2013 (12) TMI 1680 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 34,02,404/- in respect of undervaluation of closing stock.
2. Allowance of disallowances in respect of telephone expenses and vehicle expenses of Rs. 10,000/- and Rs. 3,000/- respectively.

Summary:

Issue 1: Deletion of Addition of Rs. 34,02,404/- in Respect of Undervaluation of Closing Stock

The A.O. observed that the assessee, engaged in the business of sale of gold ornaments, did not maintain a quantitative stock register and valued the closing stock at Rs. 50,01,037/-. The A.O. noted discrepancies in the valuation method, as the assessee used an average rate method instead of the cost or market price, whichever is lower, leading to an undervaluation of Rs. 34,02,404/-. The A.O. rejected the book results u/s 145(3) of the IT Act, relying on the Supreme Court decision in British Paints India Pvt. Ltd. and the Gujarat High Court decision in Kwality Steel Vs CIT.

The CIT(A) allowed the assessee's appeal, noting that the assessee consistently followed the weighted average method, a recognized method as per AS-2 issued by ICAI and the Government of India. The CIT(A) found the A.O.'s method of using a small sample of purchase bills for valuation inappropriate and observed that the A.O. did not disturb the opening balance, leading to an unrealistic G.P. rate of 288.67%. The CIT(A) directed the deletion of the addition.

The Tribunal directed the A.O. to verify if the assessee consistently followed the weighted average cost method and to ask for carat-wise details of opening and closing stock, purchase, and sale. The A.O. was instructed to take a decision as per law. This ground of appeal was allowed for statistical purposes.

Issue 2: Allowance of Disallowances in Respect of Telephone Expenses and Vehicle Expenses

The A.O. disallowed Rs. 10,000/- for telephone and vehicle expenses, citing personal use, and Rs. 3,000/- for shop expenses due to payments made in cash and self-made vouchers. The CIT(A) deleted these additions, stating they were made on an ad-hoc basis without plausible reasons.

The Tribunal reversed the CIT(A)'s order, noting that personal use elements are always present in such expenses. The Tribunal allowed the Revenue's appeal, emphasizing the need for evidence of non-business purposes and considering the assessee's low household withdrawals and income.

Conclusion:

The Revenue's appeal was partly allowed, with the Tribunal directing further verification for the undervaluation of closing stock and reversing the CIT(A)'s deletion of disallowances for telephone and vehicle expenses. The order was pronounced in open court on 17.12.2013.