Whether when a major part of sales were made against opening stock, then sales are nothing but conversion of stock into liquidity - YES: ITAT

THE issue before the Bench is - Whether when a major part of sales were made against the opening stock, then the sales are nothing but the conversion of stock into liquidity. And the verdict goes against the Revenue.

Facts of the case

The assessee is a private limited company. A search was conducted in the residential premises of the B.K. Dhingra, Poonam Dhingra and M/s Madhusudan Buildcon (P) Ltd. Assessment

proceedings were initiated in the cases of the assessee company u/s 153C r/w section 153A. In response to the notice u/s 153C the assessee filed a return for six assessment years as required by the AO. Subsequently, the cases were transferred to another AO u/s 127. The AO however rejected the legal contentions of the assessee, made additions pertaining to unexplained purchases under Section 69C and disallowed expenses in the respective assessment orders. On appeal, the CIT(A) partly allowed the appeal and deleted the additions made.

On appeal before the Tribunal, the Counsel of the assessee contended that the assessee had maintained all records and amount of purchases made. Also, during assessment proceedings, no defect was pointed out by the AO and the same stood accepted by the Assessing Officer. The counsel of the assessee also submitted that when the purchases stood accepted by the Assessing Officer and no adverse remarks were made in the sales tax assessment order, then additions under Section 69C were not sustainable.

On appeal, the Tribunal held that,

++ we observe that admittedly the assessee produced complete books of accounts before the Assessing Officer and the same were examined during the course of assessment proceedings and no defect, infirmity or ambiguity was found or pointed out by the Assessing Officer. We also observe that the revenue has not disputed the point that no adverse remark has been made in the sales tax assessment order with regard to the purchases mentioned by the assessee. We further observe that when opening stock of the assessee in the beginning of the year and the sales also stood accepted, then there is no cause for not accepting the amount of purchases. Accordingly, we are inclined to hold that the Assessing Officer made addition on wrong premises which was rightly corrected by the CIT(A) deleting the impugned additions;

++ we observe that since from the earlier part of this order, we have upheld the deletion of additions made by the Assessing Officer on account of rejection of purchases made by the assessee during the year, therefore, when a major part of the sales were made against the opening stock and the purchases made during the year, then the sales is nothing but the conversion of stock into liquidity and that too when the profit earned from this purchase and sales activities has been already offered to tax, then it cannot be inferred that the sale proceeds represent income from undisclosed sales of the assessee. In this situation, we can easily infer that the AO made additions on the basis of conjectures and surmises which was rightly deleted by the CIT(A);

++ we observe that the CIT(A) has granted relief for the assessee by relying on the books of accounts which were duly audited and there was no negative comment in the audit report. The DR has not disputed the fact that the audited books of accounts were examined by the Assessing Officer and no defect or deficiency was found by the Assessing Officer. In this situation, we are in agreement with the findings of the CIT(A) that lump sum disallowance of expenses is not sustainable and we hold that the CIT(A) rightly deleted the addition and the CIT(A) was also justified in directing the Assessing Officer to allow the depreciation for the assessee as per provisions of the Act and Income Tax Rules 1962.