ORDER
G. Krishnamurthy, President
1. This is an appeal filed by the assessee against the order of the Commissioner (A)-VIII, New Delhi. This appeal relates to the assessment year 1981-82. The appeal is directed against mainly two additions made by the Income-tax Officer and confirmed by the Commissioner (A).
2. The assessee in this case is a firm dealing in the purchase and sale of iron sheets. For the assessment year 1981-82 the firm filed a return of its income disclosing a total income of Rs. 1,66,876. During the course of examination of accounts, the Income-tax Officer required the assessee to furnish details of opening and closing stocks both quantitywise and qualitywise. This was not supplied on the ground that the stock inventories were not traceable. The assessee did not also maintain a stock register. The Income-tax Officer was unable to verify the correctness of the trading results disclosed in the absence of a stock account. An effort was made to reconcile the stock particulars with reference to the purchase vouchers and sale bills. Prom this information a chart was prepared which showed that the assessee was dealing in different varieties of materials like G.P. Sheets, H.S. Sheets, Iron Discs, C.R. Sheets cuttings and Iron cuttings. The total purchases of these items amounted in weight to 12,80,928 kg. As against this the sales disclosed were 10,81,520 kg. Some of the items purchased were not shown at all as sales. In some cases the sales were much more than the purchases, e.g., in the case of iron sheets, the purchases were 3,17,418 kg. while the sales were 5,65,309 kg., the excess of about 2,50,000 kg. In the case of C.R. Sheet cuttings, Iron cuttings, C.R. Strips, the purchases were 2,38,275 kg., 12,310 kg. and 1,95,159 kg. respectively but none of them were shown as sales. Like this identification of the purchases with sales was not furnished on the ground that it was not possible because what was sold was not in the same name as what was purchased. There was an opening stock of 7,07,355 kg. without details of inventory. Assuming that the entire stock was that of iron sheets and working out at the average rate of Rs. 4.50 per kg., the total opening stock would come to only 1,57,190 kg. Even then this was considered lower than the difference between the sales and purchases of iron sheets by about 2,50,000 kg. referred to above. This is one discrepancy which the Income-tax Officer had noticed. Since the purchases made as noted above, were not shown as sales, they must remain in the closing stock, in which case the closing stock should be of the value of Rs. 24,86,223 working out the quantity at the rate of Rs. 450 per kg. at an average. As against this the closing stock shown was only Rs. 11,56,040. There was thus an understatement of closing stock of Rs. 13,30,183. The Income-tax Officer also arrived at the difference in closing stock by a different method giving benefit of doubt to the assessee in certain aspects and even so arrived at a difference of Rs. 4,48,651 as understatement of closing stock. Keeping in view these defects, which according to the Income-tax Officer were very material, the Income-tax Officer concluded that the assessee had a large quantity of undisclosed closing stock. On reference under Section 144B, the Inspecting Asstt. Commissioner opined that as per the statements prepared by the Income-tax Officer the closing stock of the various items worked out to 6,70,049 kg., which was not accounted for in the books and valued at the average rate of Rs. 4.50 per kg., the value of the closing stock should come to Rs. 30,15,220 and since the closing stock was shown by the assessee at Rs. 11,56,040, the difference of Rs. 18,59,180 must be deemed to have been sold by the assessee during the year and the sale proceeds not accounted for. Treating this sum of Rs. 19 lakhs as sales, a revised trading account was prepared, which showed a gross profit of Rs. 12,90,629. From this gross profit of Rs. 12,90,629 arrived at as per the reconstructed trading account, the gross profit of Rs. 3,90,629, which was shown by the assessee, was deducted and the balance of Rs. 9 lakhs was added as difference in gross profit or suppressed income as a consequence of understatement of closing stock or understatement of sales.
3. Further the Income-tax Officer also held simultaneously that since it would not be possible to the assessee to have excess stock unless purchases were made, and remained unaccounted for. He estimated those purchases at Rs. 10 lakhs. He further held that these purchases must be cash purchases and therefore the provisions of Section 40A(3) of the Income-tax Act were also attracted. Thus a further addition of Rs. 10 lakhs was made under Section 40A(3) of the Income-tax Act for which also the Inspecting Asstt. Commissioner had permitted the Income-tax Officer to make the addition.
4. Thus a total addition of Rs. 19 lakhs was made besides two small other additions, which were not pressed at the time of hearing.
5. The Commissioner (A) on appeal confirmed both these additions. Relying upon the specific discrepancies mentioned by the Income-tax Officer in his order, the Commissioner (A) felt that the Income-tax Officer was justified in making the addition of Rs. 9 lakhs to the trading account. The addition made under Section 40A(3) was justified on the ground that when there was evidence to show that purchases were made in cash, to these purchases the provisions of Section 40A(3) were attracted. These are in short the conclusions arrived at by the Commissioner (A) in the brief order that he had passed.
6. In further appeal filed against this order, the learned representative of the assessee Shri R. Ganeshan submitted that both the additions were unwarranted. He submitted that the firm was dealing in iron sheets, BP & CR sheets. There was a lot of difficulty in identification of purchases with sales and closing stock as the market practice was to differently describe these very purchases in the salo bills, which rendered identification not possible. Similar situation arose even in the earlier assessment years 1976-77 to 1981-82. With a view to put an end to this controversy, the assessee filed a petition on 27-4-1984 before the Commissioner of Income-tax under Section 273(A) of the Income-tax Act, stating, inter alia, that in view of this difficulty, it would not be possible for the assessee to reconcile the purchases with sales and closing stock and therefore offered a sum of Rs. 4.50 lakhs to be included in the closing stock and that the same be considered as income of the assessee spread over equally to assessment years 1976-77 to 1981-82 and assessed accordingly. The Commissioner of Income-tax by his order dated 18-2-1985 accepted this petition and holding that the assessee came forward with such a petition prior to the detection by the Income-tax Officer of the concealment of particulars of income or of the inaccurate particulars directed that the sum of Rs. 4.50 lakhs be allowed to be spread over equally to assessment years 1976-77 to 1980-81. For assessment year 1981-82 the offer of spread over was not approved, though no specific mention was made. Placing reliance upon this order of the Commissioner of Income-tax, it was urged that the Commissioner of Income-tax had accepted the difficulties in the way of the assessee in reconciling the stock particulars and made an addition of Rs. 90,000 per year from the assessment years 1976-77 to 1980-81, which showed the genuineness of the explanation of the assessee. Further for the assessment year 1982-83 the assessment was completed by the same Income-tax Officer, who enquired into the affairs of the assessee for this assessment year after making a marginal addition of Rs. 10,000 accepting the same explanation to be bona fide. It is therefore highly unjust and improper to think that there was suppression of sales to the tune of Rs. 19 lakhs or that the closing stock was of the value of Rs. 30 lakhs and that a gross profit of Rs. 9 lakhs was suppressed. The conclusions drawn were so illogical and the addition made was so disproportionate to the situations obtaining under identical circumstances in the earlier years. It was further pointed out that since the addition of Rs. 4.50 lakhs was made to the closing stock of the assessment year 1980-81, that amount must be treated as the opening stock of the assessment year 1981-82 and if a trading account is reconstructed by including this sum of Rs. 4,50 lakhs both in the opening stock and the closing stock, the various discrepancies pointed out by the department in the quantity would disappear, which would show that the gross profit of Rs. 3,90,629 shown by the trading account was properly arrived at. It was further submitted that the gross profit shown by the assessee this year was 5.99 per cent which appeared favourable in comparison to the gross profit shown and accepted in the earlier years and therefore no inference adverse to the assessee should have been drawn. It was further pointed out that since there were no purchases made outside the accounts and those too in cash, the question of applying Section 40A(3) of the Income-tax Act would not arise since this was only a supposition without any proof for it, no addition should have been made on that account. Therefore both the additions made should be deleted.
7. The Departmental Representative, on the other hand, defending the orders passed by the authorities below vehemently submitted that the assessee was not entitled to bring in the amount added in the earlier years by the Commissioner of Income-tax under Section 273A as an aid to explain the discrepancies that were pointed out by the Income-tax Officer in this year. The accounts maintained by the assessee were such, that it showed excess stock of sales in some items and non-accounting for sales of some items and non-inclusion of certain items in the closing stock. When the accounts are in this state of affairs, no one can say that the assessee had been accounting for the true profits in its books. He also submitted alternatively that even if credit was given to the sum of Rs. 4.50 lakhs for the sake of argument, there would still be a difference, which needs to be added for this year. He prepared another trading account on the basis of the figures furnished by the Income-tax Officer and submitted that that would still leave a difference of Rs. 3,44,925 to be added in terms of value or 76,650 kg. in terms of quantity. This amount should be added as a result of discrepancies that occurred in this accounting year notwithstanding the addition of Rs. 4.50 lakhs made in the previous year. He submitted, by demonstrating from the revised trading account that even if that sum of Rs. 4.50 lakhs was taken into account, that would not make any difference in making an addition of the difference of 76,650 kg. or its equivalent value. His main submission was that there were discrepancies in the accounting year under appeal. These discrepancies must be considered independent of the addition made by the Commissioner of Income-tax in the previous year. Various arguments were addressed by showing how the books of account were incomplete and how various conclusions could be drawn by manipulating the figures, which we do not think it is necessary for us to narrate them over here except to state that discrepancies do exist in the account books, which need to be explained satisfactorily.
8. We have considered these arguments very carefully and went through the details furnished before us and also the annexures attached to the assessment order and other relevant material. The question before us in this case is whether there is reconciliation of quantity particulars. The Income-tax Officer says that there was no reconciliation in terms of quantity even by taking all the items dealt with as a whole and not as separate items. The total quantity purchased as per the annexure given by the Income-tax Officer was 12,80,928 kg. The quantity in the opening stock was not available except the value. From the value we have got to deduce the quantity. For that purpose an average rate of Rs. 4.50 per kg. was adopted, which will give 1,57,190 kg. But in the statement prepared by the learned Departmental Representative the opening stock was arrived at 1,41,892 kg. This was on the basis that the value is at Rs. 5 per kg. Proceeding on the basis that the opening stock was 1,41,892 kg., the total quantity available with the aasessee was 14, 22, 820 kg. As against this the sale accounted for was of 10, 81, 520 kg. The closing stock should therefore be 3, 41, 300 kg. As against this position, what the assessee showed was purchase of 11, 61, 396 kg. and a closing stock of 2, 64, 650 kg. The sale figure and the opening stock are the same in both the trading accounts. There is no denial of the fact that the purchase of 12, 80, 928 kg., as given in annexure ‘A’ to the assessment order, was wrongly arrived at. We therefore go by the basis that the total quantity available was 14, 22, 820 kg. and not 13, 03, 288 kg. If we go by the former figure, the closing stock of 2, 64, 650 kg. shown by the assessee does not appear to be correct and the proper figure ought to be 3, 41, 300 kg. There is therefore a difference of 76, 650 kg. This difference can be valued either at the average purchase price, which works out to Rs. 5.50 per kg. (opening stock Rs. 7, 07, 355 + purchases Rs. 66, 89, 612=Total Rs. 73, 96, 967 divided by 14, 22, 820 kg.) or at the average value of the closing stock shown by the assessee for 2, 64, 650 kg., which works out to roughly Rs. 5 per kg. If we take an average rate of Rs. 5 per kg., the addition to be made would work out to Rs. 3, 83, 250. Shri Ganeshan strongly objected to making this addition by relying upon the trading account which he prepared wherein he took into account the addition of Rs. 4.50 lakhs made by the Commissioner of Income-tax in the earlier assessment years. His submission, as we mentioned earlier, was that if that sum was taken into account both in the opening and closing stocks, there would be no discrepancy at all either in value or in quantity. Now the problem would arise like this. It is no doubt true that the sum of Rs. 4.50 lakhs was added by the Commissioner of Income-tax accepting the offer of the assessee as undervaluation of closing stock. But it is not known whether the understatement was in value or in quantity. If it is assumed that the amount of Rs. 4.50 lakhs was in quantity, only then that quantity could be added to the quantity available in the opening stock of this year but if it is assumed that the quantity was already shown in the earlier year but only the value was shown less, then the amount of Rs. 4.50 lakhs could on]y be added to the value and not to the quantity. In a situation of this nature, it is very difficult to assume that the difference was only in quantity and not in value. However, Shri Ganeshan pointed out that to the opening stock of Rs. 7, 07, 355 the surrendered amount of Rs. 4.50 lakhs if added, the opening stock would become Rs. 11, 57, 000 and adding thereto the purchase of Rs. 66, 89, 000 the total value would come to Rs. 78.46 lakhs as against which the sales accounted for were Rs. 66.30 lakhs and the closing stock of Rs. 11, 56 lakhs giving a total of Rs. 77, 87, 000 to which, must again be added the value of Rs. 4.50 lakhs, which would give a total of Rs. 82,37,000. From that figure of Es. 82,37,000 if we deduct the figure of Rs. 77,87,000 the aggregate of opening stock and purchases the difference representing the gross profit would work out to Rs. 3,90,033. As against which the gross profit shown by the assessee was Rs. 3,90,629 and therefore there was no need for any addition. This argument is very attractive, inasmuch as, the gross profit shown by the books remained unaffected because the sum of Rs. 4.50 lakhs was added both to the opening and the closing stocks. The question is whether it is proper. Assuming that it is proper, still we have got to consider whether in terms of quantity the closing stock was properly accounted for.
9. Assuming in favour of the assessee that the amount of Rs. 4.50 lakhs added represented both quantity and value, in terms of quantity it would mean 90,000 kg. at the rate of Rs. 5 per kg. (though it is doubtful whether we can adopt the average rate of Rs. 5 per kg. since this amount represents the amount spread over from the assessment years 1976-77 to 1980-81 when the rates available in each assessment year would not be uniform but would be varying), then the reconstructed trading account in terms of quantity would be as under:
Opening stock 1,41,892 kg.
Add:
Previous years 90,000 kg.
2,31,892 kg.
Purchase (as per annexure 'A' of the ITO) 12,80,928 kg.
15,12,820 kg.
Less: Sales
10,81,520 kg.
Closing stock 4,31,300 kg.
The closing stock should be 4,31,300 kg. To this if another 90,000 kg. is added as contended for by the learned Chartered Accountant then the total closing stock should be 5,21,300 kg. The value placed upon the closing stock by the assessee is Rs. 11,56,039. If the closing stock is really 5,21,300 kg. and valued at the average purchase price of Rs. 5 per kg., then the total value of the closing stock would come to Rs. 26,65,000 as against which the assessee had shown only Rs. 11,56,039 which would mean an addition of Rs. 15 lakhs. This is an absurd result to be achieved by any standard. Even according to the departmental representative, this is unattainable. This arithmetic would show that this theory would result in absurd results. We therefore discard this method of arriving at the closing stock to judge the correctness of results.
10. We will therefore go by the closing stock figure of 3,41,300 kg. as arrived at as per the trading account prepared by the departmental representative and filed before us. The question is now how to value this closing stock. The average rate adopted by the assessee would work out to Rs. 3.30 per kg. This is definitely low compared to the average purchase price of slightly more than Rs. 5 per kg. Making due allowance for the varieties of items purchased, we think it would be reasonable to value the closing stock at Rs. 4.50 per kg., which more or less approximates to the value sought to be placed upon by the department. On this basis, the addition to be made would work out to about Rs. 3,80,000, which also approximates to the addition proposed by the learned Departmental Representative during the course of his arguments. Since there are deficiencies in accounts, we think it would be reasonable to make an addition of Rs. 4 lakhs to meet the ends of justice. This will be substituted for the addition of Rs. 9 lakhs made by the Income-tax Officer as difference in value of closing stock.
11. As is seen above there was no question of making any purchases outside the books, and those too by cash. The supposed addition by invoking the provisions of Section 40A(3) does not, therefore, arise. That addition is totally unwarranted and unjustified too. Section 40A(3) has no application to the facts of this case because this is a case where the closing stock was undervalued but not a case of purchases having been made outside the accounts, to assume that such purchases were made in cash. Even otherwise, if there is proof to show that some purchases were made outside the accounts and if investment in those purchases is not proved, then the entire amount of investment has to be added as income from unexplained investments, in which case the question of invoking Section 40A(3) would not arise. Section 40A(3) would apply to a case, where some expenditure was incurred and which was claimed as expenditure. In the case of unexplained investment the question of claiming it as expenditure can never arise. That addition must therefore go. It may also be noted that for the assessment year 1982-83 the Income-tax Officer accepted the position that the reconciliation of quantitative particulars of the assessee in terms of each variety is not possible except as a whole and accepting the version of the assessee in more or less the same situation, made an addition of only Rs. 10,000. May be that in that year there were no such discrepancies as undervaluation of the closing stock, as in this year.
12. No arguments were addressed to us on other grounds raised in the grounds of appeal. Therefore, we confirm the same.
13. In the result, the appeal is allowed in part.