ORDER
S.K. Yadav, J.M.
1. This appeal has been filed by the Revenue against the order of CIT(A), dt. 6th Nov., 2001, wherein deletion of addition of Rs. 29,70,743 has been opposed.
2. The facts of the case are that premises of the assessee along with that of other concerns of same group and residential premises of partners/directors were searched under Section 132 of the IT Act on 11th and 12th Sept., 1998. Assessee is engaged in the manufacturing of spectacles, spectacle frames and cases and ophthalmic lenses. As far as assessee is concerned, its head office at 425, Kalbadevi Road, Mumbai, was covered by the search operation, whereas its factory premises at 3/2, Sakinabai Industrial Estate, Bhayander(W), was surveyed under Section 133A of the IT Act. In the course of search and survey operation, stock was found at both the said premises. Assessee filed return of income under Section 158BC,of IT Act on 25th June, 1999, showing undisclosed income of Rs. 2,35,080. Along with the return of income, the assessee furnished a stock reconciliation statement where it was pointed out that in both the premises, certain items of stock were taken in excess whereas some items were recorded less in the stock inventory prepared at the time of search operation. After adjusting all the discrepancies, as pointed out by the assessee, the AO found that the stock inventorised was less than what was recorded in the books of account as on the date of search and survey, by Rs. 29,70,743. AO, therefore, issued show-cause notice to the assessee to explain this difference. The assessee explained that there was stock lying in shop No. 5 at Himparvati Society located near the factory premises and this stock was not inventorised by the search party. According to the assessee, the existence of the premises had been pointed out to the survey party by the manager of the factory, Shri Arora, who, however, did not have any knowledge about what was kept inside the said shop premises, nor he had the keys to premises. The survey party called for the keys of cupboards which were not available with the manager, had the cupboard opened and its contents inventorised. There was no reason why the survey party could not do the same with regard to shop at Himparvati Society. The assessee, therefore, requested that since the said stock was not inventorised, it could not be held that the stock did not exist at all. Similarly, the discrepancy in the stock in the premises at Kalbadevi was because of the fact that certain broken pieces lying separately in boxes were not inventorised and further, the search party did not take into account the wastage which arose as a consequence of handling and as well as during manufacturing activity. The AO rejected the contention of assessee and added a sum of Rs. 29,70,743 representing the shortage in physical stock, which the AO concluded, was sold outside the books of account and, therefore, unaccounted sales. In p. 5 of his order, the AO has noted that, there is no dispute about the stocktaking done at any premises, except at the factory premises at Bhayander. The assessee’s explanation regarding shortage in physical stock of Rs. 29,70,743 was rejected by the AO on grounds (i) to (ix) which are narrated at pp. 3 to 5 of the order of CIT(A). On the basis of AO held that stock of raw material worth Rs. 29,70,743 which was not found in the course of search and which was reflected in the books of account was sold outside the books of account, therefore, he added the same amount to the total income of the assessee. Since the purchase costs and other expenses relating to these goods had already been debited in the books of account, the AO- treated the amount of Rs. 29,70,743 as undisclosed income of the assessee.
3. Matter was carried before the first appellate authority wherein submissions were summarized in detail in paras 7, 8,9 and 10 of the order of CIT(A). The CIT(A) observed that the AO has hinged the entire exercise of establishing the earning of undisclosed income by the assessee on the statement made by manager of the assessee’s factory at Bhayander, Shri Arora, who said in response to questions by survey party the findings recorded in statement that the premises at shop No. 5 at Himparvati Society were not in use. When this became an issue, Arora, in the course of assessment proceedings furnished an affidavit before the AO to say that he meant was that the said premises were not used for production purposes with which he was associated. CIT(A) observed that AO has tried to read too much into the statement like one made by the manager. It is quite possible that a person with a position that he had in organization, he would not be in knowledge of what was kept in the premises away from his area of operation, i.e., factory, even though he would have known the existence of said premises. The very fact that he did not have keys to almirah kept within factory premises is an indication of flair of his influence and control. This almirah had imported raw material and was under the control of partner of firm deputed to look after the factory. In such a situation, he would not be in knowledge of what was contained in shop No. 5 at Himparvati Society.In any case, it was the duty of survey party to check up all the premises. The manager did not hide anything from survey party and it was he who volunteered the information regarding existence of two shops in Himparvati Society. In fact, the survey party failed to ask a basic question as to whether any stock was kept in any other place apart from what AO found within the factory. This question should have been asked to the manager when his statement was recorded. Moreover, the survey party which have called for main stock book kept at head office at Kalbadevi. Even if this was not done at the time of survey and search, this could be done immediately after search was over. This is a common practice to make an overall reconciliation of stock position in case where stock is kept in different premises in form of raw material and finished goods and at detailed outlets. In the course of block assessment proceedings, certain stocks were inventorised which were in books of account duly recorded, the AO threw it to assessee to cover up short comings of Department. Faced with such situation, in a desperation and to prove his point it is not surprising that one of the points made by AO is that stock figure furnished by assessee is in support of its claim that stock was kept at Himparvati Society where no found figure (sic) whereas stock in all other premises were in one or uneven numbers. This is absolutely ridiculous. CIT(A) failed to understand how this can go to prove the AO’s point that assessee had sold the stock outside the books of account to earn undisclosed income. Similar situation was observed in p. 6 of AO’s order wherein he rejected assessee’s claim on ground that production record, records of sources, issue of raw material and production of finished goods had not been given on daily basis. CIT(A) observed that AO can reconcile into the missing stock of Rs. 29,70,743 so accurately if such records were not maintained by assessee, found by search/survey party and made available to AO to analyse. A perusal of books of account inventorised by survey party at the factory as well as by search party at head office shpws that such records have duly been maintained by assessee. Even more curiously is the AO’s association (sic) if the almirah in which imported goods were kept and so keys were not available with manager to be opened after obtaining keys from partners. There is no reason why survey party could not get premises at Himparvati Society if it were used. Another point raised by AO is that silence maintained by assessee after search only because to quote. CIT(A) failed to understand logic behind these reasonings. It was not assessee’s duty to identify loopholes in its own organization. It was for the Department to do during search/survey as well as take follow up measures to tie up loose ends after search/survey. The survey was conducted on 12th Sept., 1998 and assessment under Section 158BC of the Act was completed on 29th Sept., 2000 which means the Department had at least two years to make necessary enquiries or to conduct investigation which it failed to do. Most importantly, the conclusions of AO that assessee had sold stock of raw material worth Rs. 29,70,743 outside the books of account is not supported by any books, documents or any other material found or seized in the course of survey/search operations. Besides this, the learned CIT(A) relied on certain decisions and deleted the addition in question.
4. Before us, the learned Departmental Representative supported the orders of authorities below while the learned Authorised Representative of the assessee submitted that even after search and survey operation, Revenue has not substantiated its lapses regarding treating the same being sold outside the books of account. Statement is the main basis for addition. The affidavit of the manager had not been taken into consideration. Assessee is 100 per cent export unit: Accordingly, Revenue was not justified in reaching such conclusion and CIT(A) has rightly deleted the same.
5. After going through the rival submissions and material before us, we are not inclined to interfere in the finding of the CIT(A), because the statement of manager is the main basis of making the addition in question. We find that the said manager has clarified the situation by way of affidavit placed at p. 30 of the paper book filed by the assessee before the Tribunal. It is settled legal position that contents of the affidavit should not be rejected without providing the opportunity of cross-examination to deponent or assessee as the case may be, as held by Hon’ble Gujarat High Court in Glass Line Equipment Co v. CIT . So, the AO is not justified in rejecting the clarification given by manager by way of affidavit. We are also of the view that raiding party was not justified to reach to the conclusion that there was no stock at Himparvati Society though they were aware that the premises are being used by assessee. We fail to understand how raiding party did not bother to get the said premises (searched) and ascertain the real position of the stock. AO was not justified in interpreting that the same is not in use. In fact, the statement of said Shri Arora, manager that said premises was not used for manufacturing activity, does not mean that the same could not have been used for keeping stock which has been claimed to be short. AO’s conclusion regarding shortage of stock being sold outside the books of account without proper investigation of the accounts is not supported by cogent reasoning. In facts and circumstances of the case, the CIT(A) was justified in deleting the addition of Rs. 29,70,743 made by AO on account of shortage being sold outside the books of account.
6. In the result, the appeal is dismissed.