The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition made due to the alleged undervaluation of stock, directing the reclassification of wages as direct expenses, as the Assessing Officer (AO) failed to consider the correct accounting treatment.
Zari Silk (India) Pvt. Ltd., the assessee, is engaged in the manufacturing and trading of sarees, salwar suits, and dress materials. During a survey conducted under Section 133A of the Income Tax Act, 1961, the survey team observed discrepancies in the valuation of stock, observing that the wages paid to labor were classified under “Employee Welfare & Other Benefits” as indirect expenses instead of being recorded as direct manufacturing expenses.
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The AO held that wages are an essential component of the cost of production and should have been included in stock valuation. The AO added Rs. 1,98,88,536 to the assessee’s total income, citing stock undervaluation due to the incorrect classification of wages.
The assessee argued before the CIT(A) that the misclassification was an accounting error and that if the wages were reclassified correctly under direct expenses, the stock valuation would automatically increase, nullifying any discrepancy. The CIT(A) deleted the addition.
On appeal before the ITAT, the revenue argued that the assessee had already factored wages into its pricing structure, and therefore, reclassification should not impact stock valuation.
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The two-member bench comprising Rathod Kamlesh Jayantbhai (Accountant Member) and Narinder Kumar (Judicial Member), observed that the reclassification aligned with the standard accounting treatment and had been consistently followed in previous years.
The tribunal ruled that wages must be categorized as direct expenses for accurate stock valuation and held that the AO erred in making an addition based on a mere misclassification without considering its actual financial impact. The tribunal upheld the CIT(A)’s decision and deleted the addition of Rs. 1,98,88,536. The appeal was decided in favor of the assessee.
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