Income Tax Appellate Tribunal - DelhiSaran Singh, New Delhi vs Assessee on 8 December, 2008IN THE INCOME TAX APPELLATE TRIBUNAL
                     DELHI BENCH 'G': NEW DELHI
             BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER &
              SHRI R.C. SHARMA, ACCOUNTANT MEMBER


                          ITA no. 2850/Del/2009
                         Assessment Year : 2004-05

     Smt. Sunita Narang,                        Income Tax Officer,
     L/H Late Shri Saran Singh Narang,          Ward - 26(2),
     Narang Fashion,                      Vs.   New Delhi.
     11/19-A, Tilak Nagar,
     New Delhi.
     (Appellant)                                (Respondent)

               Appellant by     :   Smt. Sunita Narang
               Respondent by    :   Ms. Shumana Sen, Sr. DR

                                ORDERPER: C.L. SETHI, J.M.

        The present appeal has been filed by the assessee against the order

dated 08.12.2008 passed by the ld. CIT(A) in the matter of an assessment

made by the AOu/s. 144of the Income Tax Act, 1961 ("the Act") for the

A.Y. 2004-05.2.      The various grounds of appeal raised by the assessee revolve around

the issue regarding the addition of Rs. 16,01,215/- made by the AO on

account of undisclosed investment in stock allegedly detected at the time of

survey conductedu/s. 133Aof the Act.ITA no. 2850/Del/20093.      This appeal was filed by the assessee, namely, Shri Saran Singh

Narang, on 10.06.2009, proprietor of Narang Emporium 11/19-A, Tilak

Nagar, New Delhi - 18. In the mean time, it has been reported that the

assessee has expired on 25.08.2009.       The assessee's wife Smt. Sunita

Narang has filed application on 06.01.2010, stating that her husband has

expired on 25.08.2009, leaving behind him herself and two minor childrenes

legal heirs of the assessee. A death certificate has also been filed. In

support thereof an affidavit sworn on 22.09.2009 has also been filed. It has

been stated that the assessee was suffering from cancer, and was undergoing

treatment at AIIMS at Delhi, and medical reports and treatment prescriptions

were submitted before the AO, and that is why the assessee could not appeal

before the AO on last date of hearing fixed in the last week of December,

2006.4.      As the assessee has expired, assessee's name has been substituted by

his legal representative, Smt. Sunita Narang, representing herself and her

two children.5.      Smt. Sunita Narang in person has appeared at the time of hearing.

She was heard.      The Sr. D.R. was also heard, and the orders of the

authorities below have been perused.Page 2 of 9ITA no. 2850/Del/20096.    In this case, the return of income was filed on 17.07.2004, declaring

total income of Rs. 4,95,406/-. The nature of the business of the assessee

was trading in readymade garments. A surveyu/s. 133A, was conducted by

the Department at the business premises of the assessee on 10.10.2003.

During the course of the survey, it was revealed to the survey team that there

was a discrepancy in the stock. The stock found was of Rs. 38,79,348/- as

per tag-price, against which stock comes to Rs. 14,11,635/- as per the

trading account prepared as on 08.10.2003. This discrepancy was brought to

the notice of the assessee and his statement was recorded. It is stated by the

AO in the assessment order that vide answer to question no. 13, he accepted

the above mentioned discrepancy in the stock and surrendered Rs.

16,01,215/- as his unaccounted investment in stocks. He agreed to pay the

taxes on the same. The question no. 13 and answer thereto reads as under:-"Q. No. 13:-After physical verification it has been
         found that your stock comes to Rs. 38,79,348/-, how you will
         explain it?Ans. 13:- I am having G.P. rate of 28.78%,
         after applying the same, stock at cost comes to Rs.
         30,12,850/- while as per my books of account the stock is at
         Rs. 14,11,635/-. There is a difference of Rs. 16,01,215/- for
         which I have no explanation at this time. To buy peace of
         mind I hereby surrendered this amount on the condition that
         no penalty or prosecution will be charged/launched under
         theIncome Tax Act1961. The amount of tax comes to Rs.
         4,89,971/- for which I am offering three cheque having
         details as below:-Page 3 of 9ITA no. 2850/Del/2009




             S. No. Cheque          Amount        Bank        Date
                     No.1.        739403      1,50,000 The Nainital   11.11.200
                                            Bank Ltd.      32.        739404      1,50,000 The Nainital   12.12.200
                                            Bank Ltd.      33.        739406      1,89,971 The Nainital   12.03.200
                                            Bank Ltd.      4"7.    It is further stated by the AO that in the return of income filed by the

assessee, the assessee has not declared the surrendered amount of Rs.

16,01,215/-. The AO also noted the fact that the assessee has been declaring

income in the last two years as under:-(i)         A.Y. 2002-03       Rs.   97,207/-

      (ii)        A.Y. 2003-04       Rs. 1,03,470/-8.    It was the case of the AO that the assessee should have declared

surrendered amount over and above the normal income of the year. Since

the assessee has not declared additional income of Rs 16,01,215/-, the AO

asked the assessee's AR to produce books of accounts alongwith bills and

vouchers, and to prepare trading account as on date of the survey as well at

the end of the year alongwith the bank statements, stock register and other

details. Since the case was being time barred, the AO stated that he had no

option but to complete the assessment on the basis of the facts available.Page 4 of 9ITA no. 2850/Del/20099.    The AO then considered the material available on record including

certain details filed in the course of assessment proceedings. The assessee

filed the trading account prepared upto 08.10.2003 and also the trading

account as on 10.10.2003 i.e. the date of the survey, wherein closing stock

was shown at Rs. 23,75,260/- as against 14,11,635/- shown as on

08.10.2003. The AO said that during this gap of two days, the assessee had

shown certain purchases. The AO further mentioned that even after taking

into account the working of the assessee, the discrepancy of stock remained

to the extent of Rs. 6,37,590/-. However, the AO had chosen to made the

addition to the extent of Rs. 16,01,215/-.10.   On an appeal, the CIT(A) confirmed the addition by observing that in

the absence of any clarification or details, the AO was justified to make the

addition in the assessment madeu/s. 144of the Act on the basis of material

available on record.11.   From the aforesaid discussions, it is seen that physical stock found at

the time of survey was valued at sale price, and it was so valued at Rs.

38,79,348/-. The assessee was showing gross profit rate of 28.78%, and

after taking into account the element of profit in the sale price, the physical

stock was valued at Rs. 30,12,850/- as on 10.10.2003. As per the trading

account prepared by the assessee as on 08.10.2003, the stock was workedPage 5 of 9ITA no. 2850/Del/2009



out at Rs. 14,11,635/-. This is how a difference of Rs. 16,01,215/- {Rs.

30,12,850/- (-) 14,1,635/-} was arrived at the time of survey and this

difference of Rs. 16,01,215/- has been added to the assessee's total income.12.   Now the question arises as to whether for the purpose of determining

any difference in the physical stock found and the stock as per books, the

stock position in the books is to be taken as of 08.10.2003 or 10.10.2003. It

is not in dispute that the survey was taken place on 10.10.2003 and physical

stock as on 10.10.2003 was taken. The stock as per the trading account

based on the books of accounts prepared upto 08.10.2003 was taken at Rs.

14,11,635/-.   In the course of assessment proceedings, the assessee

submitted the trading account as on 10.10.2003, showing the closing stock at

Rs. 23,75,260/-. In the trading account prepared on 10.10.2003, the assessee

has included certain transaction of purchases made between 08.10.2003 and

10.10.2003, and in support of which, the assessee submitted certain purchase

vouchers at the time of hearing. The AO has also accepted the position even

if the closing stock is taken at Rs. 23,75,260/-, still a discrepancy of Rs.

6,37,590/- is remained. In this view of the matter, we, therefore, hold that

the stock as per the books of accounts as on 10.10.2003, should be taken at

Rs. 23,75, 260/- as against stock of Rs. 14,11,635/- as on 08.10.2003.

Physical stock found at the time of survey was of Rs. 30,12,850/-. Thus the

discrepancy remained is only of Rs. 6,37,590/- and not Rs. 16,01,215/-.Page 6 of 9ITA no. 2850/Del/200913.   At this stage, it is pertinent to note that the assessee has filed the

return of income declaring total income at Rs. 4,95,406/- including

additional income. However, the AO rejected the books of accountsu/s. 145of the Act, and completed the assessmentu/s. 144of the Act.           While

completing the assessment, the AO has estimated the net profit/income of

the year at Rs. 1,50,000/-, to which he made a further addition of Rs.

16,01,215/- on account of alleged undisclosed investment in stock.

Consequently, the AO determined the total income at Rs. 17,51,215/-. Since

the assessee has already declared a sum of Rs. 4,95,406/- in the current

assessment year, which is very much more than the total income of Rs.

97,207/- and Rs. 1,03,470/-, shown in earlier two assessment years i.e. A.Y.

2002-03 and A.Y. 2003-04, and if normal profit of the assessee is reasonably

taken at Rs. 1,00,000/- for current assessment year, it would be seen that the

assessee has declared some more income to the extent of Rs. 3,95,400/-.

The discrepancy in the stock arrived at by us is of Rs. 6,37,590/-, out of

which income of Rs. 3,95,400/- has already been declared by the assessee,

leaving the difference to the tune of Rs. 2,42,190/-.14.   Now, the question arises as to whether the whole of the stock

physically found at the time of survey is to be valued at sale price marked on

the items less the margin of profit. In the present case, it is not in dispute

that the assessee was carrying on a business of readymade garments. It isPage 7 of 9ITA no. 2850/Del/2009



common and normal in this line of business that readymade garments lying

in stock are also of outdated fashion and containing certain defects. All the

stocks of readymade garments lying in one's stock cannot be sold at the sale

price after keeping the regular margin of profit. This is a normal practice in

the market that outdated garments are being sold at a discount of 10% to

70% of the sale price. It is now-a-days a trend generally happened in the

market that to survive in the business, one has to put old stock on sale at a

discounted price. This aspect of the matter was not considered at the time of

survey while determining value of the stock at Rs. 30,12,850/-. It is not in

dispute that the valuation of stock is to be made as per the cost price or

market price, whichever is lower. In the present case, the value of stock has

been taken at the cost of Rs. 30,12,850/-, without considering the lower

market price of certain outdated and defective garments. In the light of well-

settled normal practice as discussed above, it is clear that the market price of

outdated stock would be lower than the cost price to the assessee. Having

regard to the totality of the facts and circumstances of the case, we,

therefore, give a 15% discount in average to 50% of the stock of Rs.

30,12,850/- to arrive at the true and correct value of stock, and if such

discount is given, it would come to Rs. 2,25,000/- approximately, and

consequently, the physical stock found at the time of survey would have

value of Rs. 27.75 lacs only. This will result in a reduction to the extent ofPage 8 of 9ITA no. 2850/Del/2009



Rs. 2.25 lacs to the total value of Rs. 30,12,850/- determined by the survey

team.    The difference as worked out above is of Rs. 2,42,190/- before

considering the benefit of deduction to be given on account of defective and

outdated garments. Therefore, addition caller for is only of Rs. 17,190/- (Rs.

2,42,190/- (-) Rs. 2,25,000/-). Thus, the total income of the assessee shall

stand determined at Rs. 4,95,406/- (+) Rs. 17,190/- = Rs. 5,12,596/- Rs.

5,12,600/- as against Rs. 17,51,215/- determined by the AO. Thus, the

assessee shall get a relief of Rs. 17,51,215/- (-) Rs. 5,12,600/- = Rs.

12,38,615/-. We order accordingly.15.     In the result, the appeal filed by the assessee is partly allowed.16.     This decision is pronounced in the open court on 30th April, 2010.Sd/-                                               Sd/-
    (R.C. SHARMA)                                        (C.L. SETHI)
 ACCOUNTANT MEMBER                                    JUDICIAL MEMBER

Dated: 30th April, 2010
*Nitasha

Copy to:
  1. Appellant
  2. Respondent
  3. CIT
  4. CIT(A)
  5. DR, ITAT, New Delhi.
                                                           By Order

                                                        Deputy RegistrarPage 9 of 9