparing the trading a/c on Tally Software during the course of survey, the opening stock was taken at Rs 28,66,09,180/- which was the closing stock of preceding year for which the bifurcation is as under:

• Therefore, the closing stock of preceding year was valued at Rs. 20,54,30,000/- as on 31.03.2014 after considering ageing effect of Rs. 1,34,40,000, which has not been disputed by the AO while passing assessment order for AY 2014-15 and accepted this ageing effect of Rs 34 cr. All such figures are taken from audit report for previous assessment year as well as stock summary of valuation of opening stock. Similarly the AO had passed the assessment order for AY 2012-13 and AY 2017-18 and had accepted the ageing effect while calculating the stock.

• Further for the year under consideration i.e. AY 2015-16, the AO had again taken the opening stock same as closing stock of preceding year as mentioned above. Thus, the AO had again taken said ageing effect in opening stock in impugned assessment order, however, the said treatment is being disputed only as far as the valuation as on date of survey is concerned which is not correct.
• While preparing trading account, the opening stock was valued at Net Realisable Value (NRV), thus the closing stock as per tally software was also calculated at NRV at 28,66,09,180/-. It shows that the actual difference calculated by the AO for making addition was the difference between the physical stock valued from MISSB software and the physical stock valued at NRV in tally, which is not a correct When the AO had valued the stock physically from MISSB software, then the AO have to take value of stock in trading account as per cost shown in MISSB software.
• In simple words while preparing the trading account from tally software, the AO is taking stock value as per Net realizable value e. the cost reduced by ageing effect, but while calculating the stock physically, the AO is taking the value as per MISSB software where actual stock cost is taking without considering the reduced cost due to ageing effect. Thus, due to this ageing effect, the difference is explained.
• It is pertinent to mention here that there is no dispute on the
• The assessee had himself valued the Stock as per his stock maintaining software (MISSBS) at Rs 31,24,00,586/-. Whereas during the course of survey the physical stock was calculated and valued at Rs 31,38,42,649/-. Thus, the difference was not what the AO had made addition.
• The Appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect. This approached/manner of valuation of stock was prevalent in previous assessment year also including AY 2014-15 as the opening stock was derived following the said method of accounting.
• Thus, while taking the opening stock in tally software as on date of survey, the reduced value of opening stock up to Rs 1,34,40,000/- was taken. However the appellant had valued this ageing effect as on date of survey i.e. on 26.11.2014 was of Rs 1,29,81,073/-, in valuation of inventory resulting in reduced value of Stock as per tally software.
• As stated above, the appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect and the AO had passed the assessment order for AY 2012-13, 2013-14 and AY 2017-18 and had accepted the ageing effect while calculating the stock.
• Considering the above discussion, the arguments and contention of the appellant is found to be correct and the reconciliation / difference of Rs 1,29,81,073 is hereby explained due to ageing effect on valuation of stock.
• Totaling Mistake
• The appellant had submitted before the AO as well as during appellate proceeding that there were some calculation errors in the working sheets prepared for valuation of stock as on date of survey.
• The appellant had narrated an example that while preparing details of stock available at Kartarpura Indus Area as available in Annexure AS-12 Page No. 24 where in the said sheet total value of the stock was calculated by the survey authorities at Rs. 96,51,418/-. However, correct total of value of the stock in the sheet available marked as page no. 24 of AS-12 is Rs. 85,85,268/-. It is explained further that the stock of “plain fabric and sarees” of 7,83,550/- valued at page no. 8 of AS 12 has not been carried forward/considered in the final stock sheet prepared on page no 24 of AS-12. Therefore after considering the stock of “plain fabric and sarees” of Rs 7,83,550/- as mentioned on page no.8 of AS-12 but not considered in the final stock sheet (Page No. 24 of AS- 12), the correct total of the stock sheet at page no.24 of Annexure-12 comes at Rs.85,85,268/-. Thus, there was difference of Rs 10,66,150 (Rs. 9651418 85,85,268/-) on account of totaling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities.
• The above argument of the appellant in respect of totaling mistake of Rs 10,66, 150/- is found to be correct and acceptable.
• Other Difference
• The appellant had argued that the remaining insignificant amount of Rs. 375,913/- deserves to be ignored having regard to possibility of human error, voluminous nature of the inventory and estimations adopted by the department.
• The argument of the appellant is not acceptable as all the possible human error had already been considered
• Thus, the arguments for difference of Rs 3,75,913/- is not

4.3 Thus, considering the above discussion out of total addition of Rs 3,43,11,672/- the addition for Rs 3,75,913/- is hereby confirmed and the major part of addition due to wages expenses, ageing effect and totaling effect mistake total of Rs 3,39,35,759/- (1,98,88,536 + 1,29,81,073 + 10,66,150) is hereby deleted. Thus, the ground of appeal on this issue is partly allowed.”

Decision [ for lumpsum addition made ]

5.2 I have considered the facts of the case and written submission of the appellant as against the observations/findings of the AO in the assessment order for the year under consideration. After carefully going all the above the point wise discussion is as under:-

 

During the course of assessment proceedings it has been noticed that the assessee has claimed various expenses as per detail here under:-

• On perusal of bills/vouchers produced, it is noticed that some of the expenses are not fully vouched and not supported by any documentary evidences.
• Most of these expenses have been incurred in cash without the identification of
• The expenses have been incurred not wholly and exclusively for the purpose of business u/s 37(1) and 38(2) of I.T. Act. As such the expenses incurred wholly for business purpose cannot be proved. For any expenditure to be claimed have to pass three necessary condition in which one is expenditure should not be personal in nature and the same should be wholly for the purpose of the business. Considering the nature of these expenses and the status of such closely held private company, expenditure for personal purpose cannot be ruled out.
• In the case of Universal Energies Ltd AY 2012-13 The Hon’ble ITAT, Delhi Bench B in ITA No. 2761/Del/2018 vide order dated 26.07.2022 had given following decision:

“19. We have considered the order of the AO and facts on records and find that the AO has made adhoc disallowance of Rs 1,00,000/- by stating that vouchers of expenses are not fully verifiable and the personal elements of expenses by use of vehicles by Directors and staff members cannot be ruled out. In the appellate proceedings the assessee has not produced any evidences to rebut the finding of the AO. The expenses are incurred in cash which are not fully verifiable and probability of personal nature in these expenses cannot be ruled out. The A.O has made a reasonable disallowance of Rs. 1,00,000/- out of the total claim of Rs. 45,35,803/- by the appellant 20. Therefore, the disallowance made by the AO is hereby confirmed. Hence, the ground of appeal is dismissed.

• • Considering the above facts and circumstances of the case, a lump-sum disallowance of 3,00,000/- is made in respect of the above-mentioned expenses is hereby confirmed. The ground of appeal on this issue is hereby dismissed.”

6. Felling dissatisfied with the above findings of the ld. CIT(A), revenue has preferred the appeal ITA No. 693/JPR/2024. Assessee has also filed an appeal in ITA no. 631/JPR2024 challenging the above finding of the ld. CIT(A), on the issue where the ld. CIT(A) did not favor the assessee. At the time of hearing of the appeal both the parties supported the finding of the lower authorities as are favourable to them.

7. Revenue through ld. DR supported grounds of appeal by filling the following written submission and the same are reproduced herein below:

“1. In this case, the assessee filed his return of income on 30.09.2015 and thereafter, the case was selected for scrutiny and notice u/s 143(2) of the Income Tax Act, 1961 was issued on 07.09.2016 which was duly served upon the assessee. Thereafter, notice u/s 142(1) and query letters were issued from time to time. The assessee was engaged in the business of Manufacturing & Trading of Sarees, Salwar Suites and Dress Materials during the year under consideration.

2. A survey u/s 133A of the Act was carried out on the business premises of the assessee on 26.11.2014. During the course of survey, inventory found at the business premises was prepared. It was noticed that the inventory reported on accounting software (Tally) was Rs. 27,95,30,977/- whereas, inventory as per inventory software (MISSBS) maintained by assessee was reflected as Rs. 31,24,00,586/-. However, upon physical inspection it was noticed that the value of inventory available with the assessee was Rs. 31,38,42,649/- as on 26.11.2014. Thereafter, a show cause notice dated 30.11.2017 was issued to the assessee by the AO as under:

“A survey has been conducted at various business premises on 26.11.2014. During the survey proceedings, the physical stock was taken and determined at Rs. 31,38,42,649/-, Further, it was also noticed that the assessee company was maintaining its stock on its internal software-MISSBS. Moreover, the figures of opening & closing stock are also fed manually on the accounting software- TALLY. Accordingly, there were three figures of closing stock as on date of survey i.e. 26.11.14:-

(i) Stock as per physical inventory- 31,38,42,649/-

(ii) Stock on MISSBS- 31,24,00,586/-

(iii) Stock on TALLY- 27,95,30,977/-

In view of above, it is amply clear that there is excess stock found during the survey proceedings to the tune of Rs. 3,43,11,672/- ((i)- (ii)). Accordingly, you are hereby showcause as to why the excess stock difference of Rs. 3,43,11,672/- shall not be added back to your income”

3. In respect of above notice, the assessee vide submission dtd. 11.12.17 submitted a reconciliation chart of closing inventory as per tally software and MISSBS software. Assessee company argued that the difference in valuation of inventory is on account of wages expenses of Rs. 1,98,88,356/- and stock ageing effect of Rs. 1,29,81,073/-.

4. The grounds of appeal of the department in this appeal before the Horible Bench revolves around these two issues.

4.1 The findings of the AO & CIT(A) are discussed as below:-

Ground of Appeal No. 1

“Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,98,88,536/- made on account of value of stock found without appreciating the fact that during the assessment proceedings, the assessee claimed that, wages paid to labour in the tally was recorded as indirect expense, however, the same is direct expense and therefore, the closing stock will increase by Rs. 1,98,88,536/- and hence added to the total income of the assessee.”

AO’s findings:

i) In the first place, assessee claimed that, wages paid to labour in the Tally was recorded as Indirect Expense. However, the same is Direct Expense. Therefore, if the same is considered as direct expenses the closing stock will increase by 1,98,88,536/-. This reply of the assessee was found not only vague but contrary to the facts of the case of the assessee by the AO as this view is against the accounting principles.

ii) Assessee was maintaining stock records and there exist a method based on which Sale Price of each item is fixed and accordingly Price Tags are tagged. The method for arriving at MRP of the items had been explained by Shri Virendra Dadhich, in-house Chartered Accountant of assessee in his statement recorded u/s 131 on 26.11.2014. Further, the said procedure was also acknowledged by Shri Arun Palawat in his statement recorded u/s 131 dated 26.11.2014.

iii) Perusal of the statement shows that the Sale Price is determined by inflating the cost of that particular item by a certain percentage. It is relevant to mention that the percentage is also fixed based on the type of trade e. for wholesale there is a fixed percentage and for retail percentage is different.

iv) Since, Sale Price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item Had assessee not considered the wages expenses as Costing of such items beforehand it would have not been able to determine the sale price.

Therefore, the claim of assessee that wages paid to labour were not included while reporting the closing stock in its accounting software is contrary to the fact.

v) It is relevant to mention here that, in the parallel inventory software (MISSBS) maintained by the assessee stock on the date of survey stood at 31,24,00,586/-, which is very close to the physical inventory found during the survey.

However, the trading results of the assessee were prepared on the basis of the accounting software and not on the basis of inventory software. The inventory reflected by the assessee in trading account prepared as on 31.03.2015 is short by Rs. 1,98,88,536/-.

vi) It is relevant to add here that since, assessee is maintaining stock records and the trading results are not based on reverse calculation of gross profit ratio.

The claim of the assessee that, if the wage expenses of Rs. 1,93,88,530/- is considered as direct expense, the stock on the date of survey will increase by that same amount i.e. Rs. 1,98,88,536/- and the Gross profit will remain same, Cannot be accepted as it is against the facts of the case and contrary to the accounting principles.

vii) In view of the above, it is abundantly clear that the stock is undervalued understated by Rs. 1,98,83,536/-.

Ld. CIT(A)’s findings:

1) From the facts of case, the plea taken by the appellant is found to be correct that Wages expense of Rs 1,98,88,536/- was not taken in trading account prepared for the year under consideration.

ii) Now to further strengthen this issue, it is necessary to compare the figures of year under consideration and preceding years as per Ld. CIT(A) which is as under:-

iii) The argument of the appellant is on merit that from the bare perusal of the table it is evident that wages expenditure of Rs. 1,98,88,536/-was inadvertently classified under head “Employee Welfare and other benefit”. Because of which total direct expense of Rs. 3,80,72,334/- recorded under head” Employee Welfare and other Benefit” as on date of survey are seen to be comparatively higher tham that of actual direct expenses of Rs. 3,06,03,813/- for the full year under consideration. Also, the error of wrong classification is also evident from the fac from comparison of correct ratio of Employee Welfare and Other Benefit Expenses to Sales, which is seen to be at 15%, as against the actual ratio of 7% which is consistent and in line with the past history. The significantly higher ratio as indicated before correction as above also justifies the explanation of the Appellant that due to wrong classification of wages expenses under the head “Employee Welfare and Other Benefit” at the time of Survey, the same were not considered under trading account,

iv) From the above discussion the argument of the appellant is correct that wages expense is of Rs 1,98,88,536/-, Thus, if the amount of manufacturing wages of Rs 1,98,88,356/- is transferred to trading account, the stock valuation as per tally software would have increased by the same and the difference up the extent of Rs. 1,98,88,536/- is hereby explained.

Ground of Appeal No. 2

“Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,29,81,073/- made on account of value of stock found without appreciating the fact that the assessee claimed that it is usual practice to value stock at 100% of the cost if purchased in same year, 90% of cost if purchased in immediate preceding year and 80% of cost for all previous year stock, thus, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. However, on the date of survey, the physical stock was valued at Rs. 31,38,42,649/- and valuation was done keeping in view of both net realizable value of stock and the cost that would have been incurred by the assessee. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made.”

AO’s findings:

i) Assessee also claimed that, it is their usual practice to value stock at 100% of cost if purchased in same year, 90% of cost if purchased in immediate preceding year and 80% of cost for all preceding year stock. Therefore, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. The reply of the assessee was considered, however, the same is not found tenable due to following reasons:-

(a) On the date of the survey the physical stock was valued at Rs. 31,38,42,649/- The valuation has been done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made.

(b) Further, assessee has not brought even a single instance on record to show that the physical inventory taken on the date of survey was not in accordance to its net realizable value.

(c) It is relevant to mention here that, assessee neither challenged the valuation of physical inventory nor comments or reconciliation was made or w.r.t. the physical inventory taken at the time of survey.

(d) In view of the above it is clear that that, argument put forward by the assessee is not only vague but also not corroborated with any documentary evidence.

ii) Therefore, the same is not acceptable and thus, the stock is undervalued/ understated by Rs. 1,29,81,073/-.

Ld. CIT(A)’s findings:

i) Further for the year under consideration i.e. AY 2015-16, the AO had again taken the opening stock same as closing stock of preceding year as mentioned above. Thus, the AO had again taken said ageing effect in opening stock impugned assessment order, however, the said treatment is being disputed only as far as the valuation as on date of survey is concerned which is not Correct.

ii) While preparing trading account, the opening stock was valued at Net Realizable Value (NRV), thus the closing stock as per tally software was also calculated at NRV at 28,66.09,180/-. It shows that the actual difference calculated by the AO for making addition was the difference between the physical stock valued from MISSB software and the physical stock valued at NRV In tally, which is not a correct method. When the AO had valued the stock physically from MISSB software. then the AO have to take value of stock in trading account as per cost shown in MISSB

iii) In simple words while preparing the trading account from tally software, the AO is taking stock value as per Net realizable value i.e. the cost reduced by ageing effect, but while calculating the stock physically, the AO is taking the value as per MISSB software where actual stock cost is taking without considering the reduced cost due to ageing effect. Thus, due to this ageing effect, the difference is explained.

5. The arguments of CIT(A) are not acceptable due to the following reasons: –

1. The Ld. CIT(A) has passed this order without appreciating the facts of the case. This can be verified from the very fact that the Ld CIT(A) at the very beginning of his order under decision heading at para 2 pg. 18 has categorically mentioned the following:-

“The issue is related to excess stock found during the course of survey”

It is noteworthy to mention that the dispute had never been on the quantitative details of the stock, neither the assessee nor the department had made any comment on excess stock found. However, the dispute is related to the valuation of the stock found which is undervalued and not the quantity.

The Ld. CIT(A) further, at pg. 19 of his order has mentioned the following:-

“It is important to mention here the survey team had themselves calculated the “Employee Welfare & Other Benefits total of Rs. 3,80,72,334/- and had taken into consideration as Indirect expenses while preparing trading and P&L a/c.”

It is important to note that, it was the assessee who was duty bound to prepare and provide all these records to the authorities.

From the above instances, it can be inferred that the Ld. CIT(A) had passed this very order without appreciating the facts of the case.

2. As per assessee’s paper book page 10, significant accounting policies and notes to accounts clause (d) of accounting policies, following is the extract in regard to the valuation of inventories:

“Valuation of Inventories: The inventories are valued as under:

Finished goods, stores & spares are valued at lower of cost and net realisable value. The cost comprises of cost of purchases cost of conversion and other costs including appropriate production overheads incurred in bringing such inventories to their present location. Cost for the purpose of valuation is computed on first in first out basis.

Raw material and components held for use in the production of inventories are valued at cost, if finished goods in which they will be incorporated are expected to be sold at or above cost, if there is a decline in the price of material/components and it is estimated that the cost of finished goods will exceed the net realisable value, the raw material components are written down to net realisable value, measured on the basis of their replacement cost. Cost for the purpose of valuation is computed on first in first out basis.”

Accounting Standard (AS) 2 Valuation of Inventories contains the following: –

1. Inventories should be valued at the lower of cost and net realisable value. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

2. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

The assessee had claimed to value the closing stock of finished goods at lower of cost or net realizable value after following stock ageing effect. This is as per para 28 page 10 of his written submission before the Hon’ble bench. The assessee had further valued closing stock of finished goods as per following basis: –

Same Year Purchased Stock i.e. AY 14-15	100% of value of cost
Preceding Years Purchased Stock AY 13-14	90% value of cost
Purchased stock of AY 12-13	80% value of cost
Earlier purchases stock	50% value of cost

The assessee being a company is bound to follow the accounting standards and report with appropriate disclosures. However, the assessee not only followed some vague and illogical method for inventory valuation, they had not properly disclosed the same in financials and auditors’ report. The method of adopting valuation for closing stock of finished goods at lower of cost or net realizable value after following to ageing effect leads to under valuation of stock and declaring lower profits than the actual profits.

It is relevant to mention here that, the valuation has been done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee. Had there been any differences in the valuation, the assessee should had bought up the same at the time of physical verification. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made. The assessee neither challenged the valuation of physical inventory nor provided any comments or made any reconciliation w.r.t. the physical inventory taken at the time of survey. Also, no justifiable evidence either at the time of survey or at the time of assessment was submitted to support the claim of lower value of stock by comparing it to the net realizable value.

Net realizable value is derived by subtracting estimated costs of completion and the estimated costs necessary to make the sale from the estimated sale price. The assessee when pleading for NRV lower than the actual cost needs to provide proofs of such argument and prove the direct nexus with sale of those specific items in near future. However, no such sales correlation was either provided or even discussed by the assessee.

There is a technical mechanism to derive NRV as enumerated above as per AS-2 and no one can bypass the same with some convenient and illogical basis and disguise in the name of method of valuation of inventories. The method adopted by the assessee is such that the item that is 364 days old is valued at 100% of cost and item that is 366 days old is valued at 90%, this is some vague mechanism and not acceptable as this mechanism is baseless, absurd and without any legal backing.

The assessee had himself claimed at para no. 29 page 7 and at para no. 32 of page 8 of the CIT(A)’s order which are as follows: –

“The Appellant has regularly followed valuation of finished goods at lower of cost or Net relizable value after following stock ageing effect…”

“The fact that the valuation of inventory is done only at net realizable value after giving effect to ageing effect is also evident and verifiable…”

The assessee himself accepts that he had been following the method for valuation of inventory as lower of cost or NRV after taking stock ageing effect, which is absurdly wrong as the stock ageing effect lowers down the valuation and result into lower when compared to cost. It also means that the assessee had never tried to value NRV and thus no benefit under the disguise of NRV can be given.

The assessee further submitted the following at para no. 30 page 7 of the CIT(A)’s order, extract of which is reproduced as below: –

“.. the Ld. AO has not disputed this method/approach of valuation of the stock for earlier assessments years. Rather, in the impunged assessment order also, the fact that ageing effect is required to be done while calculating inventory is not disputed.”

Ld. AO has categorically disputed this method of stock ageing and its effect on valuation of inventory raised specifically the ground to tax the so called ageing effect and the assessee it still under the impression of no dispute by the department. This shows the illogical stand of the assessee.

Ld. CIT(A) at page 22 third para from top of his order contains the following: –

“The appellant is valuing its stock by making necessary adjustment of stock…”

The assessee is bound to follow the laws and accounting principles as applicable on him. The assessee cannot opt to make ‘Adjustments’ as per his convenience in the valuation of stock or in any other area which is either not scientific or lacks legal backing.

3. CIT(A) has quoted a table at page 9 of his order and given relief to the assessee. However, he had simply ignored the very foundation when can the comparable methods be used to record satisfaction. It is to note that, in the last 2 years prior to survey the company was in profit and the sales were also in increasing trend. Thus, those 2 years could be compared. However, in the year under consideration i.e. the year of survey which is subject matter of this appeal, not only the sale declined drastically by more than 14%, but the company’s resultant profit is also negative. Thus, making it non comparable to previous years. The assessee was engaged in the business of trading and manufacturing, no break up of these two activities were provided by the assessee and thus, not considered by the Ld. CIT(A) while making the comparison and leading to wrong conclusions in his order.

4. Stock valuation took places at the business premises of the assessee. Both the departmental as well the assessee’s representative were present, at the time of physical inventory, both mutually verified the stock and determined the value of stock accordingly. The valuation of inventory derived at the time of physical verification is consented by the assessee by approving the documents prepared under his supervision. Had there been any issue in regard to the valuation of inventory being the NRV lower than the actual cost, the same would had been objected on the spot by the assessee or at the time of recording of statement. However, no such instances were found.

Assessee cannot submit general paper and corelate to preceding and succeeding year and thereby make a claim. To differentiate and substantiate his claim he has to submit credible information in the form of details. He cannot take shelter under the last year closing stock and next year opening stock when the assessee is clearly caught to persue an unscientific basis for calculation of valuation of closing stock.

Nowhere in the order of the CIT(A), it has been mentioned that the assessee furnished details of wages expenses under the head ’employee welfare and other benefit or item wise ageing effect of each and every item during the course of appellate proceedings. This should have been examined either at CIT(A) level or if submitted by appellant during the course of appeal proceedings, should have been forwarded to the AO for comments/objections, if any. However, this verification has not been done. The CIT(A) has merely relied on the past balance sheet of the appellant stating that this method was adopted in earlier years also and decided the case.

In view of the above submissions, it is requested that appeal may kindly be decided in favour of the revenue.”

7.1 Ld. DR in addition to the written submission so filed vehemently argued that the assessee is a corporate entity engaged in the business of manufacturing and trading of Sarees, Salwar, Suites and Dress Materials. The revenue conducted survey at the business premises of the assessee wherein three different stock was record were found. All the three different stock records show the different values. At the same time, the assessee also did not dispute the value of stock of Rs. 31,38,42,648/- derived by survey team, whereas stock in the Tally records was considered for Rs. 27,95,30,977/-. While making the addition ld. AO considered the arguments of the assessee about the cost of goods and cost of manufacturing the goods and that has been taken care of while making the addition. As is clear neither the assessee nor the revenue dispute the quantity. But the dispute relates only as to the valuation of stock. The method of adopting valuation for closing stock of finished goods at lower of cost or net realizable value after following to ageing effect leads to under valuation of stock by the assessee. There is no technical method to derive net realizable value.

As regards the making addition for wages the assessee had not furnished details of wages so as to justify the claim of adding the same in the stock valuation. Thus, ld. AO based on the detailed finding recorded in the assessment order made the addition is correct and that contention were ignored by the ld. CIT(A) and thus, the relief granted by the ld. CIT(A) without considering the finding of the ld. AO and therefore, he supported the order of the ld. AO.

As regards the appeal of the assessee, he strongly supported the orders of the lower authorities to the extent favour it.

8. In support of the appeal so filed by the assessee and against the grounds of the appeal raised by the revenue ld. AR of the assessee filed a detailed submission which is reproduced herein below:

Brief facts of the case:

1. The Appellant is private limited company engaged in business of manufacturing & trading of sarees, salwar suites and dress materials. The Appellant filed its return of income on 30.09.2015 declaring total income at Rs. Nil for the year under consideration.

2. The Appellant Company is regularly valuating its inventory including finished goods inventory at cost or net realizable value whichever is lower .This method of valuation of inventory has been regularly and consistently followed by the Appellant Company in previous and subsequent assessment years.

3. That for the purpose of valuation of inventory, the basis of calculating the Net realizable value(“NRV”) is that the same year stock including the purchases of the current year is valued at 100% of cost incurred, for one preceding year old stock, the same is valued at 90% of cost incurred, for two preceding year old stock, the same is valued at 80% of cost incurred and stock purchased earlier than the said two preceding period, the same is valued at 50% of cost The said treatment is considered on account ageing inventory and termed as ageing effect. This method considers valuation of the inventory on stock ageing basis having regard to the nature of product being sold by the Appellant Company. This basis of arriving at net realizable value and valuation of inventory has been followed regularly and consistently over the years.

4. That the Appellant maintains inventory records in internal inventory software called MISSBS whereby cost of inventory can be ascertained. For valuation of inventory, first the cost price of the stock is arrived through MISSBS software, then necessary adjustment of ageing effect and other factors is given to arrive at valuation of inventory for the purpose of financial reporting in accordance with applicable accounting Thus, cost of inventory derived from MISSBS is not actual stock valuation as the same is without giving stock ageing effect as explained above. The valuation of inventory done in accordance with accounting standards-2, i.e. cost or NRV, whichever is lower after having considered the stock ageing effect and other factors is reflected and recorded in financial reporting software – Tally.

5. This method of the valuation of stock by giving effect to stock ageing effect was prevalent in the earlier assessment years also including AY 2014-15.

6. That survey action u/s 133A of the I T Act, 1961 was carried out by income tax authority at the business premises of the Appellant on 26.11.2014. The survey team made valuation of stock at the time of survey by scanning the bar codes mapped with internal inventory software of the Appellant Company. While making valuation of physical inventory, the survey team, without giving effect to the facts that the valuation of the inventory is being done at “cost or net realizable value” , whichever is lower, arrived at the value of physical stock for Rs.31,38,42,649/- by taking reference to the bar-coded mapped valuation on the basis of internal inventory software called MISSBS, which was Rs. 31,24,00,586/-. Thus, there was no significant difference between the inventory found physically and recorded in inventory software though the value recorded in the inventory software was without considering the ageing effect, which department officials did not consider. Moreover the Ld. AO has also failed to consider that such difference was also on account of wrong classification wages expenses in accounting software-Tally. The wages expenses was debited under head “Employee Benefit Expense” for Rs. 1,98,88,536/-, however, they remained classified as “Indirect Expenses”, in Tally . In other words, though it was direct expenditure, but was wrongly classified/accounted as indirect expenses in Tally-Software, and were included in the figures of Employee Welfare and Others Benefit expense amounting to Rs. 3,80,72,334.15/- as below the line item in Profit & Loss account and accordingly was not considered in trading account.

Action of Ld. AO

7. After the survey proceedings were conducted at the business premises of the Appellant, the Ld. AO issued show cause notice dated 30.11.2017. In the show cause notice the Ld. AO raised a query regarding alleged excess stock for Rs. 3,43,11,672/- found during survey action. In response to show cause notice the Appellant submitted its detailed reply dated 11.12.2017,whereinit was explained by the Appellant that the difference in the valuation as per MISSBS software and value reflected in Tally software is due to stock ageing effect which is calculated separately and given effect while accounting for closing stock in Tally. Further, it was also explained that some reconciliation difference is also on account of wrong classification/grouping of wages/other direct expenditure in accounting software- Tally, which were not considered in trading account at the time of survey. The Appellant duly submitted reconciliation chart explaining the reasons for difference in valuation, which is available at page no. 17 of Paper Book.

8. Irrespective of the fact that Appellant has duly explained the alleged difference in valuation and reconciled the same, the Ld. AO arbitrarily rejected the explanation of the Appellant passed the impugned assessment order dated 26.12.2017 making the impugned addition of Rs. 3,43,11,672/- alleging that Appellant has under-valued the stock. The Ld. AO made the impugned addition considering the difference in valueof the inventory as per MISSBS and value reflected in Tally Software, though there was no significant difference in inventory as physically found and valued as per inventory software.

9. Aggrieved by the said Impugned assessment Order, the Appellant has preferred an appeal before Ld. CIT(A). The Ld. CIT(A) after considering the submission of assessee company deleted the addition of Rs.3,39,35,759/- and confirmed the addition of 3,75,913/-. The findings of Ld. CIT(A) are given in para no 4.2 page no. 17-25 of the appeal order

Submission of Assessee

Ground no.1 of department and Assessee company are interconnected hence a combined submission are made hereunder as follows:-

Department’s Ground

1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,98,88,536/- made on account of value of stock found without appreciating the facts that during the assessment proceedings, the assessee claimed that, wages paid to labour in the Tally was recorded as indirect expense, however, the same is direct expense and therefore, the closing stock will increase by Rs. 1,98,88,536/- and hence added to the total income of the assessee.

2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,29,81,073/- made on account of value of stock found without appreciating the facts that assessee claimed that it is usual practice to value stock at 100% of the cost if purchased in same year, 90% of cost if purchased in immediate preceding year and 80% of cost for all previous year stock, thus, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. However, on the sate of survey, the physical stock was valued at 31,38,42,649/- and valuation was done keeping in view net realizable value of the stock and the cost that would have been incurred by the assessee. Therefore, any difference due to ageing will automatically be subsumed in the valuation so made.

3. The appellant craves leave to add, amend or withdraw any of the ground of appeal during the course of appellant proceeding.

Appellant Company’s ground

That on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in confirming addition to the extent of Rs. 375913/- made by the ld AO an account of difference in value of stock as per book and as per physical verification at the time of survey u/s 133A of the IT Act, 1961 as undisclosed income. While confirming the said addition of Rs. 375913/-, the ld CIT (A) did not accepted submission of the appellant that the said difference is very insignificant/meager considering total stock of Rs. 27.95 corers and turnover of Rs. 32.00 corers and so deserves to be ignored.

FACTS

10. That the survey action was carried out at the Appellant business premise on 11.2014. In the survey action the Income Tax Officials arbitrarily valuated the stock of the Appellant for Rs.31,38,42,649/-. The basis on which the Income Tax Officials has arrived at the aforesaid figure was by simply scanning the bar code placed on the box or on stock items.The figure arrived by scanning the bar code, which were mapped with MISSBS software, wherein the inventory are valued at 100% of cost price without making necessary adjustment of stock ageing.

11. Moreover, at the time of survey, in the Tally software the Appellant, the wages expenditure were debited/classified under head “Employee Benefit Expense” which were part of the trading account, thus, were not considered in trading account.

12. That it was because of the separate treatment of stock ageing effect and wrong classification of wages expense there was reconciliation difference of Rs 3,43,11,672/- between the accounting software-Tally and internal inventory software-MISSBS maintained by the Appellant. Further, the difference of insignificant amount of Rs. 14,42,063/- deserves to be deleted having regard to the calculation error done by the Survey Authorities while valuating the inventory and other estimations adopted.

FINDING AND ALLEGATIONS OF THE LD. AO

13. The Ld. AO alleged that the arguments of the Appellant with respect to stock ageing effect were not supported with any documentary evidence.

14. The AO alleged and given incorrect observation that since the valuation has been done keeping in view both net realizable value of the stock and cost that would have been incurred by the Appellant. Therefore,any difference due to stock ageing effect will automatically be subsumed in the valuation so made by the Appellant.

15. The Ld. AO alleged that the claim of the Appellant that wages paid to labour were not included while reporting the closing stock under TALLY software is contrary to the facts of the case.

On the basis of above allegations, the Ld. AO alleged that Appellant has undervalued the stock.

SUBMISSIONS

16. At the very outset it is humbly submitted that the AO without considering the facts and circumstances of the case mechanically passed the impugned assessment order, wherein he has made the impugned addition of Rs. 3,43,11,672/-to the total income of the Appellant, merely on assumption and presumption of facts that the Appellant undervalued its stocks.

17. That the basis of the impugned addition of Rs 3,43,11,672/-made by the AO was on account of difference in the value of stock arrived at after comparing the values as reflected in Tally Software at the time of survey and physical valuation arrived at bar code scanning done during survey of stock found. It is submitted that there is no significant difference between the inventory found of Rs. 31,38,42,649/-and inventory found recorded in inventory software at Rs. 31,24,00,586/-. The purported difference being in stock found physically and stock found recorded in Tally is on account of the fact that Ld. AO is terming the valuation done through Bar code scanning as physical stock¹ and amount reported in Tally of Rs. 27,95,30,977/- as inventory recorded in books of account without appreciating reasons for reconciliation difference in the two.

18. It is humbly submitted that Ld. AO failed to consider that financial reporting through Tally is done on the basis of valuation arrived from inventory software MISBBS, which is required to be adjusted for ageing effect etc., for correct treatment in accordance with applicable accounting standards.

19. In this regard, at the outset, the reconciliation between the stock as physically valued by the department as compared with accounting entry in Tally and valuation in inventory software given as follows:

Particulars	Accounting Software-Tally	Inventory Software-MISSBS	Stock valued by Department*
Stock Valued on 26.11.2014	27,95,30,977/-	31,24,00,586/-	31,38,42,649/-
Less: Stock ageing effect	–	(1,29,81,073/-)	(1,29,81,073/-)
Add: wages manufacturing expense, not considered in trading account	1,98,88,536/-
Add: Insignificant difference on account of calculation errors and other factors	14,42,063/-	14,42,063/-
Reconciled Stock	300,861,576/-	300,861,576/-	300,861,576/-

*Valuation done by department by bar code scanning of the products as mapped in MISSBS software itself

20. In this regard it is pertinent to discuss in detail reasons on account of which there was reconciliation difference in valuation of the inventory found physically arrived at Rs. 31,38,42,649/- from inventory software maintained by Appellant and value reflected/recorded in Tally software. The said reasons of reconciliation/difference are as follows:

• • Stock ageing effect of 1,29,81,073/-
  • Wages expense of 1,98,88,536/-
  • Other difference of Rs. 14,42,063/- Stock Ageing Effect: 1,29,81,073/-

21. The Appellant maintains MISSBS inventory software for keeping records of Further, for financial reporting and accounting, accounting software- Tally is used, for which inventory details/valuation are taken from MISSBS software subject to adjustment for ageing effect and determination of Net realizable value of the said stock, in accordance with accounting standard- 2 which provides that inventory is required to be valued at lower of cost and net realizable value.

22. It is humbly submitted that the Appellant is valuing its stock by making necessary adjustment of stock ageing in its stock valued at 100% of cost price. For calculating the stock ageing effect, at first, cost price of its inventory is derived. For purpose of arriving at cost price of its stock the Appellant is regularly maintaining all inventory records in MISSBS software, wherein complete details of inventory are available at cost price. After ascertaining valuation based on cost price of the product as maintained in inventory software-MISSBS, for the purpose of valuation of closing stock, it is required to arrive at NRV Therefore, Appellant separately give adjustment of stock ageing on the stock valued at 100% of cost price as arrived at from MISSBS software. The closing inventory after giving effect of aging to valuation details (i.e. cost) obtained from MISSBS software, is then reflected in Tally, normally at year end basis stock physically found/available. This method of valuation of the stock is evident from stock summary available at page no. 18 wherein the Appellant has separately determined the NRV after having considered the ageing effect. From the said sheet, it is evident that on 31.03.2014 cost arrived from MISSBS software was Rs. 21,88,73,000/-, however, after considering the ageing effect, NRV was Rs. 20,54,30,000/-. Therefore, the stock was valued at Rs. 20,54,30,000/- as at 31.03.2014 after considering ageing effect of Rs. 1,34,40,000, which has not been disputed by the Ld. AO.

23. As submitted above in general facts of this submission, the basis of calculating the net realizable value by giving effect to stock ageing is that the same year stock including the purchases of the current year is valued at 100% of cost price, for a year preceding that year the stock is valued at 90% of cost price, for a year preceding to that second year, the stock is valued at 80% of cost price and stock purchased before that third year, is value at 50% of cost price. It was because of valuation of inventory at net realizable value by giving effect to stock ageing calculated separately, and recorded in Tally only, there is reconciliation difference on account of ageing effect to the extent of Rs. 1,29,81,073/-, in valuation of inventory as done by Ld. AO.

24. It is humbly submitted that it is not possible to make the necessary adjustment of stock ageing, without determining the cost price of inventory as on date as per MISSBS software. It is kindly submitted that in the MISSBS software net realizable value of stock by giving necessary adjustment of stock ageing cannot be determined as there is no such inbuilt feature available in said software, therefore as a practice, the same is done separately mostly on year end.

25. The value of the stock which is recorded in Tally software is at net realizable value because the same is lower than the cost. The method of valuation of the inventory at low or cost and “net realizable value” is well recognized method under Accounting Standards -2(“AS-2”), which deals with the accounting principle of valuation of inventories.

26. In this context, it is important to discuss the relevant portion of AS-2, which is as reproduced herein below:

Accounting Standards-2: Valuation of inventories

Para 5. inventories should be valued at the lower of cost and net realizable value. The cost of inventories should comprise all costs of purchase, cost of conversion and other costs incurred in bringing to their present location and condition.

On the bare perusal of the above, it is evident that the inventories should compulsory be valued at lower of the following:

• • Cost price
  • Net realizable value

27. It is mandatory to follow AS-2for valuation of inventory at the time of valuation of inventory. Further, it is humbly submitted that Ld. AO has not pointed out any discrepancies in valuation of inventory basis AS-2 followed by the Appellant as the same had been consistently and regularly followed by Appellant.

28. The Appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect. This approached/manner of valuation of stock was prevalent in previous assessment year also including AY 2014-15 as the opening stock was derived following the said method of accounting. The same is evident from the stock summary wherein stock of finished goods workout to 21,88,73,000/- and net realizable value is Rs. 20,54,33,000/-, the difference of Rs.1,34,40,000/-is on account of stock ageing only. The said ageing effect in opening stock has been duly considered by Ld. AO in impugned assessment order, however, the said treatment is being disputed only as far as the valuation as on date of survey is concerned. Therefore, Ld. AO is not justified in arbitrarily adopting practice of pick and choose for making impugned addition in the hands of the Appellant.

29. As stated above, in the earlier assessment years also this method of valuating the inventory was followed. the Ld. AO has not disputed this method/approach of valuation of the stockfor earlier assessments years. Rather, in the impugned assessment order also, the fact that ageing effect is required to be done while calculating inventory is not disputed. The rational for regularly and consistently valuating inventory by following approach is that this method of valuation of inventory brings out the value which stock could fetch or realize easily in the prevailing market In the MISSBS software maintained for inventory records, inventory valuation/records are available at cost price only, wherein underlying stock of earlier year is also at 100% of cost price, irrespective of the fact that realizable value of that underlying stock in market may be less than its cost price. It is pertinent to mention here that in the inventory software like MISSBS, there is no enabled feature of giving stock-ageing adjustment, on account of which, the said exercise is done separately by the Appellant on the basis of reports of valuation generated from the said software itself.

30. It is imperative to mention here that since the method of valuating the inventory at NRV by giving necessary adjustment pertaining to stock ageing is being followed regularly and consistently by the Appellant for large number of years, therefore not accepting the aforesaid method of valuation would lead to absurdity as it would impact past assessment as well as income of subsequent years also. In support of the contention raised above reliance can be placed to judicial pronouncements:

J.N. Marshall & Co. v. Commissioner of Income-tax [2004] 134 Taxman 711 (Bombay)

On facts, it could not be disputed that out of last 45 years, the assessee had been following that method for about 43 years to the knowledge of the department. That, out of these 43 years also, the department had accepted that method of valuation in large number of years and to accept the department’s contention at this stage and that too, for assessment year 1987-88 might result in practical difficulties, not only for the assessee, but also for the department. The department had not suggested any alternate method. However, if any of the methods submitted by the department was accepted at this stage and that too, for the relevant assessment year, then even the Assessing Officer would have to undertake an impossible task of rewriting the opening stock right from assessment years 1986-87, 1987-88 and 1989-90, which would ultimately result in an exercise in futility. Secondly, the assessee had submitted that the method of valuation of the closing stock employed by the assessee consistently in the past, would not be employed in future. [Para 5]

31. The fact that the valuation of inventory is done only at net realizable value after giving effect to ageing effect is also evident and verifiable from audit report of previous assessment year 2014-15 as well as the stock summary found and submitted during survey proceedings, which has not been disputed by Ld. AO. The copy of audit report for previous assessment year as well as stock summary of valuation of opening stock is available at page no. 2-16 of Paper Book.

32. In view of the above, it is submitted that the AS-2 is followed regularly by the Appellant from year to year basis, wherein the stock is valued at lower of the “cost or net realizable value” by giving necessary adjustment of stock ageing. It is submitted that AO though relied on valuation of stock through MISSBS software only while relying upon the valuation done during survey by department, however, Ld. AO failed to appreciate that stock was valued only at 100% on cost price in the MISSBS software without applying the principle of NRV, which is also required in view of AS-2. The adjustment of stock ageing given and followed by Appellant is nothing but determining of NRV of inventory, which is less than cost of inventory in the case of the Appellant.

33. In view of the above, there difference in valuation and reconciliation difference to the extent of Rs. 1,29,81,073/- is explained, therefore, there is no undervaluation as alleged by the Ld. AO. Accordingly, the impugned addition deserves to be deleted.

Manufacturing Wage snot considered in trading account: Rs. 1,988,88,536/-

34. It is humbly submitted that trading and profit and loss account are prepared in accounting software-Tally, which is maintained after complying with Schedule VI of Companies Act 1956. In the accounting software, while giving accounting entries of wages expenditure incurred during the year under consideration, the said expenses were wrongly classified/grouped under head “Employees Welfare & Other Benefits” which otherwise is part of direct expense. Thus, the same were not considered in trading account of the Appellant as drawn at the time of survey proceeding. Accordingly, there was valuation difference to the extent of these expenditures wrongly classified as indirect expenses under the head “Employees Welfare & Other Benefits” and included in total Employees Welfare & Other Benefits of Rs. 3,80,72,334/- reflected in profit & loss account.

35. The Ld. AO was not justified in rejecting the explanation of the Appellant, that such reconciliation difference in accounting software-Tally arose because of wrong classification/grouping of wages expenses amounting to Rs. 1,98,88,536 under head “Employees Welfare & Other Benefits” which otherwise is part of trading account. Had the amount of manufacturing wages for Rs. 1,98,88,536/- transferred to trading account, the stock valuation would have been increased by the same. Accordingly, there would be neutral effect on profit.

36. It is imperative to mention here that, wages expenses are required to be classified under appropriate head. These facts are even admitted by the Ld. AO, which is evident from the Assessment order. Reliance is placed on statement of the Ld. AO as reproduced herein below

“since, the sale price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had the assessee not considered the wages expenses as costing of such items before hand it would have not been able to determined the sale price”

From perusal of the statement it is evident that the Ld. AO on one hand has admitted the facts that wages expense are necessarily to be considered for determining sales value of the stock. However, on other hand the Ld. AO has not allowed grouping of wages expense under appropriate head under trading account.

37. In this context, it is necessary to refer statement of Shri Arun Palawat recorded on 26.11.2014, wherein in answer to question no.9 he stated that job work, fabric expenses, dying exp are added in determining the cost price. It is evident from the statement itself that wages expenses are considered for the purpose of valuation of inventory, however, the same remained to be classified as such at the time of survey in the trading account of the Appellant on account of inadvertent classification error.

38 In this context, to support the aforesaid reconciliation difference of Rs.1,98,99,536/- , reference is invited to previous year (AY 2014-15)audited profit and loss account statement, wherein wages amount for complete year was for Rs. 2,82,31,875/-, whereas if profit & loss account extracted at the time of survey is referred (PB No. 22), there is no such corresponding wages expenditures account debited in trading account though such expenditures were incurred and were wrongly debited/classified in “Employees Welfare & Other Benefits”. It is humbly submitted that there is no dispute to the fact that Appellant has not incurred these expenditures during the year under consideration. Even otherwise, considering the quantum of expenditure incurred in AY 2014-15, for period of 8 months², wages expenses would be Rs. 1,88,21,250/- which also justifies the quantum of actual amount of expenditure incurred of Rs. 1,98,88,536/-. These facts itself establishes that wages expenditures were not considered in trading account as extracted during the period of survey, therefore, there is reconciliation difference to the extent of Rs. 1,98,88,536/. The above facts are supported from the reconciliation table as discussed herein below:

Sr. NO.	Particulars	Stock valuation as on 1.03.2014	Stock valuation as on 26.11.2014	Stock valuation as on 31.03.2015
1.	Sales	502770697/-	256922781/-	431400149/-
2.	Employee Welfare & other benefits	31226312/-	3,80,72,334/-3	30603813/-
3.	Ratio of Sales to Employee welfare and other Benefit	6%	15%	7%
4.	Wages expenses	28231875/-	1,98,88536/-4	39453369/-
5.	Correct employee Welfare and other benefit Expenses	31226312/-	18183798/- (3,80,72,334- 1,98,88,536)	30603813/-
6.	Ratio of Sales to corrected Employee Welfare and Benefit Expense	6%	7%	7%

From the bare perusal of the table it is evident that wages expenditure of Rs. 1,98,88536/-was inadvertently classified under head “Employee Welfare and other benefit”. Because of which total direct expense of Rs. 3,80,72,334/- recorded under head “ Employee Welfare and other Benefit” are seen to be comparatively higher than that of actual direct expenses of Rs. 3,06,03,813/- for the year under consideration. Also, the error of wrong classification is also evident from the fact from comparison of correct ratio of Employee Welfare and Other Benefit Expenses to Sales, which is seen to be at 15% (at Sr No. 3), as against the actual ratio of 7%( at Sr No. 6), which is consistent and in line with the past history. The significantly higher ratio as indicated at Sr No. 3 before correction as above in Sr. No. 6, also justifies the explanation of the Appellant that due to wrong classification of wages expenses under the head “Employee Welfare and Other Benefit” at the time of survey, the same were not considered under trading account.

39. In view of the above, it is submitted that that wages expenditures were not considered in trading account as extracted during the period of survey.

40. Even otherwise if it is assumed but not accepted that the wages expense have already been considered in trading account as extracted during survey, while determining the costing of such item , then, at the outset, the said observation is factually incorrect and further there is no such specific finding regarding this aspect of the Ld. AO. Therefore, the explanation of the Appellant to justify the valuation difference at the time of survey deserves to be accepted.

41. In view of the above, the reconciliation difference to the extent of Rs. 1,98,88,536/- is explained and accordingly, there is no undervaluation of stock as alleged by Ld. AO.

Other Difference of Rs. 14,42,063/-

42. It is humbly submitted that the difference of the insignificant amount of Rs.14,42,063/- deserves to be deleted as the said difference was on account of totaling error/ omission /eye estimation/ clerical mistake done by the survey authorities at the time of preparing inventory details of stock found at the business premise. Example of one of such errors is more clearly evident from error while preparing details of stock available at Kartarpura Indus Area as available in Annexure AS-12 Page No. 24 (PB No. 19).

43. The above facts are supported by the stock sheet summary prepared by the survey authorities (Annexure AS-12, Page No. 24) available on Page No of the Paper Book. In the said sheet total value of the stock was calculated by the survey, authorities at 96,51,418/-. However, correct total of value of the stock in the sheet available marked as page no. 24 of AS-12 (PB No. 19)is Rs. 85,85,268/-, which is explained as under:

a. The stock of “plain fabric and sarees” of Rs.7,83,550/- valued at page no. 8 of AS- 12 (PB NO. 20) has not been carried forward/considered in the final stock sheet prepared on page no 24 of AS-12 (PB No. 19).

b. After considering the stock of “plain fabric and sarees” of Rs 7,83,550/-as mentioned on page no.8 of AS-12 but not considered in the final stock sheet (Page No. 24 of AS-12), the correct total of the stock sheet at page no.24 of Annexure-12 comes at Rs.85,85,268/-.

44. Thus, there was difference of Rs 1,066,150 (Rs. 9651418 minus 85,85,268/-) on account of totaling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities available at page no. 19 of PB. The remaining insignificant amount of Rs.375,913/- deserves to be ignored having regard to possibility of human error, voluminous nature of the inventory and estimations adopted by the department.

45. In view of the above, it is evident that the impugned valuation of the stock done by department was not correct as the same was based on eye estimation Therefore, the addition of Rs.14,42,063/- deserves to be deleted.

46. In view of the above, the difference is duly explained and summarized in following table for better understanding and ready reference:

Particulars	Tally	MISSBS	Stock valued by Department*
Stock Valued on 26.11.2014	27,95,30,977/-	31,24,00,586/-	31,38,42,649/-
Less: Stock ageing effect	–	(1,29,81,073/-)	(1,29,81,073/-)
Add: wages manufacturing expense, not considered in trading account	1,98,88,536/-	–	–
Insignificant difference on account of other factors including totaling error	14,42,063/-	14,42,063/-	–
Reconciled Stock	300,861,576/-	300,861,576/-	300,861,576/-

47. From bare perusal of the table it is evident that the difference in valuation of stock physically found but valued as per MISSBS at Rs. 31,24,00,586/-and book value of 27,95,30,977/-ison account of the fact that no stock ageing adjustment was given in inventory found but valued as per MISSBS, which has been consistently and regularly followed by the Appellant. Moreover in the year under consideration the wages expense for Rs.1,98,88,536/- was wrongly classified under head “Employee Welfare and other Benefit” in the Tally software. Had the amount been recorded under appropriate head in the Tally software, then there would have not been any difference in valuation of stock as recorded in Tally and valuation of stock so made by the Survey officials during survey.

48. Further, as stated above, the difference of amount of Rs. 14,42,063/- also deserves to be ignored as the same is on account of totaling errors and estimation error as explained herein above.

WITHOUT PREJUDICE TO EXPLANATION AND SUBMISSIONS MADE HEREIN ABOVE, IT IS FURTHER SUBMITTED THAT:

49. As stated above, even though the Ld. AO choose to relied on valuation of stock at the time of physical inspection done through scanning the bar code placed on the box or stock. The figures so arrived after scanning the bar coded was mapped with internal inventory software where stock is recorded at 100% of cost value without giving necessary adjustment of stock ageing. Further, Ld. AO also failed to consider the reconciliation difference on account of wrong classification of wages expense as explained herein above. There is no dispute to the fact that Ld. AO while determining valuation of physical inventory, considered cost of stock from MISSBS software only. The said fact is supported from inventory scanning details and cost of stock as per MISSBS software available at page no 21 of Paper Book respectively, wherein physical stock valued at 3^Rd Floor at Narayan Singh Circle was 38771713/- (PB No. 21), the same value of the stock is also reflected in stock summary mentioned in the assessment order at page no. 2.

50. The above fact is also supported from statement of Mr. Rajesh Jain, wherein he also stated that valuation has been arrived at taking report from MISSBS software. The Ld. AO on page no 6 of impugned order, has also stated and confirmed that the details of arriving at the valuation of the stock, was report of stock generated by Shri Rajesh Jain from the MISSBS software. In this context, relevant extract of statement of the Shri Rajesh Jain is reproduced herein below:

“ this report is generated by me from MISSB software and data base of ZSPL on the basis of barcode. This represents the stock position of all stores/factory of ZSPL as on 26.11.2014 for flagship store”

51.It is evident from the above that the basis of arriving at the valuation of the inventory was inventory records maintained under MISSB software only and accordingly, there was no significant difference in stock as per books as well stock as physically found and valued at the time of survey. To support this fact, stock valuation as per MISSBS software was Rs. 31,24,000,586/- and stock valuation by bar coding scanning was Rs. 31,38,42,649/-.The said insignificant difference of Rs 14,42,063/-is because the valuation of the inventory was done completely on an eye estimation basis and there were totaling errors in computation while taking inventory as explained in foregoing paras.

52. To sum up the reconciliation difference of Rs.3,43,11,672/- between accounting software-Tally and stock found during physical inspection valued through MISSB software is due to totaling errors as well as adjustment pertaining to stock ageing as reflected in Tally software and wages expense which is wrongly classified under head “indirect expense” in its accounting software-tally . By reconciling such differences there exist no difference between valuation of inventory made during physical inspection through scanning the bar code mapped with MISSBS and value of the stock as reflected/recorded under accounting software-Tally.

53. Without prejudice to the above even if it is assumed but not accepted that the Appellant Company had undervalued its stock, the same would be contradictory to the findings of the survey team because no such discrepancy in quantity of physical stock were found and pointed by the survey team. Valuation of physical inventory are made by scanning the bar code mapped with MISSB software, thereby there is no scope for Ld. AO allegation that the Appellant has undervalued its stock, as no such significant difference was found during physical inspection of stock and records of the inventory arrived from MISSBS.

54. It is further submitted that the Ld. AO in the course of assessment proceedings has not provided any iota of evidence which would substantiate his claims. Rather he had only relied on information gathered/collected by survey team on the basis of MISSBS software. For example, the Ld. AO alleged that wages expense are beforehand recorded in Tally under head direct expense, whereas such allegation is factually incorrect besides the fact that the AO failed to mention/specify head under which the Appellant has recorded the same, which forms part of trading account of the Appellant.

55. In this regard, it is further submitted that the income is assessed during the assessment proceeding and not at the time of conducting the Therefore though the information gathered during the course of survey may be considered while finalizing the assessment but the same is not conclusive. The Ld. AO is the only person who is required to compute the income on the evidence produced before him. When the evidence was produced before the Ld. AO due consideration and weightage should also be given to the evidences submitted by Appellant, which clearly established that there was only reconciliation difference in stock valuation and no any under valuation of stock.

56. The Ld. AO only choose to rely on findings of the survey team and has passed the impugned order without independent application of his mind.

57. It is humbly submitted that closing stock of previous year become opening stock of subsequent assessment year, for example, closing stock of 31.03.2014 became the opening stock of FY 2014-15, i.e. AY 2015-16. The Ld. AO has duly accepted the opening stock of AY 2014-15. Similarly, closing stock as on 31.03.2015 has been duly accepted, which has been carried forward to AY 2016-

58. Therefore, if the version of Ld. AO for undervaluation of stock as on 26.11.2014 is accepted, this would disturb the chain of assessments. Therefore, in any case, addition for impugned under valuation of stock is made, then it is requested to kindly allow adjustment in opening stock figures for AY 2016-17 and benefit be given in income of subsequent assessment years.

59. It is humbly submitted that opening stock for AY 2015-16, closing stock of AY 2015-16 as well all purchases as well sales of year under consideration has been duly accepted by the AO, therefore, he is not justified in making impugned addition in respect of alleged difference in valuation of inventory at the time of survey. In support of the said contentions, Appellant places reliance on following judgment:

Commissioner of Income-tax (Central), Ludhianav.OswalWoollen Mills Ltd[2009] 2 taxmann.com 130 (Punjab & Haryana)

3. The Tribunal set aside the view taken and held that the Assessing Officer had not given any logical basis for not accepting the valuation of closing stock-in- It was further observed that if the Assessing Officer objected to the valuation of the closing stock, he should have also objected to opening of the stock on the same basis, which was not done. It was held in the circumstances disturbing the closing stock valuation of the work-in-progress was not justified.

7. In view of the above, we are of the view that the Tribunal correctly applied the principle of law for setting aside the addition made on the ground of under valuation of closing stock of work-in-progress.

Deputy Commissioner of Income-tax v. Upper Rajasthan Sales & Services (P.) Ltd.[2012] 20 taxmann.com 158 (Jaipur)

The above findings of learned CIT(A) neither could be controverted nor any other material was brought on record to establish otherwise. It is also a matter of fact that if any addition is made on account of difference in valuation, then the effect has to be given in subsequent year. Various Courts have held that where there is no defect in maintenance of books of account and the method of valuation is the same as adopted in earlier year, then no addition can be made in a particular year by adopting a different method. Whatever the closing stock has been shown by the assessee, the same has been shown as opening stock in next year which has been accepted. It is also a matter of fact that closing stock of earlier year which became the opening stock of the year under consideration is the same and accepted by the Department. Thereafter, each and every purchase and sale is vouched which is verifiable, therefore, for this reason also, in our considered view, the AO was not justified in making any addition on account of difference in valuation of closing stock.

ASSISTANT COMMISSIONER OF INCOME-TAXV.RAM SAHAI WOOL COMBERS (P.) LTD.[2002] 120 TAXMAN 84 (CHD.) (MAG.). The assessee had been consistently following the method of accounting of debiting the entire purchases of machinery spare parts to profit and loss account and such a method had been accepted by the revenue in earlier years. Assuming that if there was some stock of spare parts available with the assessee as at the end of the year, similar stock would be available at the opening day of the accounting year for which adjustment had to be given to correctly arrive at total income of the previous year as per section 4, which levies a charge on income of that particular year. Accordingly, if only addition on account of closing stock of spare parts was made without making adjustment of value of spare parts which must be available in the openingstock, it would give a highly distorted figure of profit of the current year. Hence, the order passed by the Commissioner (Appeals) was to be upheld. This view was supported by the decision of Calcutta High Court in CIT v. Bengal Jute Mills Co. Ltd. [1992] 107 CTR (Cal.) 34.

59. Without prejudice to the above, when books were duly accepted without pointing any defects in purchases and sales, at most the Ld. AO can only make addition for profit earned on alleged undervalued stock. In support of the said contentions, the reliance is placed on following judicial pronouncements:

Stone Age (P.) Ltd. v.Deputy Commissioner of Income-tax, Circle-2, Jaipur [2020] 116 taxmann.com 930 (Jaipur – Trib.)

17. It is clear from the above chart that even if the tentative quantity taken by the department with the rates as per books of account is taken total stock works out at Rs. 7,87,86,680/- as against the stock as per books of account at Rs. 8,18,90,637/-. Thus, there is shortage of stock as on the date of survey amounting to Rs. 31,03,957/- which can be considered as having been sold but not recorded in the books of account on the date of survey. At the most, the department can add GP earned on such shortage of stock, in so far as the A.O. has not doubted that all the purchases had been recorded in the books of account. Once the purchases is found to be accounted for, addition can be made with respect to G.P. earned on such shortage of stock. The G.P. during the year is 7.48%. Applying the same to the shortage of stock amounting to Rs. 31,03,957/- gives a profit of Rs. 2,32,175/-. Accordingly, we uphold the addition of Rs. 2,32,175/-. The A.O. is directed accordingly.

60. Moreover, it is humbly submitted that it appears that AO took valuation of inventory as per MISSBS software as basis for impugned addition is because value of closing stock as per MISSBS is comparatively high as compared reflected in Tally software. This action of the Ld. AO is solely on account of pick and choose methods applied by him, which is not justified. The Ld. AO instead of verifying/looking into the reason/core for which there might occur as reconciliation difference in valuation of the inventory during physical inspection made by scanning the bar coded mapped with MISSBS and value recorded in Tally software, relied upon valuation report as per MISSBS software wherein stock is valued at 100% of cost without giving effect to stock ageing. Even otherwise by relying on the said valuation,there exist no significant difference in valuation report of stock as per MISSBS and physical valuation as reported by survey team.

61. It is humbly submitted that impugned addition was on account of survey conducted on 26.11.2014, the records found in the middle of the assessment year under consideration was the basis on which the Ld. AO made the impugned addition. However the Ld. AO failed to pay due heeds to the facts that true trading result is only ascertainable at the end of financial year, wherein closing stock is taken at that time as there is no practice prevalent to account for closing stock in the middle of the accounting year in Tally, this also raises doubt on the survey proceedings and accounting entries of closing stock as on date of survey in accounting software. The Ld. AO mechanically proceeded on the basis of accounting records available at the time of survey, without appreciating that wages expense were wrongly classified under head “Employee Welfare and Other Benefit ” and were not considered in trading account.

62. In view of the above, the actions of the Ld. AO are untenable and not justified. Accordingly, it is prayed that impugned additions made by Ld. AO arbitrarily be kindly deleted.

WITHOUT PREJUDICE TO CONTENTIONS RAISED HEREIN ABOVE, SUBMISSION ON FINDINGS AND ALLEGATIONS OF THE LD. AO ARE BEING MADE AS FOLLOWS:

63. “The Ld. AO alleged that the arguments of the Appellant with respect to stock ageing effect were not supported with any documentary evidence” .In this regard it is submitted that said allegation false, vague and incorrect for the reason that the Appellant in support of his contentions produced stock summary sheet (PB No. 17, reconciliation chart (PB ), which were not considered and not defect or discrepancies in the same were pointed out by the Ld. AO. The Appellant submittedall such documents which duly explained the reason for which there occurred difference in valuation of inventory.The burden casted upon the Appellant was duly discharged, therefore, the allegation of the Ld. AO deserves to be negated.

“ The valuation has been done keeping in view both net realizable value of the stock and the cost that would have been incurred by the Assessee”.

64.In this regard, it is submitted that in the survey action conducted, the Income Tax Officials valuated the inventory on the basis of figures/value so recorded in MISSBS software. It is also evident from statement of Shri Rajesh Jain reproduced in 46 of submission, because he himself has generated the report of stock on the request of Survey Officials. The report generated by him is value of stock as per inventory records kept by Appellant in MISSBS .as stated above, in the MISSBS software the stock is only valuated at 100% of cost price value without any adjustment for ageing effect and other factors to bring it to net realizable value in accordance with AS-2.Therefore, allegation of the Ld. AO is contrary to the facts and circumstances of the case, accordingly, it is incorrect version of the Ld. AO that the valuation was done keeping in view both cost price and net realizable value. Rather it is fact that valuation was done by survey officials keeping in view only cost price of the stock, without considering net realizable value, which is also to be considered in view of applicable accounting standards.

“ Therefore, any difference due to ageing will automatically be subsumed in the valuation so made”.

65. In this regard it is humbly submitted that it is not practically possible to valuate the stock with ageing effect in MISSBS software, as before arriving at that figure, cost price/cost reports of the product is required to be derived. cost price of the product can only be ascertained in valuation report of the inventory prepared through internal inventory software-MISSBS, which was basis for survey officials also. Moreover, if it is assumed but not accepted that stock ageing effect is automatically subsumed in valuation of stock as per MISSBS, accepting such proposition will be contrary to stand taken by Ld. AO itself, as he himself accepted opening stock after adjustment of ageing Therefore, this allegation of Ld. AO is answered and controverted.

66. Event otherwise it is not possible to value the inventory by giving effect to stock ageing through MISSBS because there is no enabled feature in the MISSBS software for making necessary adjustment of stock ageing on inventory so valued. It was to overcome this problem and for the purpose of financial reporting the Appellant makes the necessary adjustment pertaining to stock ageing separately on the basis of the valuation reports of MISSBS software. Thus, Ld. AO is not justified to state that ageing effect is automatically subsumed in the valuation so made by the Ld. AO.

67. In view of the forgoing detailed submission in relation to this ground of appeal, the impugned additions of Rs.1,29,81,073/- deserves to be deleted.

Finally in summary the appellant company further submits following details/reconciliation of stock as per books and found during the course of survey for better understanding as follows:-

A(i) A stock reconciliation chart between Tally and MISSBS Software as on 31.03.2014 is enclosed herewith.

A((ii) The figures in the reconciliation statement are from the seized document No. 64, Annexure A-8 – From the said document, it is evident and verifiable that the value of the stock of finished goods as per MISSBS software at Showroom as on 31.03.2014 was Rs. 21,88,73,000/-. The net realizable value of the said mode as per method of valuation of closing stock regularly followed by the appellant and accepted by the department was Rs. 20,54,30,000/- stock at factory not included in MISSBS software Rs. 8,11,79,180/-. Thus, in the MISSBS software, the value of opening stock as on 01.04.2014 was taken in excess by Rs. 1,34,40,000/- and the said value has been considered and taken into account by the survey team in calculating the alleged excess value of stock. In view of the above facts, it is crystal clear that the value of stock by the survey team has been taken in excess by Rs. 1,34,40,000/-.

B. A statement of total opening stock amount Rs. 28,66,09,180/- as on 01.04.2014 and closing stock as on 31.03.2014 is enclosed herewith.

C. It is a fact that no unrecorded purchases made out of books of accounts were found during the course of survey and the difference in stock in between Tally and MISSBS software occurred because of the actual cost of the stock and the net realizable method of valuation of stock regularly followed and accepted by the IT department in earlier and subsequent years.

D. There is a totaling mistake in the stock inventory sheet vide Page No. 19 and 20, and seized paper No. 24 and 8 of Annexure AS-12 annexed with the written submissions submitted already. As per the said sheet, the total value of stock works out to Rs. 96,51,418/- whereas, the correct total of the said sheet works out to Rs. 85,85,268/-. Therefore, there is a difference of Rs. 10,66,150/- accordingly, the survey team of the department has valued the stock in excess by this amount. For ready reference, a reconciliation statement of the said figure is also enclosed herewith.

E(i) It is pertinent to mention here that, wages expenses are required to be classified under appropriate heads. These facts are even admitted by the learned AO, which is evident from the assessment order. Reliance is placed on finding of the learned AO at Page No. 11 para 5.3.3 (C) of the assessment order. The finding is reproduced herein below :-

“since, the sale price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had the assessee not considered the wages expenses as costing of such items before hand it would have not been able to determined the sale price”.

Further, perusal of the above finding, it is evident that the learned AO on one hand has admitted the facts that wages expenses are necessarily to be considered for determining sales value of the stock. However, on other hand the learned AO has not allowed grouping of wages expenses under appropriate head under trading account. The facts and submissions are evident and verifiable from the Trading A/c prepared during the course of survey i.e. 26.11.2014 in which, the value of stock was worked out by applying of a GP rate of preceding year. It is further pertinent to mention here that in the said Trading and Profit & Loss A/c, there is no wages and the entire expenses of wages and other employee expenses are debited under the head ‘Employee Welfare and other benefits’ below the Trading A/c. This amount includes factory wages amounting to Rs. 1,98,88,536/-.

As per above facts, which are also evident and verifiable from the assessment order and the Trading A/c prepared during the course of survey, the submissions of the assessee regarding none consideration of the factory wages in determining the value of stock as per tally software is correct and deserves to be accepted as such.

E(ii) Copy of Trading A/c for the financial years 2012-13 and 2013-14 relevant assessment years 2013-14 and 2014-15 along with copy of Expenses A/c from where the direct wages expenses transferred to Trading A/c is enclosed herewith. In this connection, it is worthwhile to mention here that the assessment for the assessment year 2014-15 was completed by the same Assessing Officer who completed the assessment for the assessment year 2015-16 under appeal and he has accepted the facts that the direct wages expenses are transferred to Trading A/c at the end of the year from ‘Employee Welfare and other benefits A/c.

In view of the above facts and submissions of the appellant have duly been accepted by the department the method of not including the direct wages of the previous year relevant to the assessment year under appeal are grossly wrong and against the accepted facts by the department. It is therefore, further requested that there was no alleged excess stock on the date of survey and the declared value of stock by the appellant deserves to be accepted as such.

Ground No. 2

That on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in confirming lump sum disallowance of Rs. 300000/- made by the ld AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability thereof and/or not being incurred wholly/exclusively for business purpose.

68. At the outset it is humbly submitted before your goodself that the Ld. AO has grossly erred in making lump sum disallowance of Rs. 3,00,000/- in relation to travelling repairs and other expenditures, merely on the assumption that the Appellant has incurred the expenses not wholly and exclusively for the purpose of

69. In this regard it is pertinent to discuss the relevant provision of section 37(1) of the Act which is reproduced herein below:

Section 37:General.

37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

70. From the bare perusal of the Section 37 it is evident that there are two cases wherein deduction u/s 37(1) is not allowed:

• • Expenditure incurred is capital in
  • Expenditure incurred is personal in nature or it has not been incurred wholly and exclusively for the purpose of business

71. In the present case, the Ld. AO has not given any specific finding of any such specific expenditure incurred by the Appellant which is not for business purpose or which is capital in nature. The Ld. AO has just made ad-hoc or estimated disallowance without pointing of which specific voucher, expenditure, transactions of the business is not wholly and exclusively for business purpose.

72. As stated above, all the expenditure incurred by Appellant are for business purpose only, there was not even single instance of expenditure pointed out by the Ld.AO which indicates that the aforesaid expenses was incurred in cash or not for business purpose. Even the Ld. AO has not provided with any cogent material regarding how the expenses were not incurred exclusively for the purpose of business. Appellant submitted all supporting vouchers/details and documentary evidences in support of the claim made by the Appellant, however, Ld. AO instead of giving any specific adverse instances has made general comments on assumption, presumptions only. Therefore, this disallowance made on account of flimsy/whimsical grounds deserves to be deleted.

73. It is kindly submitted that return of income was filed by the Appellant along with audit report which was duly signed by the chartered accountant. The auditor has not also pointed out any expenditure incurred which is personal in nature or not for the purpose of business as they are duty bound under the Companies Act, 2013 to report said instances. Therefore the veracity of the all expenditures incurred for business purpose is established from this fact itself. Further, in the auditor report, there is no discrepancies to that effect that any of expenditures or payments were made in cash, which is not admissible under the law or any expenditure was not fully vouched etc. Apart from auditor report the books of account were also duly accepted by the Ld. AO without pointing out any defects in the books. Therefore, disallowance of expense made by the Ld.AO on estimate basis is not permissible in the eyes of law.

74. In support of the submission herein above, reliance is placed on judicial pronouncement discuss herein below:

Commissioner of Income-tax, Faridabad v. S.S.P. (P.) Ltd.[2011] 14 taxmann.com 87 (Punjab & Haryana)

It was noted that the disallowance was made on ad hocbasis without there being any material to justify such disallowance. No specific instances of expenditure had been pointed out which may disentitle the assessee’s claim for site expenses. The findings on appeal were affirmed by the Tribunal. No error of law or perversity could be shown by the revenue in the aforesaid finding which may warrant interference. [Para 9]

As regards to disallowance telephone and main expenses, the Commissioner (Appeals) had concluded that the audited books of account along with vouchers were produced by the assessee and thereafter the Assessing Officer had failed to show that the said expenditure was not for business purposes. Further, the disallowance was made on ad hocbasis without there being any material which would justify that the amount had been spent for personal use of the directors. The aforesaid findings were confirmed by the Tribunal.

[Para 11] GurudevSingh v.Assistant Commissioner of Income-tax[2017] 88 taxmann.com 741 (Cuttack – Trib.)

10. When the return of income has been filed with supporting account and audit report in Form No. 3CB duly signed by the chartered accountant, the audited profit and loss account cannot be ignored and the Assessing Officer/Commissioner of Income-tax (Appeals) are not permissible to proceed to disallow the expenses on the basis of the artificial estimation only self-estimation of the Assessing Officer/Commissioner of Income-tax to disallow the expenditure claimed by the assessee is not sustainable in the eyes of law particularly when the audited books account and the balance-sheet have not been rejected by the Assessing Officer so the addition on the basis of estimation is not permissible on the flimsy ground that some of the bills and vouchers were handmade and most of the payments were made in cash particularly when all these documents have been duly audited and have not been disputed by the Assessing Officer.

11. So, keeping in view the fact that the assessee himself had shown profit at 9.9 per cent. and has been regularly maintaining the books of account in the regular course of business duly audited under section 44AB, the Assessing Officer as well as the Commissioner of Income-tax (Appeals) have exceeded their powers to disallow the deductions claimed by the assessee in the face of the books of account duly audited under section 44AB, having been accepted by the Assessing Officer. So, grounds Nos. 1, 2, 7, 3 are determined in favour of the assessee.

Deputy Commissioner of Income tax-(1)(1), Kolkata v.Lexicon Auto Ltd.[2018] 92 taxmann.com 84 (Kolkata – Trib.)

From the above, it is observed that necessary details were duly filed by assessee at the time of assessment proceedings but AO was not satisfied with the same, therefore he disallowed the same on ad hoc basis. In view of above proposition we note that if assessee has not furnished necessary documents then AO should have disallowed all the expenses claimed by it under the head “repairs”. It is settled law that the disallowance on account of ad hoc basis is not permissible under the provision of the Act. If the AO is not satisfied with the submission of assessee then he has to make the disallowance after making specific reference to such documents/vouchers. AO cannot just make the disallowance on ad hoc basis without pointing out any defect/error in the submission of assessee. In this connection, we also rely in the order of Co-ordinate Bench of ITAT Kolkata in the case of Animesh Sadhu v. ACIT in ITA 11/Kol/2013 Dated 12.11.2014 Assistant Commissioner of Income-tax, Circle-1 v. Ganpati Enterprises Ltd[2013] 32 taxmann.com 262 (Delhi – Trib.)

Before first appellate authority, assessee has furnished details of the expenses. The assessee has also pointed out that in Assessment year 2004-05 an ad hoc disallowance of Rs. 5,00,000 was made by the Assessing Officer and it was confirmed by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. The assessee has further pointed out that in assessment year 2005-06 also an ad hoc disallowance of Rs. 1,45,000 was made which was restricted to 90,000 by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. In assessment year 2006-07 also, ad hoc disallowance of Rs. 2,00,000 was made and, it was restricted to 1,00,000 by the Commissioner (Appeals) but the Tribunal has deleted the disallowance. The first appellate authority has gone through all these details and, thereafter, observed that Assessing Officer has not discussed the details of expenses and how assessee fail to prove the genuineness of the expenses. The scheme of Act does not authorize Assessing Officer to make a disallowance according to his wishes, rather it provide that he should first point out the defects in the accounts of the assessee. In the finding extracted above it nowhere reveals what was the total amount of expenditure claimed by the assessee, which specific vouchers was not in accordance with law. In a just sweeping statement, the Assessing Officer observed that on verification, some of the expenses were found to be unverifiable, but what were those expenses, he should make out in the assessment order, only then he can disallow them. This is more important when in a row in the last 4-5 years, similar disallowances were made by him but deleted by the Commissioner (Appeals) as well as Tribunal. Therefore, if the finding of the Assessing Officer extracted were considered vis-à-vis the view taken by the Commissioner (Appeals) which is a higher authority in the pedestal of the hierarchy, the scale would tilt in favour of the first appellate authority, and, thus, no interfere is called for in the order of Commissioner (Appeals). [Para 6.2]

It is further submitted that Ld. AO directly made reference to Section37(1) and Section 38(2) to support his inaction, whereas no show cause notice to propose any such action was given by the Ld. AO during impugned proceedings. Therefore, on this ground itself, the impugned addition made by Ld. AO deserves to be deleted as there had been violation of principle of natural justice while making the impugned addition to the total income of the Appellant.

75. In support of the submissions above reliance is placed on judicial pronouncements as discuss below:

Uma Nath Pandey and Ors. Vs. Respondent: State of U.P. and Ors. MANU/SC/0401/2009

8. The adherence to principles of natural justice as recognized by all civilized States is of supreme importance when a quasi-judicial body embarks on determining disputes between the parties, or any administrative action involving civil consequences is in issue. These principles are well settled. The first and foremost principle is what is commonly known as audi alteram partem rule. It says that no one should be condemned unheard. Notice is the first limb of this principle. It must be precise and unambiguous. It should appraise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of fair play. The concept has gained significance and shades with time. When the historic document was made at Runnymede in 1215, the first statutory recognition of this principle found its way into the “Magna Carta”. The classic exposition of Sir Edward Coke of natural justice requires to “vocate, interrogate and adjudicate”. In the celebrated case of Cooper v. Wandsworth Board of Works (1863) 143 ER 414, the principle was thus stated:

“Even God did not pass a sentence upon Adam, before he was called upon to make his defence. “Adam” says God, “where art thou? hast thou not eaten of the tree whereof I commanded thee that thou shouldest not eat”.

76. In view of the above, facts and circumstances of the case and in light of settled legal position discussed, impugned disallowance of Rs. 3,00,000/- deserve to be deleted.

9. Ld. AR of the assessee against the written submission so filed by the revenue also filed his rejoinder wherein the ld. AR contended as under :

“The learned CIT (DR) has mentioned regarding wages expenses not considered in Trading A/c for the reasons that the assessee was duty bound to prepare and provide all the records to the authority. In this regard, it is submitted that the reverse Trading A/c was prepared by the authority themselves from the data(s) available in Tally Software. From the said data(s), it is evident and verifiable that the amount of factory wages was debited under the head “Employee Welfare and Other Benefit”. The said expenditure is a direct cost and is an item of the Trading A/c which has been correctly debited to Trading A/c in all the previous as well as subsequent years and has been accepted by the learned AO’s in all the said years as it is also in the assessments completed u/s 143(3) of the IT Act, 1961. In view of the above fact, the learned CIT(A) order is factually as well legally correct and passed the order after appreciating and taking into consideration of the fact of the case.

2. The submissions regarding valuation of the stock inventory that the method of valuation of the stock as per accounting standard-2 i.e. the valuation of inventory cost or net realizable value whichever is less is constantly followed and accepted by the department in all the years. The facts and submissions are verifiable from the immediate preceding assessment years 2014-15 completed u/s 143(3) by the same learned Assessing Officer. Thus, the submissions made by the learned CIT(DR) are against the accepted facts of the assessee’s case.

The learned CIT(DR) has also mentioned that the details of the wages expenses and ageing effect have been furnished during the course of appellate proceeding. This submission is not correct for the reason, that during the course of survey, entire record was impounded / seized by the learned AO and the said record was available at the time of completion of the assessment proceedings u/s 143(3). Further, the valuation of stock as per aging of goods was with the learned AO in the seized records vide Annexure-8, Page No. 64 discussed in assessment order at Page No. 5, 1^st para thereof.

In view of the above facts and circumstances of the case, the entire documents on which basis, the learned CIT (A) decided the appeal of the assessee company were available with the learned AO.”

10. To support the contention so raised in the written submission, reliance was placed on the following evidence / records:

11. The AR of the assessee in addition to the above written submission so filed vehemently argued that the apple cannot be compared with the orange and vice versa. The ld. AR also submitted that even after the two years of survey while completing the assessment for A. Y. 2014-15 revenue accepted the stock valuation method regularly adopted by the assessee. While calculating the alleged difference revenue started with the opening stock of tally and stopped with the stock of physical inventory. Thus, comparing the apple with the orange will not give the correct result. Ld. AO should have started with the opening stock of tally and should have compared with that of the stock of tally only. Even otherwise the assessee reconciled the figure as per the written submission. It is clear that revenue has not disputed the quantity found and that is recorded in the regular books of account maintained. The only dispute is valuation of stock and the same adding the wages related to the goods taking to its present status and giving the benefit of net realizable value on account of ageing of stock and the said method is regularly followed by the assessee should not be disturbed when it was accepted even in the assessment after to the survey. Therefore, the valuation of the stock regularly followed should be accepted. Even otherwise the revenue cannot change the regular method of accounting and if there exist any difference the same will be taxed in the year of sale automatically so revenue merely on valuation cannot tax the income which has not realised.

As regards the second issue, ld. AR of the assessee relied upon the written submission and while doing so he submitted that without rejecting the regular books of accounts so maintained no lumpsum addition can be made and if made is not sustainable and to drive home to this contention he relied upon the judicial precedent cited in the written submission.

12. We have heard the rival contentions and perused the material placed on record. As is evident from the grounds of appeal raised by the revenue that, revenue has challenged the finding of the ld. CIT(A) on the three- additions made by the ld. AO.

13. We shall be dealing ground no. 1 raised by the revenue and in that ground revenue object to direction of the ld. CIT(A) while directing the ld. AO to delete the addition of Rs. 3,43,11,672/- to the income of the assessee-appellant on account of alleged difference in value of stock found at the time of survey u/s 133A of the Act as undisclosed investment. While accepting the contention CIT(A) erred considering valuing of stock as per books of accounts (as per tally) wages/job charges etc. of Rs. 1,98,88,536/- were required to be considered while correcting the valuation of stock. Revenue further challenges that ld. CIT(A) should not have considered the effect of valuation on account of ageing of stock valuation amounting to Rs. 1,29,81,073/- not reflected in inventory software maintained by the appellant-assessee. Lastly the revenue challenges that residual difference of Rs. 14,42,063/- was considered as insignificant while considering the inventory of Rs. 32 crores.

14. The brief facts related to the issue on hand as emerges from the order of the lower authorities are that there was a survey u/s 133A of the Act, which was conducted at the business premises of the assessee on 26.11.2014, survey team took the inventory of stock found at the business premises which was determined at Rs. 31,38,42,649/-. The survey team also take note of the fact that the assessee company was maintaining its stock on its internal software-MISSBS. Whereas the figures of opening & closing stock fed manually on the accounting software- TALLY. Thus, it was noted that stock records as on date of survey i.e. 26.11.2014 has three different value of stock, (i) Stock as per physical inventory- Rs. 31,38,42,649/- (ii) Stock on MISSBS- Rs. 31,24,00,586/- and (iii) Stock on TALLY- Rs. 27,95,30,977/-. Thus, while in assessment proceeding assessee was asked to show cause as to why the excess stock difference of Rs. 3,43,11,672/-shall not be added back to the income of the assessee company. While submitting the reply the assessee contended that they were not aware as to how the figure of 31,38,42,649/- was derived.

That objection of the assessee was not considered as the stock of goods were carried out in the presence of Shri Rajesh Jain who is the employee of the assessee company and Manager of EDP. The physical inventory was taken by the Department with the help of employees/ incharge of stores/ factories. A/R Shri R.K. Bhatra and Shri Virendra Dhadhich also admitted this position of physical stock as on 26.11.2014. Hence the objection raised by the assessee through his reply to show cause dated 11.12.2017 that the assessee does not know how the figures of Rs. 31,38,42,649/- does not hold good and accordingly that was not considered.

The assessee further claimed that, wages paid to labour in the Tally was recorded as Indirect Expense, however, the same is Direct Expense and thereby same should be considered while valuating the closing stock and thereby that is required to be increased by Rs. 1,98,88,536/-. Ld. AO did not considered this explanation considered that reply of the assessee as vague and contrary to the facts of the case of the assessee, because assessee maintains stock records and there exist a method based on which Sale Price of each item is fixed and accordingly Price Tags are tagged. The method for arriving at MRP of the items has been explained by Shri Virendra Dadhich, in-house Chartered Accountant of assessee in his statement recorded u/’s 131 on 26.11.2014. Further, the said procedure has also been acknowledged by Shri Arun Palawat in his statement recorded u/s 131 dated 26.11.2014. Ld. AO noted that perusal of the statement shows that the Sale Prices is determined by inflating the cost of that item by a certain percentage. It is relevant to mention here that the percentage is also fixed based on the type of trade i.e. for wholesale there is a fixed percentage and for retail percentage is different. Since, Sale Price of an item is only a markup on cost of that item, it is necessary to have ascertained cost of that item first. Had assessee not considered the wages expenses as costing of such items beforehand it would have not been able to determine the sale price. Therefore, the claim of assessee that wages paid to labour were not included while reporting the closing stock in its accounting software was considered as contrary to the fact. Even ld. AO noted that, in the parallel inventory software (MISSBS) maintained by the assessee stock on the date of survey stood at Rs. 31,24,00,586/-, which is very close to the physical inventory found during the survey and accordingly ld. AO did not consider the contention of taking the labour expenses in considering the valuation of stock and accordingly ld. AO noted that the stock is undervalued/ understated by Rs. 1,98,88,536/- rejecting the contention of the assessee.

Another contention raised by the assessee-appellant while explaining the difference in the stock thereby it was claimed that it was assessee’s regular practice to value stock at 100% of cost if purchased in same year, 90% of cost if purchased in immediately preceding year and 80% of cost for all preceding year stock. Therefore, the difference to the extent of Rs. 1,29,81,073/- is nothing but ageing effect only. The reply of the assessee was considered, but however, the same was not found tenable by ld. AO because on the date of the survey the physical stock was valued at Rs. 31,38,42,649/- The valuation was done keeping in view both net realizable value of the stock and the cost that would have been incurred by the assessee and therefore, ld. AO did not considered the difference due to ageing and taken a view that it was automatically subsumed in the valuation so made. Ld. AO contended that assessee could not brough on record a single instance that the physical inventory taken on the date of survey was not in accordance to its net realizable value. Therefore, the argument put forward was considered as vague and without any corroborated documentary evidence and thereby the explanation was not acceptable for Rs. 1,29,81,073/-.

Thus, ld. AO did not consider the explanation furnished by the assessee in stock for an amount of Rs. 1,98,88,536/- for labour expenses and Rs. 1,29,81,073/- on account of ageing difference. For the balance amount of Rs. 14,42,063/- assessee failed to furnish any justification and this resulted an addition for the difference in inventory of Rs. 3,43,11,672/- as income of the assessee as undisclosed investment.

15. When the matter came up before the ld. CIT(A), he noted that ld. AO made addition of excess stock of Rs 3,43,11,672/- by reducing stock as calculated on tally software from physical stock (31,38,42,649 less 27,95,30,977). Before the ld. CIT(A) the assessee explained that difference as tabulated herein below :

16. As is evident from the record, the valuation of stock on “Tally software” by applying last year GP rate at 28.11% and did reverse calculation of So while preparing the trading result, closing stock of last year was considered as opening stock and then as the actual sale made by the assessee. Thereafter, actual purchases so made is required to be shown on the debit side of the trading account along with the necessary expenditure incurred to bring the closing stock at their reported level. After doing so generally the regular gross margin earned by the assessee is reported and thereby the closing stock amount derived as balance credit. That is how, the survey team derived the stock as per accounting software (Tally) at Rs. 27,95,30,977/-.

The appellant-assessee contended that while debiting direct expenses in trading account, the survey team had not taken the wages expenses Rs 1,98,88,356/- incurred during the year which was classified as Indirect Expenses under the head “Employee Welfare & Other Benefits” total of Rs 3,80,72,334/- and further that had the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by that amount. Out of the total sum of Rs 3,80,72,334/- under the head Employee Welfare & Other Benefits the dispute is only related to Rs. 1,98,88,356/-. While giving the relief of this ld. CIT(A) noted that the survey team had taken GP rate of 28.11% from last year. The last year (i.e. for AY 2014- 15) the GP was Rs 14,13,17,765/- and turnover was Rs 50,27,70,697 which leads to GP at 28.11% and in that year the direct expenses had taken into trading account was as under:

Thus, while applying the GP for the last year the wages were considered and there is reason to exclude the same for the year under consideration and thereby the plea of the assessee was considered that wages expense of Rs 1,98,88,536/- was not taken in trading account prepared for the year under consideration and therefore, that difference is required to be adjusted. On careful consideration of the record, we find that wages expenditure of Rs. 1,98,88,536/- was inadvertently classified under head “Employee Welfare and other benefit”. Because of which total direct expense of Rs. 3,80,72,334/- recorded under head” Employee Welfare and other Benefit” as on date of survey are seen to be comparatively higher than that of actual direct expenses of Rs. 3,06,03,813/- for the full year under consideration. Also, the error of wrong classification is also evident from the fact from comparison of correct ratio of Employee Welfare and Other Benefit Expenses to Sales, which is seen to be at 15%, as against the actual ratio of 7%, which is consistent and in line with the history. The significantly higher ratio as indicated before correction as above also justifies the explanation of the Appellant that due to wrong classification of wages expenses under the head “Employee Welfare and Other Benefit” at the time of survey, the same were not considered under trading account. Thus, the argument of the appellant -assessee was found correct that wages expense of Rs 1,98,88,536/-. Thus, if the amount of manufacturing wages for Rs 1,98,88,356/- transferred to trading account, the stock valuation as per tally software would have increased by the same and the difference up the extent of Rs 1,98,88,536/- required to be considered as explained. Thus, we do not find any infirmity in finding of the ld. CIT(A) so recorded and thereby the ground taken by the revenue has no leg to stand and thereby we confirm the finding of the ld. CIT(A) while directing to delete the addition of Rs. 1,98,88,536/-.

As regards the second limb of explanation of the assessee that ageing difference of stock as is regularly followed by the assessee was not considered. Before we proceed to go into the merits of the dispute it was noted that there was no dispute on quantitative records maintained and verified by the survey team, and was found to be in accordance with the software maintained by the assessee, but the dispute which revenue has taken up about the valuation of that stock. As is experienced by the revenue during the survey that the assessee using Tally software for financial reporting and accounting purpose but at the same time assessee-appellant maintains MISSBS inventory software for keeping records of inventory. The Survey Team found value of stock as per MISSBS inventory software at Rs 31,24,00,586/-. When the assessee asked about the difference the assessee contended that over a period after manufacturing the cloth or that of the wearable considering the style and age of stock, older the style and stock chance of getting the same price gets reduced and thereby the stock price was considered based on the past statistic of getting reduced percentage of price and valuation cost or market price being the recognised method as per Accounting Standard-2 and even that case Income Tax Act, also allow to value the stock at cost or market price whichever is low. This method of accounting is regularly followed by the assessee and even the assessment completed for A. Y. 2014-15 after the date of survey on 23.11.2016 [ date of survey 16.11.2014] wherein same method of valuation was considered and no separate adjustment was called for.

Thus, the assessee’s plea that value of the stock, which is recorded in Tally software, is at net realizable value because the same is lower than the cost. The basis of the valuation being consistently followed and no one while doing necessary adjustment of stock ageing in its stock valued at 100% of cost price on MISSBS inventory software. The assessee-appellant had stated that even during the course of survey as well as during assessment proceeding that the basis of calculating the net realizable value (NRV) is that the same year stock including the purchases of the current year is valued at 100% of cost price, one year old stock valued at 90% of cost price, two years old stock is valued at 80% of cost price and stock purchased before that third year, is value at 50% of cost price. It was because of valuation of inventory at net realizable value by giving effect to stock ageing calculated separately and recorded in Tally only and that has been followed consistently and accepted by the revenue even after the survey when the assessment for A. Y. 2014-15 is considered then why the same cannot be for the year under consideration i.e 2015-16. Ld. CIT(A) in his order noted that the survey team, while survey proceeding had valued the stock by giving effect to stock ageing and taken printout of valuation sheet at page no 64 of Annexure A-8. From that impounded document, he noted that on 31.03.2014 (i.e. on last day of preceding year) cost arrived from MISSBS software was Rs 21,88,73,000/-, however, after considering the ageing effect, NRV was taken at Rs. 20,54,30,000/-.

In the light of those cognisant past practices being followed while preparing the trading results on Tally Software. Considering that being fact while deciding the issue ld. CIT(A) observed as under:

• Thus, while preparing the trading a/c on Tally Software during the course of survey, the opening stock was taken at Rs 28,66,09,180/- which was the closing stock of preceding year for which the bifurcation is as under:

• Therefore, the closing stock of preceding year was valued at Rs. 20,54,30,000/- as on 31.03.2014 after considering ageing effect of Rs. 1,34,40,000, which has not been disputed by the AO while passing assessment order for AY 2014-15 and accepted this ageing effect of Rs 1.34 cr. All such figures are taken from audit report for previous assessment year as well as stock summary of valuation of opening stock. Similarly the AO had passed the assessment order for AY 2012-13 and AY 2017-18 and had accepted the ageing effect while calculating the stock.
• Further for the year under consideration i.e. AY 2015-16, the AO had again taken the opening stock same as closing stock of preceding year as mentioned above. Thus, the AO had again taken said ageing effect in opening stock in impugned assessment order, however, the said treatment is being disputed only as far as the valuation as on date of survey is concerned which is not correct.
• While preparing trading account, the opening stock was valued at Net Realisable Value (NRV), thus the closing stock as per tally software was also calculated at NRV at 28,66,09,180/-. It shows that the actual difference calculated by the AO for making addition was the difference between the physical stock valued from MISSB software and the physical stock valued at NRV in tally, which is not a correct When the AO had valued the stock physically from MISSB software, then the AO have to take value of stock in trading account as per cost shown in MISSB software.
• In simple words while preparing the trading account from tally software, the AO is taking stock value as per Net realizable value e. the cost reduced by ageing effect, but while calculating the stock physically, the AO is taking the value as per MISSB software where actual stock cost is taking without considering the reduced cost due to ageing effect. Thus, due to this ageing effect, the difference is explained.
• It is pertinent to mention here that there is no dispute on the
• The assessee had himself valued the Stock as per his stock maintaining software (MISSBS) at Rs 31,24,00,586/-. Whereas during the course of survey the physical stock was calculated and valued at Rs 31,38,42,649/-. Thus, the difference was not what the AO had made addition.
• The Appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect. This approached/manner of valuation of stock was prevalent in previous assessment year also including AY 2014-15 as the opening stock was derived following the said method of accounting.
• Thus, while taking the opening stock in tally software as on date of survey, the reduced value of opening stock up to Rs 1,34,40,000/- was taken. However the appellant had valued this ageing effect as on date of survey i.e. on 26.11.2014 was of Rs 1,29,81,073/-, in valuation of inventory resulting in reduced value of Stock as per tally software.
• As stated above, the appellant has regularly followed valuation of finished goods at lower of cost or net realizable value after following stock ageing effect and the AO had passed the assessment order for AY 2012-13, 2013-14 and AY 2017-18 and had accepted the ageing effect while calculating the stock.
• Considering the above discussion, the arguments and contention of the appellant is found to be correct and the reconciliation / difference of Rs 1,29,81,073 is hereby explained due to ageing effect on valuation of stock.

At the time of hearing ld. DR did not find any fault with the observations of the ld. CIT(A) and on the facts placed on record upon which ld. CIT(A) has given his finding in favour of the assessee-appellant, the decision cannot go in favour of the revenue, without pointing out that how that finding is incorrect or inconsistent. Thus, on this aspect of the matter we do not find any merits on the ground of ‘valuation’, and therefore, the same deserves to be dismissed.

17. Now coming to the last item being the difference remained after giving effect to the above two adjustment one of labour and other of ageing of stock. That difference the assessee-appellant explained that there exist some calculation errors in the working sheets prepared for valuation of stock in survey proceeding. The ld. CIT(A) in his order considered the instance that while preparing details of stock available at Kartarpura Indus Area as available in Annexure AS-12 Page No. 24 where in the said sheet total value of the stock was calculated by the survey authorities at Rs. 96,51,418/-. However, correct total of value of the stock in the sheet available marked as page no. 24 of AS-12 is Rs. 85,85,268/-. It is explained further that the stock of “plain fabric and sarees” of 7,83,550/- valued at page no. 8 of AS 12 has not been carried forward/considered in the final stock sheet prepared on page no 24 of AS-12. Therefore, after considering the stock of “plain fabric and sarees” of Rs 7,83,550/- as mentioned on page no.8 of AS-12 but not considered in the final stock sheet (Page No. 24 of AS- 12), the correct total of the stock sheet at page no.24 of Annexure-12 comes at Rs.85,85,268/-. Thus, there was difference of Rs 10,66,150 (Rs. 9651418 85,85,268/-) on account of totalling mistake/omission as explained above, which is apparent from the stock sheet summary prepared by the survey authorities. That arguments of the assessee-appellant were accepted by ld. CIT(A) and before us ld. DR did not point out anything contrary on facts and that finding being very simple like one plus one. Thus, we do not find any infirmity in that finding of the ld. CIT(A) while accepting the total mistake for an amount of Rs 10,66,150/-.

Based on the discussion recorded herein above, the appeal of the revenue in ITA No. 693/JP/2024 is hereby dismissed.

18. Now, we take up the appeal filed by the assessee, wherein the assessee has raised two grounds of appeal. First one relates to the sustained addition on account of Rs. 375913/- by ld. CIT(A). The assessee contends that the said difference is very insignificant / meager considering total stock of Rs. 27.95 corers and turnover of Rs. 32.00 corers and so deserves to be ignored and should be deleted. Second addition confirmed by the ld. CIT(A) is the amount of lump sum disallowance for an amount of Rs. 3,00,000/- made by the ld AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability of those expenses and not being incurred wholly/exclusively for the business of the assessee.

The facts relating to these two grounds being already discussed herein above while dealing with the appeal of the revenue and therefore, the same are not repeated to avoid duplication but will deal with it when it required to do so while decided grounds of appeal of the assessee.

18.1 As regards the first ground taken by the assessee, same is related to the addition sustained by the ld. CIT(A) being the amount of excess stock found during the course of survey. As discussed herein above the physical stock was calculated and valued at Rs 31,38.42.649/-. Survey team had also valued the physical stock as per inventory software (MISSBS) maintained by assessee at Rs. 31,24,00,586/-. Whereas the physical stock as per accounting software (Tally) was worked out at Rs. 27,95,30,977/-. AO made addition of excess stock of Rs 3,43,11,672/- by reducing stock as calculated on tally software from physical stock (31,38,42,649 less 27,95,30,977). The assessee-appellant explained the difference / reconciled before the ld. CIT(A) who has considered the major difference of addition due to wages expenses, ageing effect and totalling effect mistake total of Rs 3,39,35,759/- (Rs. 1,98,88,536 + Rs. 1,29,81,073+ Rs. 10,66,150, respectively) and has sustained the balance amount of Rs 3,75,913/-. In terms of the percentage, same is about 0.12 %. As is evident the inventory has been taken by item wise and there was not allegation of the revenue that the assessee could not reconcile the quantitative records. There was also no allegation or material found showing that the assessee was engaged in the unaccounted purchase and sales of goods. The books of accounts are maintained as per the companies act as well as under the Income tax Act. No adverse finding of the ld. AO on the records of the quantity maintained by the assessee. It is also evident that in this case, the revenue has prepared the list of 10 different type or location of the goods, while doing so and is confirmed by the ld. CIT(A) that there was totalling mistake/omission for an amount of Rs. 10,66,150/-. The balance difference pleaded on account of stock taking error and omission and in fact considering the volume of the stock and taking them hurriedly while recording the figure and benefit of the error and omission be given to the assessee when there is no dispute on the quantitative terms. Even in value terms the difference is less than 1 % and while taking the stock the error of less than 1 % shall be considered as on account of error or omission when the assessee is following the same method of accounting year to year and there is no adverse comments on the quantitative record. Based on these observations we direct the ld. AO delete the addition of Rs. 3,75,913/- which was sustained by the ld. CIT(A). In the light of this observation ground no. 1 raised by the assessee is allowed.

18.2 The second ground of the appeal relates to the disallowance of lump sum disallowance of Rs. 3,00,000/- made by the ld. AO out of travelling, repairs & other expenses u/s 37(1) and 38(2) of the IT Act, 1961 on account of alleged un-verifiability nature of expenses and not considered to be expended wholly/exclusively for the purpose of the business of the assessee. In support of the grounds so raised, it has been argued that the provision of section 37(1) does not provide allowability of the expenditure in part based on the surmises and conjectures and without specifying the specific fault on the part of the assessee. Ld. AO has not identified as to which of the expenses and for what amount was not considerable as for the purpose of the business. The expense pickup were conveyance expenses, repairs and maintenance expenses, vehicle running and maintenance expenses and show room miscellaneous expenses. As is clear from the heading of the expenses itself that all expenditure are expressly demonstrate it nature and once the expenditure is duly recorded in books supported by bills and vouchers no lump sum addition can be sustained in the corporate entity. Even if the same is not for the purpose of the business the same is for the employee welfare and are also considered as allowable and part of perquisite and thereby also stands allowable. Therefore, we do not concur with the finding of the lower authority and the same are directed to be deleted. While arriving at this conclusion we get support from the decision of our own jurisdictional High Court’s in the case of CIT-II, Jaipur Vs. M/s. Consulting Engineering Group Ltd., [ 44 taxmann.com 232(Rajasthan) ] wherein Hon’ble High Court observed that ;

12. We have considered the arguments advanced by counsel for the parties and gone through the impugned orders as well as the orders of the lower authorities.

13. In so far as the payments to sub-contractors are concerned, it is noticed that all the payments are by account payee cheques and the work, which the respondent-assessee is doing, certainly required sub-contractorship to look into various other jobs which possibly the respondent-assessee was unable to handle on its own. Admittedly, Shri Bhura Ram Chaudhary appeared before the AO, accepted that he has worked for the respondent-assessee and had also received payments from the said concern. One may not remember after lapse of years as to exact amount having been received from a particular concern and therefore, to say that there was discrepancy in the statements of Shri Bhura Ram Chaudhary is not proper. He had already conveyed that he had filed his return u/s 44AF (should be 44AD as he was not aware of the provisions of law) but did not maintain the books of accounts which, in-fact, is not required to be maintained in a case of presumptive He has already conveyed that he had taken 25 people for working for the respondent-assessee and used to take 10 to 12 persons as and when required and that the tax was also deducted at source. In so far as the Payal Builders and Consultants & Gautam Builders & Consultants, both have admitted that they have received amount from the respondent- assessee for the work done by them and tax has also been deducted in their respective cases. It may be that these are small time persons and as required under the IT Act u/s 44AD, they were filing return and therefore, not required to maintain regular and proper books of accounts and if adverse inference is drawn by the AO on account of this fact, in our view, is not proper. It is also an admitted fact, as observed by the CIT(A) as well as the ITAT that income from DPR work had increased by 21.35% over preceding year whereas the corresponding expenditure is only 17.19%. We also observe that while the payment to the three sub-contractors totaled Rs.60,09,550/- whereas the AO, for no reason, disallowed 5% out of the total job work charges paid amounting to Rs.2,51,80,655/- and this exercise of the AO appears without any justification and was not proper. When all the three recipients did claim that they have received the amount for the work done on behalf of the respondent-assessee, then by and large there was no occasion for the AO to disallow the same and if or any reason the AO was not satisfied with reference to the income shown by the recipients in their respective hands, adverse inference at least could not have been made in the hands of the assessee and if at all then, the AO, assessing the assessee ought to have forwarded such information to the AO, assessing those recipients and action, if deemed proper, could have been taken in their respective hands rather than observing here in the case of the respondent-assessee that the sub-contractors have not shown proper income or the income is disproportionate to the receipts. Therefore, we feel that such an observation and ultimate conclusion by the AO to disallow the adhoc amount was not correct and rightly accepted by both the appellate authorities.

14. In so far as the disallowance out of the Soil testing and surveying expenses is concerned, both the ITAT as well as CIT(A) have correctly disallowed the deletion and there was no occasion for any adhoc disallowance out of the said expenditure at the rate of 10%. The CIT(A) so also the ITAT had considered the matter after analyzing the details submitted before them and it has been observed by the CIT (A) and approved by the ITAT that the receipts by the assessee were to the extent of Rs.85,75,162/- as against the expenditure of Rs.50,18,663/-. Therefore, even the receipts are substantially higher than the expenditure and in our view, the disallowance deleted by the CIT(A) and approved by the ITAT cannot be faulted with.

15. In so far as the salary/remuneration to the Chairman-cum-Managing Director Shri Viswas Jain to the extent of Rs.24 lac is concerned, in our view, it is for an assessee, a businessman, who happens to be well versed in running business/profession to come to a conclusion as to what remuneration/salary is to be paid to an employee and in our view, reasonableness is to be judged from the angle of a businessman rather than from the angle of the AO who may not be aware of the realities and peculiarities of business. It has already been explained on the assessment records that the reasonableness or the justification of paying salary to the tune of Rs.24 lac to Shri Viswas Jain was highest as he was the sole person who was influential in getting business for the assessee-company. It is already observed in the assessment record that the receipts of the assessee had increased from 7.73 crores in the assessment year 2003-04 to 9.92 crores during the previous year relevant to the year under appeal due to competence of Shri Viswas Jain whereas the salary has been increased from 12 lac to 24 lac during the previous year under appeal. Not only this, it is a case of a limited company and the said remuneration/increase in the remuneration was approved after passing a proper resolution in an extra-ordinary general meeting of the shareholders u/s 269 of the Companies Act. The minutes of the said meeting where all the directors were present had also been produced before the lower authorities. It is already on record that it was on account of Shri Viswas Jain who happens to be the key person of the Company and whole time Director and who had converted his proprietorship concern into a limited company from the assessment year 2003 and when he has been proved to be an asset for the company, in our view, the CIT(A) rightly deleted the said disallowance which was upheld by the ITAT and we also see no reason in interfering with the same. In our view, on the face of overwhelming evidence on record, salary of Rs.24 lac cannot be said to be excessive or unreasonable and the revenue has not been able to make out as to whether the salary paid to Shri Viswas Jain was not as per the fair market value as provided u/s 40A(2)(a) and 40A(2)(b) of the IT Act.

16. Certainly, aforesaid section provides that the AO, if he is of the opinion that such expenditure is excessive or unreasonable, having regard to the legitimate business needs of the company and the benefit derived by assessee, is not proper, has a chance to disallow any amount over and above which he feels appropriate but the opinion should be formed objectively from the point of view of a prudent businessman and after taking into account the statutory criteria and all relevant circumstances and should not be influenced by immaterial considerations. Therefore, the AO, in our view, has been influenced by extraneous considerations and has not properly appreciated the involvement of Shri Viswas Jain in leading a limited company of having substantial increase in receipts and overall results since the limited company was formed. Not only that, we also notice that the assessee-company as well as the salary paid to Shri Viswas Jain has offered to tax at maximum rate in his individual capacity and therefore, it can be said that there is hardly any loss to the revenue in so far as the payment of salary is concerned. We have observed this only by way of an observation, otherwise, as observed herein above, the reasonableness has to be considered from the angle of a businessman and the assessee, who happens to be a businessman, certainly did consider that salary of Rs.24 lac to Shri Visvas Jain was fair and reasonable and after getting it approved, as observed herein above, in the extra-ordinary general meeting of the company.

17. In view of what we have discussed herein above, on all the three issues, the ITAT, after appreciation of evidence, has come to the conclusion that the disallowance out of job work charges, soil testing and surveying charges and directors’ remuneration is not proper and it had been rightly deleted by the CIT(A) and we do not find any infirmity or perversity in the said order of the ITAT. It is purely a finding of fact and no question of law much less substantial question of law can be said to emerge out of the said order of the ITAT so as to call for any interference of this Court. In our view, no substantial question of law arises out of the order passed by the ITAT.

18. Consequently, the appeal, being devoid of merit, is hereby dismissed in limine. No order as to costs.

Respectfully following the above binding precedent, we do not find any reason to sustain the addition, and thereby direct to delete the same. Based on this observation, ground no. 2 raised by the assessee is allowed.

In the result appeal filed by the assessee is allowed and that of the revenue stands dismissed.

Order pronounced in the open court on 09/01/2025.