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2016 (5) TMI 240 - ITAT LUCKNOW

2016 (5) TMI 240 - ITAT LUCKNOW - TMI - Addition on undervaluation of stock - Held that:- Undisputedly the assessee has been following the weighted average rates method in valuing the stock and same was accepted by the Revenue in earlier years. Therefore, there is no justification in rejecting the method of valuation made by the Assessing Officer. Moreover, the Assessing Officer has not furnished the reasonable explanation of the reasons for rejecting mode of valuation adopted by the assessee. W .....

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the sale of stock outside the books of account at 11%, resulting into addition of ₹ 5,91,667/-. Since we do not find any infirmity in the order of Ld. CIT(A) as the addition is only to be made with respect to profit earned on stock of sale outside the books of accounts. Accordingly, we confirm the order of the CIT(A) in this regard.- Decided against revenue

Addition u/s 56 - purchase of shares by the assessee from Bharat Bearings Ltd. and Shankar Telecom Ltd. for ₹ 1 per s .....

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the light of relevant provisions of the Act, we find no infirmity therein. Accordingly, we confirm his order.- Decided against revenue

Disallowance u/s 14A - Held that:- CIT(A) has calculated the disallowance as per Rule 8D and Section 14A. Since no specific defect in the calculation of disallowances were pointed out by the Ld. DR, we find no infirmity in the order of the CIT(A) - Decided against revenue - ITA No.716/Lkw/2015 - Dated:- 21-3-2016 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMB .....

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hat on the facts and in the circumstances of the case, Ld. CIT (A) - has erred in deleting the addition of ₹ 57,45,800/- made by the AO on account of shortage in stock of ply board, mica, granite, concept marble, stone and cement tiles without appreciating the fact that the addition was made by the AO on the basis of the stock discrepancy found during the search. 3. That on the facts and in the circumstances of the case, Ld, CIT (A) has erred in deleting the addition of ₹ 30,60,000/- .....

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restored. 6. That the appellant craves to add, modify , revise or amend any one or more of the grounds of the appeal as stated above as and when need for doing so may arise. 2. Apropos Ground No.1, it is noticed that during the course of assessment proceedings, Assessing Officer has noticed from the details of purchases of timber of different grades and varieties and having noted the difference in valuation of different varieties of timber, the Assessing Officer has made an addition of ₹ .....

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higher valuation, pro rata bifurcated in the ratio of purchases between UPFC and private dealers as under for valuation purposes. The assessee further explained that as per accounting standard (AS) 2- valuation of inventories issued by the Chartered Accountant prescribes the cost formulas to be used while valuation of inventories by an entity. He has also placed reliance upon certain judgment in support of his contention that regularly followed method for valuing stock should not be rejected. It .....

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the case. I have considered the findings of the Assessing Officer in the assessment order and the submissions of the appellant. I have also considered the remand report submitted by the AO and the comments of the appellant thereon. The issue involved is an addition of ₹ 10,15,162/- on account of valuation of stock. The appellant has been consistently valuing the stock of timber as per weighted average method. The opening and closing stock have been consistently been valued over the years .....

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not disturbed the opening stock as on 01.042010 or the closing stock as on 31.03.2011, which have been valued by the assessor on weighted average rate. There is no finding of the AO that the quantitative details of stock of timber at the time of search on 11.03.2011 as per actual inventory differed from the stock as per books of accounts. The AO has only adopted a new method of valuing the stock on prorata basis of stock of timber in the ratio of purchases from Forest Corporation and private pa .....

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ssee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation.-For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment: (b) interest re .....

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n the said addition made by the Assessing Officer where the valuation of closing stock has been changed vis'-a-vis' its value and not because of any difference in the quantity of stock. The assessee was consistently following a particular method of accounting which is being accepted from year to year and in the absence of any contrary findings by the Assessing Officer; there is no merit in not adopting the method of valuation of stock being consistently followed by the assessee. Further .....

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on a particuldi date but not that of opening stock and closing stock. Reliance is placed on the decision ot Hon'ble ITAT, Chandigarh in the case of DOT, Ambala Vs Shri Vipin Agarwal in 1TA No. 450/CHD/2010 dated 23.07.2010. 4(9) In view of the discussions above the addition of ₹ 10,15,162/- made by the AO is deleted giving corresponding relief to the appellant. 3. Now, the Revenue is in appeal before the Tribunal and placed the reliance upon the assessment order. During the course of h .....

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on, we find that undisputedly the assessee has been following the weighted average rates method in valuing the stock and same was accepted by the Revenue in earlier years. Therefore, there is no justification in rejecting the method of valuation made by the Assessing Officer. Moreover, the Assessing Officer has not furnished the reasonable explanation of the reasons for rejecting mode of valuation adopted by the assessee. We have carefully examined the order of the CIT(A) and find that the CIT(A .....

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the books of account and he made the addition of ₹ 57,45,800/- for sale outside the books of accounts. The assessee preferred an appeal before the CIT(A) with the submission that the excess of stock of marble of ₹ 3,67,008/- was found, therefore, it cannot be said that it was sold out the books of accounts and for the remaining stock it was contended that the addition of the entire short of stock cannot be made. At the most profit earned thereon can be added. Finding force in the co .....

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I have examined the facts and circumstances of the case. 1 have considered the finding", of the Assessing Officer in the assessment order and the submissions of the appellant. I have also considered the remand report submitted by the AO and the comments of the appellant thereon. The AO found shortage in stock of ply board, mica, granite, concept marble, stone and cement tiles on the basis of inventory prepared at the time of search on 11.03.2011 of Rs, 53,78,792/- and excess stock of Marbl .....

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ne the issue I find that for invoking provisions of sections 69 of the Act to section 69C of the Act two conditions are required to be satisfied. They are (i) investment/expenditure are not recorded in the books of account of assessee & (ii) the nature and source of acquisition of assets or expenditure' are not explained or not explained satisfactorily The expression "nature and source" used in this section should be understood to mean requirement of identification of source an .....

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r source or to agriculture. Where the assessee is able to explain nature and source of investment/expenditure and also if they are recorded in the books of account then such investment/expenditure will not be treated as deemed income but where investment /expenditure is not recorded in the books of account and/or their nature and source is not explained or not satisfactory explained, deeming provision under these four sections can be invoked by the AO and investment/expenditure would be treated .....

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ition has been made by the AO by treating the shortages as sales outside books of accounts, I find that the issue needs consideration from the angle of what is recorded in the books of accounts. The books of accounts of the appellant show existence of stock of ₹ 53,78,792/- of various items which is not actually available at the time at search on 11.03.2011. The normal corollary is that once the stock is recorded in books of accounts, the corresponding investment in purchase is also record .....

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n if any which could be sustained is the profit on sales outside books of accounts of ₹ 53,78,792/-, 5(10) Hon'ble ITAT, Kolkata in the case of ITO Vs Subhas Brothers Jewellers (P) Ltd in ITA.No.1736/Kol/2009 dated 05.06.2014 held that8 We find that the above shortages can at best be treated as undisclosed soles. In such circumstances the entire amount cannot be added. In our considered opinion, an estimated addition of 10% profit on the above sales would be sufficient and would serve .....

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tside the books then the books cannot be relied upon and can be rejected and profit can be estimated under section 145(3). in view of this, total sales of the assessee 4 should be worked out and profit thereon should be estimated. The shortage in stock would odd to the sales and reasonable GP rate should be applied to work out the profits. Again, Hon'ble ITAT, Indore in the case of ACIT Vs Surajbhan Agrawal in ITA No. 352/lnd/2013 Dated 26.8.2013 held that- We are also in agreement with the .....

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ind that the appellant has shown gross profit rate of 10.12% in the year under consideration and profit rate of 10.62% in the immediately preceding year. Accordingly, I find it reasonable to compute the profit embedded in the sale of ₹ 53,78,792/- @11% which comes to Rs, 5,91,667/-. The addition made by the AO is therefore confirmed to the extent of ₹ 5,91,667/ . 5(12) To sum up, the additions of ₹ 57,45,800/- made by the AO is sustained to the extent of ₹ 3,67,008/- and .....

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carefully examined the order of the lower authorities in the light of rival submissions. We find that the CIT(A) has confirmed the addition of ₹ 3,67,008/- made on account of unexplained investment in acquisition of excess stock of marble. Since assessee has not challenged this order of the CIT(A), it attains the finality. So far as the addition of ₹ 53,78,792/- is concerned, the CIT(A) has restricted the addition to the profit earned on the sale of stock outside the books of accoun .....

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i) of the Act for the purchase of shares by the assessee from Bharat Bearings Ltd. and Shankar Telecom Ltd. for ₹ 1 per share against the face value of shares of ₹ 10/- for each share. The assessee preferred an appeal before the CIT(A) with the submission that provisions of Section 56(2)(vii) cannot be invoked as it was applicable w.e.f. 01.06.2010 and shares were acquired by making payment on 07.04.2010 and the date of share transfer was also on 15.04.2010. Besides, it was also cont .....

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Assessing Officer in the assessment order and the submissions of the appellant. I have also considered the remand report submitted by the AO and the comments of the appellant thereon. The appellant purchased 3,40,000 shares of M/S Goel Infracon (P) Ltd (earlier known as M/S Suraj Amusement Parks Ltd.) as per details below - Date of Payment Date of Share Transfer Transferor Mode of Payment 07.04.2010 15.04.2010 Bharat Bearings Ltd. cheque number 334140 of Oriental Bank of Commerce, A/c no. 042740 .....

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#8377; 3,40,000/-) under section 56(2)(viia) of the Act. 6(5) At the outset, f find that the provisions of section 56(2)(viia) of the Act are applicable with effect from 01.06.2010. In other words the applicability of the provision is to transfer of shares for consideration less than the fair market value where such transfer takes placed on or after 01.06.2010. The appellant acquired the shares on 1.S.O-).20.10 and therefore the provisions cannot be said to be applicable in the present case. The .....

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d section 69A of the Act are not attracted. Now, thi; addition made by the AO for the difference in face value and sale consideration presupposes that the shares of a company cannot trade for less than the face value. In other word-,, the face value of the share is different from the fair market value of the share. The AO has not brought any material on record to show that there was any consideration paid on making the investment in shares by the appellant over and above that which is recorded b .....

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ation. In CIT v, Gulshan Kumar 257 ITR 703 (Del), it was held that v-,here the assessee had sold shares of employees, dealers and close relatives at cost price ^nd there was no evidence that the assessee had received more than the declared value, directly or indirectly, section 52 of the Act, dealing with consideration for transfer in case of understatement, was not applicable and that the assessment of deemed capital gain was not valid. In CIT v. Smt. Nilofer I. Singh 309 ITR 233 (Del), it has .....

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the agreement to sell, there was no necessity to compute the fair market value for capital gains and that the full value of the sale consideration was to be taken into account. A similar issue came up for consideration by a Division Bench of Hon'bie Madras High Court in Sundaram Industries Private Ltd. Vs CIT [1969] 741, l.T R. 243 (Mad). The facts of the case were these; The assessee-company purchased 669 shares in Southern Roadways Private Ltd. in August, 1954, for a sum of ₹ 93,660 .....

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for the purpose of benefiting the ladies. On these facts, the question for consideration was whether the proviso to Section 12B(2) of the Act could be invoked. The learned judges held: " What the proviso gets at for charge is the actual capital gain which the vendor should, in the circumstances, have made, but is mode to appear that the gain as shown by the consideration for the transaction to be much less or nil. We are not persuaded to think that the proviso discourages or avoids honest t .....

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does, as the first proviso to Sub-section (2) dealing with the procedural aspect of computation, it should, we think, be interpreted as limited 'o escaped capital gain, which is so in truth and in fact, and not intended to bring about fictional gain on an assumption and charge the same. " 6(8) in view of the discussion above and applying the decisions cited supra to the facts of the present case I find that since section 69B of the Act envisages only value of investment not fully record .....

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annot be substituted for the fair market value of shares. Face Value of share refers to the value at which the Company issues its shares to initial subscribers and in case of companies limited by shares, face value is the maximum liability on a share held by a shareholder. Whereas the fair market value of share is the price at which the share would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge .....

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r the deeming provisions of the Act. The addition of ₹ 30,60,000/- made by the AO is deleted giving relief to the appellant. 9. Aggrieved, the Revenue has preferred an appeal before the Tribunal and placed reliance upon the order of the Assessing Officer whereas Ld. counsel for the assessee has placed reliance upon the order of CIT(A) with the submission that Assessing Officer has invoked the provisions of Section 56((viia) of the Act for making an addition but the said section could not b .....

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e, the provisions cannot be attracted to the present transaction. The applicability of the other provision of Section 69 and 69A was also examined by the CIT(A). Since CIT(A) has properly adjudicated the issue in the light of relevant provisions of the Act, we find no infirmity therein. Accordingly, we confirm his order. 11. Apropos Ground No.4, it is noticed that the Assessing Officer has made the addition of ₹ 2,26,752/- having invoked the provisions of Section 14A of the Act against whi .....

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port submitted by the AO and the comments of the appellant thereon. Section 14A of the Act has been introduced by the Finance Act of 2001 in Chapter IV and has effect from 01.04.1962. The said Section provides for disallowance of expenditure incurred in relation to income which is not included m the total income of the assessee (i.e. exempt income for example agricultural income}. In other words, Section 14A of the Act deals with expenses incurred by an assessee to earn on exempt income. Such ex .....

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made under section 14A of the Act. Sub-sections (2) and (3) were inserted in section 14A of the Act by the Finance Act 2006, with effect from 01.04.2007. Sub section 2 of Section 14A of the Act makes it clear that the Assessing Officer shall determine the amount of expenditure with respect to the exempted income if he is not satisfied with the correctness of the claim. He shall do the same by the method prescribed after having regard to the accounts of the assessee. Sub section 3 provides that t .....

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ome not includible in total income, If one examines Rule 8D, one finds that the method for determining the expenditure in relation to exempt income has three components. i. Amount of expenditure directly relating to income which does not form part of the total income. ii. Expenditure computed on the basis of the formula given therein in a case where ; the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. iii. An artificial figu .....

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income which does not form part of the total income. I therefore do not offer my comments thereon. The AO has disallowed interest of ₹ 2,01,675/- as per second component of Rule 8D. I find that the AO has proceeded at paragraph 9fvii) on page 25 of the assessment order on the presumption of utilization of funds for non-business purposes out of composite funds of borrowings and own funds. The AO therefore presumed that Income from such shares is exempt from taxation and therefore expenditu .....

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1 for making the investments in shares and no part of borrowed funds was utilized in making investments. 7(5)(ii) The AO cannot straight away resort to Rule 8D. Sub-Section 2 of Section 14A of the Act and Rule 8D(1), both require the AO to first consider the books of accounts of the assessee before resorting to Rule 80. The AO must arrive at an objective satisfaction that the Assessee's claim is incorrect. In the case of Auchtei Products Ltd it was held by the Tribunal in Para IS that disall .....

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rticular-expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. In the present case the AO has made disallowance of interest on presumption without any concrete finding as to the utilization of borrowed funds for making investment in shares. 7(5)(iii} Can an Assessee cairn that investments have been made entirely from Owned Funds, which are non-interest bearing and he .....

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. The Madras High Court in Hotel Savera Vs. CIT 239 ITR 796 (Mad), held that where sufficient own funds of the assessee were available for making investment, it cannot be assumed that any part of investment producing the tax free income must have been from bor-owed funds unless there is evidence to show that any specific investment has been made from borrowed funds. The Bombay High Court in Reliance Utilities and Power Ltd. 313 ITK 340 held that if interest free funds are available to an assesse .....

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