Procedure for valuation of inventory from tag price during survey u/s 133A-Cost price has to be determined and due deduction to be given towards direct expenses – ITAT
ABCAUS Case Law Citation:
ABCAUS 2477 (2018) 08 ITAT
Important Case Laws Cited/relied upon:
CIT v. S. Khader Khan Son, 300 ITR 507 (Mad)
The instant appeal was filed by the assessee against the order of Commissioner of Income-tax (Appeals) challenging the addition made by the AO.
The assessee was a partnership firm engaged in the business of retail trading in garments. A survey was carried out u/s 133A of the Income-Tax Act, 1961 (the Act) in the business premises of the assessee. Statement of partner of the assessee was recorded and in his statement, he agreed to declare income of Rs. 40 lakhs in the hands of the firm.
However, in the return of income filed by the assessee for the concerned Assessment Year, there was no declaration of the said income. The AO called upon the assessee to explain as to why the income declared at the time of survey was not offered to tax in the return of income.
The assessee submitted that at the time of survey, the value of stock was determined by taking the tag price as given in the garments found in the assessee’s business premises. From the value of the stock so arrived, only a sum of Rs. 2 lakhs was given as deduction on account of direct expenses, whereas the actual direct expenses incurred by the assessee was much more. The assessee further submitted that if his profit margin on the tag price is reduced, the value of stock at the time of survey would be further reduced.
The assessee specifically pointed out that in the statement recorded at the time of survey, the assessee agreed to declare profit after verification. The assessee submitted that after verification, it was of the view that the financial statements and the financial results taken by the assessee in the return of income disclosed the correct state of affairs and therefore declaration of income of Rs. 40 lakhs in the statement made at the time of survey was incorrect.
However the AO was not impressed by the submissions made by the assessee and made the impugned addition.
On appeal by the assessee, the CIT(Appeals) confirmed the order of AO.
The Tribunal opined that the statement recorded u/s 133A of the Act de hors incriminating material found at the time of survey cannot be the basis to make any addition. In other words, there should have been evidence found which can lead to the conclusion that assessee has suppressed income.
It was observed that in the instant case, no such exercise has been carried out by the AO or the CIT(Appeals).
The Tribunal stated that in the course of survey u/s 133A of the Act, the inventory has to be compared with the stock as per the books of account. While arriving at the value of inventory, the cost price has to be determined and due deduction given towards direct expenses.
In other words, if the stock found at the time of survey carries a tag of sale price, then to arrive at the purchase price of the assessee, gross profit margin as declared in the relevant assessment year and direct expenses have to be reduced. Only then the value of inventory at the time of survey can be ascertained.
The Tribunal opined that the value of inventory so ascertained has to be compared with the value of inventory as recorded by the assessee in the books of account. If the inventory is more than the value as recorded in the books of account, then addition u/s 69 as unexplained investment in stock has to be made. If there is a shortfall, then the presumption is that the assessee has sold goods outside the books of account and then appropriate profit margin has to be added to the total income.
The Tribunal observed that without following the aforesaid procedure which is normally adopted in the case of a survey, the AO has proceeded to make an impugned addition merely on the basis of statement recoded at the time of survey which approach was not in accordance with the law.
Accordingly, the Tribunal therefore set aside the order of CIT(Appeals) and remanded the issue to the AO for fresh consideration.