1979 (11) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Application of the proviso to Section 145(1).
2. Addition of Rs. 1,57,865 by way of under-valuation of closing stock.
3. Non-allowance of weighted deduction under Section 35B.

Issue-wise Detailed Analysis:

1. Application of the Proviso to Section 145(1):

The assessee, a partnership firm engaged in the manufacture and export of precious and semi-precious stones, did not maintain day-to-day stock records or quantitative details, nor a manufacturing account. The Income Tax Officer (ITO) found these defects significant enough to apply the proviso to Section 145(1). The assessee argued that quantitative details were provided in the jewellery account and that their books had been maintained similarly in previous years without issue. However, the Commissioner of Income Tax (Appeals) [CIT(A)] observed that the records were insufficient for verification of wastage, recovery percentages, and stock correlation. The Tribunal agreed with the authorities below, emphasizing the necessity of proper quantitative records in manufacturing activities to verify raw material accounting. It was noted that the vouchers for payments to Karigars were inadequate for verifying the loss in weight. Consequently, the authorities were justified in applying the proviso to Section 145(1).

2. Addition of Rs. 1,57,865 by Way of Under-Valuation of Closing Stock:

The ITO found discrepancies in the valuation of the closing stock, which was shown at Rs. 21,83,961 in the books but correctly valued at Rs. 19,74,995. The ITO used the export price to check the valuation, finding a disparity rate of 40%, higher than the previously accepted 35%. The assessee contended that the gross profit rate, including exchange profit and import license sale profit, was actually around 42%, justifying the 40% disparity. However, the ITO applied a 35% disparity rate, adding Rs. 1,57,865 as under-valuation. The CIT(A) upheld this addition, influenced by the defects in the books and the valuation method used for goods in hand in India.

Before the Tribunal, the assessee argued that the method of valuing the closing stock based on export price, reduced by expected profit, had been consistently followed. The disparity rate in previous years was higher than 35%, and similar additions had been deleted in other cases. The Tribunal found that the disparity rate approximated the gross profit earned and that the valuation method had been accepted in the past. The Tribunal concluded that the valuation adopted by the assessee was proper and directed the deletion of the addition.

3. Non-Allowance of Weighted Deduction under Section 35B:

The ITO rejected the assessee's claim for weighted deduction under Section 35B in toto. The CIT(A) examined the claim and allowed part of it based on an estimate, which was acceptable to the assessee. However, the CIT(A) declined to consider three fresh items (commission paid to M/s. K.D. Jhaveri, stationery, and conveyance) based on a Supreme Court decision in Addl. CIT vs. Gujargravures Pvt. Ltd., which held that claims not made at the assessment stage could not be raised at the appellate stage. The Tribunal found that this decision did not apply as the claim under Section 35B was made initially, and only the amount was modified. The Tribunal restored the issue to the CIT(A) for reconsideration of the fresh items.

Conclusion:

The appeal succeeded partially, with the Tribunal upholding the application of the proviso to Section 145(1), deleting the addition of Rs. 1,57,865 for under-valuation of closing stock, and restoring the issue of weighted deduction under Section 35B to the CIT(A) for reconsideration.