Addition Due to Stock Undervaluation Capped at 25% as Assessee Provided Stock Statements Duly Verified by CAs

Case Details: Principal Commissioner of Income-tax-1 v. Gujarat Insecticides Ltd. - [2023] 157 taxmann.com 518 (Gujarat)

Judiciary and Counsel Details

• • Bhargav D. Karia & Niral R. Mehta, JJ.
  • Nikunt K Raval for the Appellant.
  • Manish J. Shah for the Respondent.

Facts of the Case

During the relevant assessment year, the assessee furnished its return of income. However, in the scrutiny proceedings, the Assessing Officer (AO) made additions with respect to the undervaluation of closing stock. In response, the assessee furnished various stock statements segregating into saleable and non-saleable stocks of various locations.

Even though the stock statements were physically taken and verified by the firms of Chartered Accountants, wherein it was certified that the stocks had expired, damaged, leakage or unsaleable from the total stock, the AO rejected the contention made by the assessee and continued to make the additions.

Aggrieved by the order, the assessee filed an appeal to CIT(A), who dismissed the appeal. Thereafter, the assessee challenged the order before the Surat Tribunal. The Tribunal, by the impugned order, restricted the addition to 25% on the ground that the AO did not bring any contrary evidence on record to disbelieve the contention of the assessee.

The matter then reached the Ahmedabad High Court.

High Court Held

The High Court held that the findings of fact arrived at by the AO and CIT(A) were without any basis and contrary to the materials produced on record by the AO in the form of the stock statements of various locations as the stocks of such locations were physically taken and verified by the Firms of the Chartered Accountants.

It was observed that a certain percentage of product/ goods produced by the assessee was bound to damage or expire by efflux of time or other factors affecting the chemical composition of such pesticides. Further, it is a common feature that neither the expired chemical nor the damaged goods of the assessee can secure the price in the market, and most of the assessee’s products may prove hazardous to the environment.

Therefore, the Tribunal rightly restricted the additions to 25% of the closing stock to prevent revenue leakage.