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Assistant Commissioner Of Income Tax, Circle-5, Rajkot v. Morbi Vegetables Products Ltd. .

Income Tax Appellate Tribunal

Nov 26, 2018

Judgment

CaseIQ

Smart Summary (Beta)

Factual and Procedural Background

This appeal by the Revenue challenges the order of the Commissioner of Income Tax (Appeals)-IV, Rajkot dated 05.07.2010 in respect of Assessment Year 2006-07. During a survey on 20.09.2005, the Assessing Officer (AO) observed stock differences between physical stock and book stock amounting to Rs. 83,98,469 and made corresponding additions in the assessment. The assessee appealed to the CIT(A). The CIT(A) remanded several matters to the AO for verification. The AO submitted a remand report dated 18.01.2010 verifying certain reconciliations asserted by the assessee. Based on the remand report, the CIT(A) deleted several additions (total deletions and confirmations detailed in the order), but sustained some additions where the assessee could not satisfactorily explain differences. The Revenue appealed to the Tribunal challenging the deletions by the CIT(A). The Tribunal heard submissions from the Revenue and the assessee and pronounced its order on 26.11.2018.

Legal Issues Presented

Whether the CIT(A) was justified in deleting additions made by the AO on account of stock differences found during the survey, after calling for and relying upon the AO's remand report which verified certain reconciliations put forward by the assessee.
Whether the CIT(A) correctly deleted the addition of Rs. 1,07,840 relating to unexplained cash shortage on the basis that the assessee had explained the cash was given as advances and recorded subsequently.

Arguments of the Parties

Revenue's Arguments (Appellant)

The AO found total stock differences of Rs. 83,98,469 during the survey and made additions accordingly; the assessee could not properly explain these differences before the AO.
The Revenue relied on the AO's findings and maintained that the CIT(A) erred in deleting additions totaling Rs. 58,54,592 after the remand.
On the cash shortage point, the Revenue relied on the AO's view that the cash shortage existed and supported the AO's addition.

Assessee's Arguments (Respondent)

The assessee submitted detailed reconciliations and explanations during appellate proceedings showing that many of the apparent stock differences were due to production in progress, recording practices that post-dated the survey day, calibration/conversion errors, or dispatches supported by invoices.
The assessee pointed out that the CIT(A) called for a remand report and, based on the AO's own verification in that remand report, the CIT(A) deleted additions of Rs. 58,54,592; the assessee did not file a second appeal against the remaining confirmed Rs. 25 lakhs.
With respect to the cash shortage, the assessee contended that the shortfall arose because advances paid on the survey date were recorded in the books the following day, and the AO had no evidence to displace that explanation.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal reviewed the factual findings of the CIT(A) and the AO's remand report. Its analysis proceeded as follows:

Item-by-item verification: The Tribunal noted that the CIT(A) examined item-wise details of stock differences as worked out by the AO together with the reconciliations and submissions made by the assessee.
Use of remand report: The CIT(A) had called for a remand report from the AO. The AO, in his remand report dated 18.01.2010, verified several of the assessee's contentions (for example, production in progress recorded the next day; calibration/conversion figures for tanks; dispatches supported by invoices). The Tribunal treated the AO's remand verification as key factual material.
Deletions and confirmations based on verification: Where the AO's remand report corroborated the assessee's reconciliations (e.g., certain tins and metric tonnes accounted for by production, receipts, or recording practices), the CIT(A) deleted the additions. Where the assessee failed to explain specific items (e.g., certain tin shortages, certain metric tonnes not reconciled), the CIT(A) sustained the AO's additions. The CIT(A) thus confirmed about Rs. 25 lakhs of additions that remained unreconciled and deleted the rest that were verified.
Specific findings endorsed: The Tribunal reviewed examples in the record (Ranjit ghee, Tulsi Vanaspati, BIB/TP tins, Krispi Vanaspati, various pouch/tin/palm oil/soyabean items, calibration error on Tank No. 23, etc.) and observed that the CIT(A) either deleted or sustained those additions after remand verification; where the AO's remand report validated the assessee's reconciliation, the deletion was upheld.
Cash shortage reasoning: For the cash shortage (Rs.1,07,840), the Tribunal accepted the assessee's explanation that cash was given as advances on the survey date and entered into the cash book on the subsequent day; the AO had not produced evidence to displace that explanation. The CIT(A)'s deletion of this addition was therefore sustained.
Standard of interference: The Tribunal concluded that because the CIT(A)'s order was based on the AO's own verification during remand proceedings and because the CIT(A) confirmed only items that remained unreconciled, there was no reason for the Tribunal to interfere with the CIT(A)'s factual and verification-based conclusions.

Holding and Implications

APPEAL OF THE REVENUE DISMISSED.

Implications and direct effects:

The Tribunal upheld the CIT(A)'s deletions of additions made by the AO to the extent those additions were satisfactorily reconciled and verified in the AO's remand report. Specifically, deletions aggregating to Rs. 58,54,592 (as contested by the Revenue) were sustained where verified; the CIT(A) had, however, confirmed items aggregating to approximately Rs. 25 lakhs that remained unreconciled and those confirmations were not disturbed.
The Tribunal also upheld the deletion of the addition for cash shortage of Rs. 1,07,840 on the basis of the assessee's explanation and lack of contrary evidence by the AO.
No new legal precedent or novel principle of law was laid down by this order; the Tribunal's determination was factual and based on verification by the AO in the remand report and the item-wise reconciliations presented by the assessee. The decision's practical effect is to leave the CIT(A)'s order intact and to resolve the particular assessment-year disputes between the parties as recorded in the order.

Order pronounced in open court on 26.11.2018.

Show all summary ...

O.P. Meena, A.M.:— This appeal filed by the Revenue is directed against the order of learned Commissioner of Income tax (Appeals)-IV, Rajkot dated 05.07. 2010 pertaining to Assessment Year 2006-07.

2. Ground no. 1 states that the Ld. CIT (A) has erred in law and on facts in deleting the addition made by the AO of Rs.58,54,592 on account of stock difference found during survey.

3. The AO has observed that during the course of survey proceedings carried out on 20.09.2005, stock difference between physical stock and books stock of Rs. 83,98,469 was found. However, the assessee has not shown this in return of income nor the explanation offered was found satisfactory, therefore, the AO made an addition of Rs. 83,98,469.

4. Being aggrieved, the assessee filed an appeal before the ld. CIT (A). During the course of appellate proceedings, detailed submissions were made by the assessee, therefore, the CIT (A) has remanded the matter to the AO. The AO vide letter dated 18.01.2010 submitted his remand report on the points raised by the assessee. The CIT (A) noted that the AO has made addition of Rs.1,67,200 on account of excess 292 Tins of Ranjit Vegetable Ghee found. It was explained that the during survey, production of plant was going on, hence, production was not recorded in stock register on the day of survey but it was recorded next day. The AO has verified this facts during remand proceeding. As against excess stock of 15 kg, the assessee has shown 757.50 Kg and there was production receipt of 1612 Tins, which has been duly verified by the AO in remand proceedings. Thus, the assessee has already shown receipt of 1612 Tins as against excess of 292 Tins. In view of these facts and circumstances, the CIT (A) found that inventory at Serial No. 55 of loose sheet showed 757.50 Kg of Ranjit Ghee made during survey, which the AO has verified during remand report proceedings. Hence, the appellant has shown the stock, therefore, contention of the AO of the that excess stock is not accounted for is not correct hence, addition of Rs.1,67200 was therefore, deleted.

5. The excess stock of Tulsi Vanaspati Tin- 15 KG is concerned, the AO had contended that 532 Tins were excess hence; he made addition of Rs. 2, 57,920. However, the CIT (A) found that the appellant has already shown production of 574 tins on 20.09.2005 which has been verified by the AO during the course of remand proceedings and has been found to be correct. Therefore, if the same is considered then findings of the AO that 532 tins is not accounted for stands settled. Accordingly, the addition of Rs. 2,57,920 was deleted.

6. With regard to excess stock of 15 Kg of BIB/TP tins valued at Rs.1,35,975, the CIT (A) observed that the appellant is unable to explain the excess stock of 259 Tins of this item hence, the addition of Rs.1,35,975 made by the AO on this account was sustained.

7. The next addition of Rs. 4,13,580 was made by the AO on account of Krispi Vanaspati of 20 Kg by 678 tins, the AO discussed this in para 5.2 (c) of his order. The contention of the assessee in this regard was not found acceptable as the assessee was unable to explain shortage and hence, addition of Rs. 4,13,580 was confirmed.

8. The next addition of Rs. 55,550 made as per para 5.2. (d) of assessment order was not found explained hence, CIT (A) sustained the said addition.

9. The next addition of Rs. 136 tins of Ranjit Gold Coin Vanaspati of Rs. 73,440 made by the AO vide para 5.3 of assessment order, was found to be explained by the assessee and same was verified by the AO during the course of remand proceedings. Hence, said addition was deleted.

10. The next addition relates to addition of Rs.41,850 of 1240 pouches of 1 litre of Vanaspati, it was explained that the AO has erroneously considered this to be V2 kg of pouch which in facts of 1 litre of pouch, which has been already accounted for in production of 8980 pouches on the date of survey. Therefore, CIT (A) observed that the appellant has already shown 8980 pouches, which is greater than 1240 pouches, so the excess stock stands accounted for. Therefore, addition of Rs.41,850 was deleted. The CIT (A) has confirmed the addition of Rs.608 being excess stock of 200 ml letters and shortage of Vanaspati by V letters of Rs.2040 made by the AO.

11. The AO made next addition of Rs.34,400 on account of shortage of 40 tins of Ground Nut Oil as per para 5.6 (a) of assessment order and further, addition of Rs. 86,625 of shortage tins of 105 aggregating to Rs. 1,21,25. It was explained that the assessee has dispatched 100 tins during the day for which invoices were filed, thus, shortage remains for 45 tins valued at Rs.38,700. In consideration, the CIT (A) held that since the appellant has already accounted for 100 tins hence, balance of 45 tins remains hence, addition was restricted to Rs. 38,700 as against Rs. 1,21,025.

12. The next addition of Rs.4,17,800 relates to excess stock of 72.049 MT Ground Nut Oil Cake. It was explained that weight of 760.8 MT has been taken the average rate per bags at 80 Kilograms by multiplying with 9510 bags that were physically found. However, CIT (A) observed that physical bags so found were appeared to be tallied with the number of bags appearing in the stock book. However, at the appellant's stage he is unable to accept that difference arisen due to different weight taken. Therefore, this addition of Rs. 4, 17,800 was confirmed.

13. Similarly vide para 14.2, the CIT (A) deleted the addition of Rs. 68,750 in respect of 1650 tins.

14. The next addition relates to shortage of 107.875 MT of RD Palm oil (loose) of Rs. 33,54,913. It was explained that as reflected at Page No. 46 of Paper Book, the stock of 109 MT from RBD palm oil was transferred in the production of ghee, which is clearly reflected on 20.09.2005. The CIT (A) observed that plant was in operation during survey as mentioned earlier consequently, there was ongoing consumption of raw material, production and sale activities. As per the system of accounting currently being followed, all the movements in the inventories were being recorded on subsequent day. The appellant has already accounted consumption of 109 MT of RBD Palm oil (loose) which has been verified by the AO during the course of remand proceedings and found to be correct. Therefore, the physical stock would be excess by 1.12 MT. Therefore, addition made on account of shortage of stock of 107.875 MT of RBD Palm oil is no ledger survive, hence, addition of Rs.33,54,913 was deleted.

15. The next addition of Rs. 1,68,521 relates to excess stock of 45.693 MT of imported soyabean refund oil as discussed in para 5.10(a) of his order. It was explained that that there was production of 28.860 MT during the day which has been duly accounted for in the books of accounts as reflected at Paper Book Page No. 49. Therefore, difference comes to Rs. 5,82,654. Further, the value of difference in reconciliation comes to Rs. 2,34,468 and not Rs. 4,67,266 as stated by the AO. The CIT (A) observed that the appellant has already accounted for production of 28.860 MT of this product in the books of accounts which also been verified by the AO during the course of remand report proceedings, which has been found to be correct. As per remand report of the AO, excess of 16.833 remains to be unexplained. Therefore, out of excess stock of 45.693 MT stands resolved to the extent of 28.860 MT and only balance excess of 16.833 MT remains unexplained. In view of this, the addition was restricted to Rs. 6, 19,454 and relief of Rs. 10,62,066 was allowed.

16. The next addition of Rs. 4,67,266 relates to shortage of 13.990 MT of Degum Soya oil. The CIT (A) observed that the appellant has submitted detailed reconciliation of stock appearing in the books of accounts. During the course of remand report proceedings, the AO verified the stock and found the excess stock of 2,34,468 of 7.02 MT of Degum Soya oil. Since the movements of stock production is accounted for subsequent day. The appellant has already accounted for an inward receipt 18.070 MT of this item in books of accounts. Hence, this excess stock is no longer survived; therefore, incorrect addition of Rs. 4, 67,266 made by the AO and addition of Rs.2, 34,468 so arrived at by the AO was also deleted.

17. The next addition of Rs. of Rs.52,91,354 relates to excess Crude Palm oil (loose) of 170.140 MT. It was explained that the calibration conversion on the Tank was 1 cm = 83.925 as could be seen from the photograph of said Tank No. 23 wherein said conversion is stated at 1 cm : 83.925 but the AO has erroneously considered the conversion at 1 cm : 83925 Kilograms. Whereas calibration conversion of Tank no. 22 is at 1cm= 56.250 Kg, which the AO has correctly, adopted. In view of these facts, the CIT (A) observed that said excess stock has been arisen due to miscalculation by the AO with regard to calibration conversion. Since the appellant's contention has been verified by the AO during the course of remand report proceedings, the said question of there being excess stock of 170.140 MT is no longer survived. Hence, addition of Rs. 52,91,354 was therefore, deleted. However, CIT (A) has confirmed the addition of stock of Rs. 20,437 being excess vegetable ghee. Further, addition of Rs. 8,16,035 of 15.251 MT was also confirmed.

18. With regard to excess stock of 4713 tins of Rs. 6,79,089, the CIT (A) noted that the appellant has already accounted for receipt of 4297 tins as per practice being followed as discussed above, hence, addition of Rs. 6,57,041 was deleted and balance addition of Rs. 22,048 was confirmed.

19. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The ld. Sr. D.R. relying on the order of the AO submitted that difference in stock of Rs.83,98,469 found during the course of survey proceedings. The assessee could not explained the same properly hence, the AO made addition of the same. However, CIT (A) has deleted the addition of Rs.58,54,592 after obtaining and examining the remand report from the AO. Therefore, the ld. Sr. D.R. relies on finding of the assessee.

20. Per contra, the learned counsel for the assessee submitted that the AO has made addition of Rs.83,98,469. The CIT (A) has called for a remand report from the AO and based on the same has confirmed the addition of Rs.25 Lakhs on which the assessee has not filed any second appeal. The CIT (A) after considering remand report from the AO in which the AO has verified the difference of stock as per reconciliation filed by the assessee. Therefore, CIT (A) has deleted the addition of Rs. 58,54,592. Hence, the CIT (A) has correctly deleted the addition made by the AO on incorrect facts and not considering the explanation provided by the assessee during the course of assessment proceedings. Hence, same may be upheld.

21. We have heard the rival submissions and perused the relevant material on record. Ongoing through the findings of Ld. CIT (A), as mentioned in the above para of this order, we find that the CIT (A) has analyzed the items wise details of stock difference worked out by the AO and submission made by the assessee. We further find that the CIT (A) has called for a remand report from the AO. The AO vide his remand report dated 18.01.2010 has verified the contentions of the assessee and same stands reexamined by the CIT (A) and found to be correct. Therefore, CIT (A) has deleted the addition made by the AO based on remand report of the AO. Hence, Revenue should not have any grievance now as the decision of CIT (A) is based on verification carried out by the AO during the course of remand report proceedings. We have gone through the remand report as well as the order of CIT (A) and found that the CIT (A) has confirmed the items of stock around Rs.25 lakhs, which were not reconciled by the assessee and deleted the addition of those items, which stood reconciled and stand verified by the AO. In view of these facts and circumstances, we are of the considered opinion that the CIT (A) has passed a judicious and clear order based on facts, which were verified by the AO; therefore, we do not have any reason to interfere with the same. Therefore, same is upheld. Ex-consequenti, this grounds of appeal of revenue is therefore, dismissed.

22. Ground No. 2 relates to deletion of addition of Rs.1,07,340 on account of difference in cash not explained during survey.

23. The AO has made addition of Rs.1,07,840 being difference in cash found physically during survey and that cash appearing in books of accounts. The CIT (A) observed that cash in hand as per books of accounts was at Rs.2,83,034 and cash physically found during survey was at Rs.1,75,197. Thus, there was shortage of cash of Rs.1,07, 840. The AO has disregarded the explanation that cash given to parties on date of survey as advance was recorded subsequent to date of survey. Further, the defect per se cannot be treated as an income. The AO has not brought on record anything to establish that explanation offered by the assessee was not correct. Therefore, the addition of Rs. Rs. 1,07, 840 on account of deficiency of cash was deleted.

24. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The ld. Sr. D.R. relied on the AO.

25. Au contraire, the learned counsel for the assessee submitted that no addition could be made on account of difference in cash found during the course of survey. Further, the AO disbelieved that cash was given as advance not accounted for on the date of survey but it was accounted for on subsequent date of survey. Therefore, CIT (A) has rightly deleted the addition so made.

26. We have heard the rival submissions and perused the relevant material on record. We find that the assessee has explained that cash was found short as it was given to various parties as advance on the date of survey, which remained to be entered in to cashbook, and it was accounted for next day. We further are of the view that no addition can be made on account of shortage of cash. Therefore, we do not find any infirmity in the order of CIT (A), accordingly, same is upheld. This grounds of appeal is therefore, dismissed.

27. In the result, the appeal of the Revenue is dismissed.

28. Order pronounced in the open court on 26.11.2018.