Calcutta High Court Upholds Quashing Of CIT's Order Speculating Possibility Of Understatement In Closing Stock Without Specific Finding

The Calcutta High Court has upheld the quashing of an order passed by the CIT speculating on the possibility of understatement in closing stock without a specific finding.

The bench of Chief Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyy has observed that the assessing officer has conducted a due inquiry and thereafter completed his scrutiny assessment. The tribunal also noted that the CIT, in his order under Section 263, has only observed that there is a possibility of understatement in the closing stock without a specific finding on the said aspect. Thus, the case on hand is not one such case where no inquiry was conducted by the assessing officer.

The scrutiny assessment was completed, determining the total income of the assessee. The Commissioner of Income Tax (CIT) invoked his powers under Section 263 of the Income Tax Act, alleging that the assessing officer had completed the assessment in a hasty manner and accepted the return of income without making the necessary inquiry and verification. Therefore, the order is prejudicial to the interest of the revenue.

The assessee was aggrieved by the order of the CIT and preferred an appeal before the tribunal. The tribunal allowed the appeal. The appellant/department has appealed under Section 260A of the Income Tax Act, 1961, against the order passed by the Income Tax Appellate Tribunal.

The substantial questions of law on which the appeal was admitted, though three in number, all pertain to the correctness of the exercise of powers by the CIT under Section 263 of the Income Tax Act.

With regard to the alleged allegation of understatement of closing stock, the assessee has submitted that they valued the stock at cost on a first-in first-out basis or the market price, whichever is less, and that they have duly maintained a complete stock record in their computer system item-wise, which contains full details of opening stock, purchases made, sales made, and closing stock, giving quantity, rate, and value. The assessee stated that the computer system automatically computes the value of closing stock on a FIFO basis, and there is no change and/or possibility of any understatement in the valuation of the closing stock.

The assessee had furnished item-wise details of the closing stock for the entire amount and also furnished the entire stock records pertaining to 12 items selected on a random basis and sought to establish that the valuation of the closing stock has been done at cost on a FIFO basis and there is no understatement in the valuation of the closing stock.

The tribunal pointed out that the records were available before the assessing officer during the assessment proceedings as well as before the CIT in the initial proceedings, and the assessee also filed a paper book before the tribunal enclosing item-wise details of the closing stock valuation. The other documents that were filed by the assessee were also taken note of by the tribunal, which include the details filed before the bank, namely the stock statements for hypothecation and the value that was found to be exactly identical. Thus, taking note of the fact that the stock statement submitted by the bank and the stock as per the stock register were exactly matching each other, the tribunal agreed with the assessee's submission that the assessing officer had conducted a due inquiry and thereafter completed his scrutiny assessment.

The tribunal noted that the CIT, in his order under Section 263, has only observed that there is a possibility of understatement in the closing stock without a specific finding on the aspect. Thus, the case on hand is not one such case where no inquiry was conducted by the assessing officer.

The court has held that the tribunal also re-appreciated the factual position and found that the CIT while exercising power under Section 263 of the Act has not recorded a specific finding that it is as case of no enquiry by the assessing officer rather the observation was there could be a possibility of understatement of the closing stock.

The court was satisfied that the tribunal rightly interfered with the order passed by the CIT and allowed the appeal of the assessee.

Counsel For Appellant: Soumen Bhattacharyee

Counsel For Respondent: S.M. Surana

Case Title: Commissioner Of Income Tax Versus Gopal Sharma

Case No.: ITA NO. 31 OF 2015

Click Here To Read The Order