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2016 (3) TMI 21 - ITAT AHMEDABAD

2016 (3) TMI 21 - ITAT AHMEDABAD - TMI - Addition on account of unaccounted stock - CIT(A) deleted the addition - Held that:- CIT(A) while deciding the issue in favour of the Assessee has noted that A.O has not disputed daily stock and daily production register which are maintained by the Assessee and that the manufacturing of finished goods being refined kapasia tel from the raw material being kapasia wash tel is a continuous process and for such process pipeline for both raw material and finis .....

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tock and excess stock if considered together would result in excess of only 4131 kg. which can be considered to have been covered by the disclosure made by the Assessee. Before us, Revenue has not pointed out any fallacy in the findings of ld. CIT(A). In view of the these facts, we find no reason to interfere with the order of ld. CIT(A) - Decided against revenue

Addition on account of quality allowance - Held that:- We find that ld. CIT(A) while deciding the issue in favour of the As .....

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have been treated as unexplained expenditure. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) nor could point out any fallacy in his findings - Decided against revenue

Addition made on account of brokerage - Held that:- We find that ld. CIT(A) while granting the relief has given a finding that the claim of brokerage expenses is supported by third party evidences and the payment have been made after deduction of TDS from such brokerag .....

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findings of ld. CIT(A). - Decided against revenue

Treatment of loss on shares - Held that:- We find that ld. CIT(A) while deciding the issue against the Assessee has given a finding that Assessee has treated the shares transaction as investments in F.Y. 06-07 & 07-08 and the Assessee by passing a journal entry on 31.03.2009 accounted for the notional loss of value of closing inventory of shares. Before us, Assessee could not controvert the findings of ld. CIT(A). In view of the afores .....

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I, Ahmedabad dated 28.12.2011 for A.Y. 2009-10. 2. The relevant facts as culled out from the material on record are as under. 3. Assessee is a partnership firm stated to be engaged in the business of Cotton Ginning & Cotton Seeds Crushing. A search action u/s. 132 of the Act was conducted in the case of Raja Group on 05.02.2009. A warrant of authorization u/s. 132 was also issued in the case of Assessee. The Assessee thereafter electronically filed its return of income for A.Y. 2009-2010 on .....

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(SS)A No. 141/Ahd/2012 reads as under:- 1. The ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the addition made on account of unaccounted stock of ₹ 10,72,280/-. 2. The ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the addition made on account of quality allowance of ₹ 33,25,929/-. 3. The ld. CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the addition made on account of b .....

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unaccounted stock of ₹ 10,72,280/-. 6. During the course of search proceedings on comparison of the stock details as provided by the Assessee and the physical stock taken during the course of search on 05.02.2009 excess stock of ₹ 16,99,360/- in case of refined kapasia oil and deficit stock of ₹ 14, 15,560/- in the case of kapasia wash tel was found. The aforesaid discrepancies in stock were apart from the difference of stock amounting to ₹ 53,72,920/- in case of Shankar .....

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r Kapas. A.O accordingly made addition of ₹ 70,72,280/- (53,72,920 + 16,99,360) and after giving the credit of disclosure of ₹ 60 lacs made during the course of search added the difference of ₹ 10,72,280/-as income. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who deleted the addition made by the A.O holding as under:- 4.2. I have carefully considered the Assessment .Order and submission filed by the appellant. During the course of search at app .....

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g finished goods lying in tanks is considered and after considering the stock counted in immediately preceding day, entry for raw material consumption and finished goods produced during preceding day is entered in stock register in very next day. It was also explained that factory of appellant is working in two shifts of 12 hours i.e. from morning 8.00 AM to evening 8.00 PM and second shift from 8.00-PM to next day morning 8.00 AM and during the course of search, stock was inventoried_at 8.00 PM .....

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umption for first shift for 39,374 is reduced from book stock of 1,71,804 kgs, stock as per books would come to 1,32,430 as against physical stock of 1,35,415 kgs. The explanation of appellant regarding shortage of stock has been accepted by AO and no addition is made. While coming to this conclusion, AO has also stated that in support of his argument appellant has submitted copies of daily stock register and daily production report. The similar explanation-was also given for finished goods by a .....

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comes to 38,789 kgs. As appellant is recording production as well as consumption in Books of Account on very next day, and if the figure of production of 38,789 kgs is added to book stock of 1,40,042 kgs being opening stock as on the date of search, book stock at the time of recording stock by Authorised Officer in the evening would work out to 1,78,831 kgs as against physical stock of 1,79,562 kgs and there will be minor difference of 731 kgs. On careful consideration of entire details, AO has .....

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evening which was compared with opening stock of raw material in the books without giving effect of consumption made during the day upto 8.00 PM and if such adjustment is provided, no material shortage would work out. And even AO has not made this addition on the ground that stock being 'work-in-progress and in the pipeline of finished goods cannot be measured. The appellant is following similar method of counting and recording book stock for finished goods as explained herein above and exc .....

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similar and when finished goods are counted as on the date of search in the evening whereas book stock does not include production during the day, effect of such production ought to have been given by the A.O. With regard to shortage of stock of 35,389 kgs and excess stock of 39,520 kgs, partner of the appellant in his statement dated 28th April, 2009 has stated that net result of both shortage and excess is only 4,131 kgs which can be considered as covered by disclosure made on 9th March, 2009 .....

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ening stock of the day as per method of keeping stock records as explained in preceding para. The finished goods was found in excess only because finished goods produced during the day was not increased in books, as explained herein above. The plea of appellant is acceptable for the reasons stated herein above. In the result in case of appellant there remains minor difference of excess stock of 731 kgs which works cut to ₹ 31,433 which is covered by excess disclosure made in Shankar Kapas .....

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erial, counting of raw material , recording the stock in books and stock being work in progress in pipeline, he was not justified in not accepting the similar process of regarding finished goods more particularly when the entire process is correlated with each other. He thus supported the order of ld. CIT(A). 9. We have heard the rival submissions and perused the material available on record. The issue in the present case is with respect to addition on account of unaccounted stock. We find that .....

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g shortage of stock was worked out only because stock found during the course of search was counted at 8.00 P.M. which was compared with opening stock of raw material in the books without giving the effect of consumption made during the day up to 8.00 P.M. and if such adjustment is provided, no material shortage would be worked out. He has further noted that the shortage of stock and excess stock if considered together would result in excess of only 4131 kg. which can be considered to have been .....

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oticed that there was an increase in expenditure as compared to the same in immediately preceding assessment year. The Assessee was asked to justify the increase but the submission of the Assessee was not found acceptable to the A.O. He therefore held that in the absence of any evidence or justification, the claim of expenditure cannot be allowed. He accordingly disallowed ₹ 33,25,928/- by holding it to be unexplained and unsupported expenditure. Aggrieved by the order of A.O., Assessee ca .....

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odity and quality depends mostly on weather condition. When the quality of raw cotton is deteriorated due to bad weather and unseasonal rains, the finished goods produced are not up to good quality and when goods supplied are not according to requirement of buyer, appellant has paid the quality allowance which is supported by debit notes. The appellant being in business of cotton ginning and cotton seed crushing, quality of production depends on raw material received by it and same cannot be com .....

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ts are paid/settled on the balance amount after credit of such quality allowance. The expenditure claimed is only 0.46% of turnover' and even AO has not disputed book results shown by appellant hence addition made by AO on presumption that no such expenditure was incurred in earlier year is not tenable. Even, appellant has settled ongoing disputes with the debtors regarding quality allowances in current year only which is even clearly reflected in ledger account of quality allowance which ha .....

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as unexplained expenditure. Considering the same, disallowance made by A.O is deleted. The related ground of appeal is allowed. 11. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us. 12. Before us, ld. D.R. supported the order of A.O and further submitted that in the absence of any evidence and justification for increase in expenditure as compared to that of earlier year, A.O was fully justified in making the disallowance. Ld. A.R. on the other hand reiterated the submissi .....

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Assessee to its customers and such expenditure was supported by third party evidences and were duly recorded in the books of accounts and the expenditure claimed was only 0.46% of turnover and therefore the expenditure could not have been treated as unexplained expenditure. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) nor could point out any fallacy in his findings. In view of the aforesaid facts, we find no reason to interfere with the order .....

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sed as compared to earlier years. The Assessee was asked to justify the increase in expenses. The submissions of the Assessee was not found acceptable to the A.O. He therefore considered 0.27% (0.38% - 0.11%) of sales of ₹ 281,18,78,744/- as being not justifiable and accordingly made addition of ₹ 75,92,072/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who deleted the addition made by the A.O holding as under:- 7.2 I have carefully considered the as .....

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ellant has explained that claim of brokerage expenses is supported by third party evidences and payment is made by appellant after deducted TDS from such' brokerage expenses which are not disputed by Assessing Officer and hence addition simply on the basis of comparison of expenditure cannot be made. The appellant has also explained that expenditure includes brokerage paid on purchases for ₹ 11,47,666/- and same has been paid to procure better quality of raw material for production of .....

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herwise, appellant would not be able to sale finished goods in local market. The appellant has also explained that India's cotton exports fell over 95% year-on-year to 75,000 bales on sluggish overseas demand and the reason for fall in export is that overseas traders were not ready to buy since prices fixed by the government were higher as compared to prices offered by the other countries and to overcome such situation and without pilling up the finished goods, brokerage had to be paid at a .....

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o of brokerage expenditure has been increased in current year. The Assessing officer has even not rejected book result shown by appellant. The reason for reduction in sale was very well explained by appellant that rates of cotton prevailing in international markets were cheaper as compared to the prices prevailing in Indian markets. The payment of brokerage both on purchase and sale in current assessment year at higher rates was because .of difficulty in making sales by appellant for the reasons .....

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make sale of finished goods is supported by tenable material hence disallowance made by AO simply on the basis of comparison of ratio of expenditure is uncalled for. As held in para 5.2 herein above, revenue cannot justifiably claim to put in armchair of a businessman and decide what is reasonable expenditure having regard to the circumstances of the case. The decision of Hon'ble Rajasthan High Court in the case of Laxmi Engineering Industries vs. ITO (298 ITR 203) and decision of .the Hon& .....

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l before us. 16. Before us, ld. D.R. supported the order of A.O. Ld. A.R. on the other hand reiterated the submissions made before A.O and ld. CIT(A) and supported the order of ld. CIT(A). 17. We have heard the rival submissions and perused the material available on record. We find that ld. CIT(A) while granting the relief has given a finding that the claim of brokerage expenses is supported by third party evidences and the payment have been made after deduction of TDS from such brokerage expens .....

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of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed. 18. In the result, the appeal of Revenue is dismissed. Now we take up Assessee s appeal in IT(SS)A No. 146/Ahd/2012 The issue is treatment of loss on shares. 19. On perusing the Profit and Loss account, A.O noticed that Assessee has debited ₹ 69,05,134/- as share profit and loss account . He also noticed that the share trading was not the .....

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CIT(A) who upheld the order of A.O holding as under:- 5.2 I have carefully considered the Assessment Order and submission filed by the appellant. The appellant has claimed loss from sale of shares for ₹ 69,05,134 as business loss which- has been treated as capital loss by Assessing Officer mainly relying on Tax Audit Report wherein it has been mentioned that appellant is engaged in the business of cotton ginning and cotton seeds crushing and there is no mention regarding share trading acti .....

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in notes to final accounts has specifically mentioned that appellant has also carried out business in shares. With regard to observation of AO that as shares were held as investment in A.Y. 2008-09, profit/loss is taxable under the head capital gain, appellant has stated that treatment given in Books of Account is not the only determinative factor regarding nature of the transactions. 5.2.2 On further verification of the facts, it is noticed that during the year under consideration, the appellan .....

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treated as investment by the appellant. The closing stock of various shares amounting to ₹ 10,36,260/- were shown under the head investments in the balance-sheet as on 31.03.2007. Like-wise in the F.Y.2007-08, the closing stock of shares was shown as investment, amounting to ₹ 81,87,730/- in the balance-sheet as on 31-03.2008. The statement of computation of income was also verified during appellate proceedings. The computation of income statement for the A.Y.2008-09 (F.Y.2007-08) re .....

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2009-10 which is the year under consideration. On verification of ledger account of share transactions, it is noticed that the appellant passed journal entries on 31.03.2009 i.e. the last day of the F.Y.2008-09, to treat the capital loss on shares amounting to ₹ 69,52,698/- as business loss and to get set off against the business profit of other businesses. 5.2.4 The appellant was also asked to submit the details separately for loss on share transactions booked as well as loss on account o .....

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ly be carried forward for set off against capital gain in future but it cannot be set off against any other business income. Had the appellant continued to treat the share transactions as investment, which was being done by him in the F.Y.2006-07 and F.Y.2007-08, then the appellant would have paid tax on Short Term Capital Gain on share transactions of ₹ 3,88,537/- during the year under consideration. The appellant would not be entitled for loss in the value of closing inventory of shares .....

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