2025 (7) TMI 118 - AT - Income Tax

Addition u/s 68 - cash deposits made during the demonetization period - AO has alleged that the Assessee has booked concocted cash sale to adjust his undisclosed income and the sales disclosed by the Assessee was denied by presuming that the Assessee has made out of books sales and on that basis AO rejected the books of the Assessee - CIT(A) observed that the addition would not sustain as the AO has made the casual remark in the assessment and proper examination and analyses was not done for the documents - HELD THAT - We find that assessee submitted the complete details of sales along with PAN address of buyers Bank statement depicting purchases party-wise details of purchase stock details etc.. AO himself admitted that the appellant had sufficient stock. Ld. CIT(A) thus rightly concluded that when assessee was having sufficient stock so could have sold the same and by submitting all the documents established that such sales were made by him during 1st week of Nov 2016 should not have been doubted. Especially when no discrepancy was pointed by AO in purchases opening stock. Hence once the purchases are accepted the corresponding sales could not be questioned. The findings of CIT(A) need no interference. Undervaluation of closing stock - AO has re-valued closing stock of assessee - differential value from the value of stock reported by the assessee was added to the returned income - CIT(A) while deleting the addition had observed that the AO had not worked out correctly the difference in the valuation of stock for the purpose of addition and in the interest of justice confirmed the addition of 5% - HELD THAT -Value of gold and diamond jewellery as calculated by the AO relying on average purchase rate / last purchase rate was not in accordance with the method of valuing the stock since there is a method for such valuation under prescribed in ICDS-II Valuation of Inventories . AO did not mention why method of valuation is adopted by appellant incorrect and which was consistently followed in earlier years. Ld. CIT(A) also observed that appellant was not granted with reasonable opportunity to explain the difference. AR has submitted that job work was done on 24K gold to 22KT gold along with other alloys to make Kundan jewellery which involved wax with a weight up to 25-40% of total value which could be varied similarly thus the assessee has itself reduced the weight of stone from 18KT gold stock while doing the valuation. CIT(A) has observed that assessee had reduced the value of diamond without any proper justification and also based on the quantity of gold lying with the Kundan jewellers accordingly confirmed 5 % of such difference on account of under valuation. Assessee has not challenged the same. However the fact that without giving assessee an opportunity to explain the reasons for revaluation the addition was made and that being the major ground to give benefit by the Ld. CIT(A) needs no interference.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether the addition made under section 68 of the Income Tax Act on account of cash deposits during the demonetization period, alleging undisclosed sales, was justified when the assessee furnished detailed supporting documents including PAN details, bank statements, stock records, and purchase details.
• Whether the rejection of the assessee's books of account and disallowance of sales based on presumed out-of-books sales was sustainable in the absence of any discrepancy pointed out in purchases or opening stock.
• Whether the addition made on account of undervaluation of closing stock by revaluing the stock was valid, considering the valuation method followed by the assessee and the provisions of ICDS-II (Valuation of Inventories).
• Whether the assessee was accorded a reasonable opportunity of hearing before the addition on undervaluation of stock was made, and whether the valuation method adopted by the assessee was correct and consistently followed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 on account of cash deposits during demonetization period

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The burden lies on the assessee to explain the nature and source of such credits. The AO can make additions if the explanation is unsatisfactory. However, the explanation must be examined on the basis of evidence and documents produced.

Court's interpretation and reasoning: The AO alleged that the assessee had made concocted cash sales to adjust undisclosed income and rejected the books of account on the presumption of out-of-books sales. However, the CIT(A) found that the AO had made a casual remark without proper examination of the evidence.

Key evidence and findings: The assessee submitted comprehensive details of sales with PAN and addresses of buyers, bank statements showing purchases, party-wise purchase details, and stock records. The AO admitted that the assessee had sufficient stock to support the sales made during the first week of November 2016. No discrepancies were found in purchases or opening stock.

Application of law to facts: Since the purchases were accepted and stock was sufficient, the corresponding sales could not be doubted merely on presumption. The AO's rejection of books and addition under section 68 was thus not sustainable.

Treatment of competing arguments: The Revenue's argument rested on presumption without documentary support. The assessee's detailed documentary evidence was accepted by the CIT(A) and upheld by the Tribunal.

Conclusions: The addition under section 68 was rightly deleted by the CIT(A), and the Tribunal found no reason to interfere with that conclusion.

Issue 2: Addition on account of undervaluation of closing stock

Relevant legal framework and precedents: Valuation of inventories is governed by ICDS-II, which prescribes methods for valuation to ensure consistency and correctness. The AO is required to follow these methods and provide reasons if adopting a different valuation method.

Court's interpretation and reasoning: The AO revalued the closing stock at INR 3,16,36,633, adding the differential value to income. The CIT(A) observed that the AO had not correctly worked out the difference and that the assessee was not given a reasonable opportunity to explain the valuation. The AO relied on average or last purchase rates, which was inconsistent with the method followed by the assessee.

Key evidence and findings: The assessee's valuation method was consistent with previous years and involved conversion of 24K gold to 22KT gold along with alloys and wax, which affected weight and value. The assessee had also reduced the diamond value based on quantity with Kundan jewellers. The AO did not provide reasons to reject this method.

Application of law to facts: The Tribunal agreed with the CIT(A) that the AO's valuation was not in accordance with ICDS-II and that the assessee was not afforded a reasonable opportunity. The CIT(A) allowed a nominal addition of 5% of the differential value to safeguard revenue interest, which was not challenged by the assessee.

Treatment of competing arguments: The Revenue's argument for revaluation was based on their own method without justifying the rejection of the assessee's consistent method. The assessee's explanation regarding job work and valuation adjustments was accepted.

Conclusions: The Tribunal upheld the CIT(A)'s deletion of the major portion of the addition and confirmed only a nominal addition of 5% of the differential value.

3. SIGNIFICANT HOLDINGS

"The addition of INR 1,02,35,000 would not sustain as the AO has made the casual remark in the assessment and proper examination and analyses was not done for the documents and evidences placed on record by the Assessee."

"Once the purchases are accepted, the corresponding sales could not be questioned."

"AO did not mention why method of valuation adopted by appellant incorrect and which was consistently followed in earlier years."

"Without giving assessee an opportunity to explain the reasons for revaluation the addition was made and that being the major ground to give benefit by the Ld. CIT(A), needs no interference."

The Tribunal established the principle that additions under section 68 require a thorough examination of documentary evidence and cannot be based on presumptions or casual remarks. It also reaffirmed that valuation of inventories must comply with ICDS-II and that the assessee must be given a reasonable opportunity before any addition on valuation grounds is made.

Final determinations:

• The addition under section 68 on account of cash deposits during demonetization was deleted.
• The rejection of books of account and disallowance of sales based on presumed out-of-books sales was not sustained.
• The addition on undervaluation of closing stock was deleted except for a nominal addition of 5% of the differential value, which was confirmed.
• The appeal filed by the Revenue was dismissed in entirety.