Additions U/s 69C On Account Of Excess Stock Can't Be Based On Third Party Statements Alone Without Any Corroboration: Delhi ITAT

As per Section 69C of Income Tax Act, where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the AO, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.

The Division Bench of Sudhir Kumar (Judicial Member) and Dr. B.R.R. Kumar (Accountant Member) observed that “The Assessing Officer has straightaway picked up the total quantity of finished goods and added the same as unaccounted stock ignoring the fact of corresponding raw material being available in the books of accounts”.

Facts of the case:

A search was carried out at the premises of assessee, where an inventory of the stock was prepared by the AO which determined excess stock after comparing it with the books stock. Relying on the statement of General Manager as well as the Director of the company, the AO made additions. On appeal, the CIT(A) affirmed the action of AO on the grounds that the statement of the Director of the Company cannot be ignored and the search team has done a very diligent task and has taken the inventory of raw material, finished goods stock wise and also scrap.

Observations of the Tribunal:

The Bench accepted that the goods received during the period of search have not been entered in books and also the final product has been manufactured and ready for sale was also not entered in the books.

However, the Bench found that there was a difference to the tune of raw material received as well as the finished goods ready for dispatch which has been available at the premises but not entered in the books of accounts.

The finished goods pointed out by the AO represent the production which has been done by the unit and which were ready for subsequent sales, added the Bench.

The Bench further noted that at the time of issue for sale, the entry is passed in the stock account whereby the raw material is reduced as consumed and corresponding entry of finished goods produced is recorded with the simultaneous issue of finished goods against the sale invoice, which is normal accounting practice of stock in any manufacturing unit.

Further the Bench observed that additions made by AO are sustained by the CIT(A) due to the misinterpretation of the accounting system of finished goods and solely based on the statements recorded without any corroborative evidence of unaccounted sales.

Therefore, the ITAT deleted the addition on account of excess stock and allowed the appeal of the assessee.

Counsel for Appellant/ Assessee: Ved Jain and Supriya Mehta

Counsel for Respondent/ Revenue: Subhra J. Chakraborty

Case Title: Mahavir Transmission Ltd Verses DCIT

Case Number: ITA No. 2636/Del/2022

Click here to read/ download the order