The ITO, Ward-2(3), Bhavnagar V. M/s. Ganga Industries, Bhavnagar

ITA 1180/AHD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76832 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 04-06-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 21-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K PANDEY
• Section: 143(3); 147; 145; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD (BEFORE SHRI D.K. TYAGI, J.M. & SHRI ANIL CHATURVED I, A.M.) I.T. A. NO. 1180/AHD/2011 (ASSESSMENT YEAR: 2005-06) THE ITO., WARD-2(3), BHAVNAGAR V/S M/S GANGA INDUSTRIES PLOT NO. 1, SURVEY NO. 159/160, VILLAGE: MALPAR, DIST:BHAVNAGAR (APPELLANT) (RESPONDENT) PAN: AAFFG 5748F APPELLANT BY : SHRI A.K. PANDEY, SR. D.R. RESPONDENT BY : SHRI TUSHAR HEMANI ( )/ ORDER DATE OF HEARING : 04-06-2014 DATE OF PRONOUNCEMENT : 13 -06-2014 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER CIT(A)-XX, AHMEDABAD DATED 25.01.2011 FOR A.Y. 2005-06. 2. THE FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. ITA NO 1180/ AHD/2011 . A.Y. 2005- 06 2 3. ASSESSEE IS A PARTNERSHIP FIRM STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING OF STEEL BARS. ASSESSEE FIELD ITS RET URN OF INCOME FOR A.Y. 05-06 ON 24.10.2005 DECLARING TOTAL INCOME OF RS. N IL. THE ASSESSMENT WAS FINALIZED UNDER SECTION 143(3) ON 12.11.2007. THE CASE WAS THEREAFTER REOPENED BY ISSUING NOTICE UNDER SECTION 148 AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) READ WIT H SECTION 147 VIDE ORDER DATED 29.03.2010 AND THE TOTAL INCOME WAS DET ERMINED AT RS. 13,24,090/-. AGGRIEVED BY THE ORDER OF A.O, ASSESS EE CARRIED THE MATTER BEFORE CIT(A). CIT(A) VIDE ORDER DATED 25.01.2011 G RANTED SUBSTANTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF C IT(A), THE REVENUE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWIN G GROUNDS. 1. THE LD. CIT(A) ERRED ON LAW AND ON FACTS IS DELETIN G ADDITION OF RS. 13,24,091/- MADE ON ACCOUNT OF UNUTILIZED CENVAT CREDIT. 2.1 THE LD. CIT(A) HAS FURTHER ERRED ON LAW AND ON FA CT IN ACCEPTING THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSES WHICH WAS IN CONTRAVENTION TO SEC. 145 A OF THE ACT WHICH MANDATES INCLUSIVE METHOD OF ACCOUNTING IN RESPECT OF DUTIES AND TAXES PAYABLE TOWARDS THE PURCHASE FOR THE PURPOSE OF THE ACT. 2.2 THE LD. CIT(A) HAS ERRED ON LAW AND ON FACT, WHEN I T IS HELD BY HIM THAT AS PER SEC. 145A THE OPENING STOCK AND PURCHASES MADE ARE ALSO TO BE VAL UED INCLUDING THE PAYMENT TO CUSTOM AND EXCISE DUTY DEPARTMENT DUTY (CALLED AS CVD) AND EXC ISE PAID ON SUCH PURCHASE AND THEREFORE IN THE CIRCUMSTANCES THE DUTIES SO OUTSTA NDING IS CONSIDERED AS PART OF THE VALUE OF CLOSING STOCK, CORRESPONDING DEBIT ON ACCOUNT OF PURCHASE H AS TO BE CONSIDERED, IF THE DEBIT IS SO CONSIDERED, THERE WILL BE NO EFFECT TO THE TOTAL IN COME IN THE CASE BECAUSE IN THIS CASE THERE WILL BE NO OPENING BALANCE OF UNUTILIZED CENVAT CREDIT AND ALL THE CREDIT TO THE CENVAT ACCOUNT HAVE BEEN GENERATED FROM THE PURCHASES MADE DURING THE Y EAR. 4. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUNDS, THE ONLY ISSUE IS WITH RESPECT TO DELETION OF ADDITION MADE ON ACCOUNT OF UNUTILIZED CENVAT CREDIT. 5. A.O NOTICED THAT ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND THE PURCHASES WERE DEBITED TO THE PR OFIT AND LOSS ACCOUNT BY FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING. A.O W AS OF THE VIEW THAT ITA NO 1180/ AHD/2011 . A.Y. 2005- 06 3 SINCE THE ASSESSEE FOLLOWED THE EXCLUSIVE METHOD OF ACCOUNTING, CENVAT CREDIT WAS NOT REFLECTED IN THE PROFIT AND L OSS ACCOUNT AND THUS THE PROFIT WAS REDUCED TO THE EXTENT OF UNUTILIZED CREDIT. HE WAS THEREFORE OF THE VIEW THAT THE ACCOUNTING METHOD ADOPTED BY T HE ASSESSEE WAS IN CONTRAVENTION TO SECTION 145A OF THE ACT. HE ACCOR DINGLY CONSIDERED THE UNUTILIZED CENVAT CREDIT OF RS. 13,24,091/- AND ADD ED TO THE INCOME OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF A.O, ASSESS EE CARRIED THE MATTER BEFORE CIT(A). CIT(A) DECIDED THE ISSUE IN FAVOUR O F ASSESSEE BY HOLDING AS UNDER:- 3.3 IN THE INSTANT CASE IT IS SEEN THAT THE APPELL ANT WAS ONLY FOLLOWING INCLUSIVE METHOD OF ACCOUNTI NG IN THE EARLIER ACCOUNTING YEAR. DURING THE CURRENT YEAR THE APPELLANT HAS CHANGED THE METHOD OF ACCOUNTING AND HAS STARTED FOLLOWING THE EXCLUSIVE METHOD OF ACCOUNTING. THE AR OF THE APPELLANT ARGUED THAT THERE WAS NO CHANGE IN THE METHOD OF AC COUNTING DUE TO EXCLUSION OF EXCISE DUTY FROM THE INVENTORIES PURCHASES AND SALES. IN SUPPORT OF THE ABOVE CONTENTION, THE AR OF THE APPELLANT RELIED ON THE ACCOUNTING STANDARD AS-2 PRESCRIBED BY THE INST ITUTE OF INDIA. HOWEVER IT IS SEEN THAT THE ABOVE CONTENTION IS NOT ENTIRELY CORRECT. IN CASES WHERE NO DUTY WAS PAYABLE ON THE SALES BECAUSE OF UNUTILIZED CENVAT LYING IN THE CENVAT ACCOUNT OF TH E ASSESSEE IN THE BALANCE SHEET, IF THE ASSESSEE STILL PAYS EXCISE DUTY THE UNUTILIZED CENVAT CREDIT BALANCE OF THE APPELLANT INCREASES AND THE PROFIT OF THE APPELLANT GOES DOWN BECAUSE OF THE EXTRA EXCISE DUTY PAID IN THAT YEAR. SIMILARLY IN THE YEAR IN WHICH THE ASSESSEE WANTS TO INFLATE ITS PROFITS, IN THAT CASE NO EXCISE DUTY IS PAID AND THE UNUTILIZE D CENVAT CREDIT IS USED TO PAY THE DUTY OTHERWISE PAY ABLE, THIS HAS THE EFFECT OF UNUTILIZED CENVAT CREDIT GOING DOWN IN THE BALANCE SHEET BUT THE PROF IT IN THE PROFIT AND LOSS ACCOUNT INCREASES BECAUSE OF REDUCED DEBIT ON ACCOUNT OF LESS EXCISE DUTY PAI D. THUS, THE EXCLUSIVE METHOD RESULTS IN SHIFTING O F PROFIT FROM ONE YEAR TO ANOTHER YEAR AND DOES NOT G IVE THE CORRECT INCOME OF THE YEAR. 3.3(I) MOREOVER AFTER 1/4/1999 AFTER THE AMENDMENT TO SECTION 145A OF THE IT ACT SUCH EXCLUSIVE METHOD OF ACCOUNTING IS NOT PERMITTED. THUS THE APP ELLANT WAS REQUIRED TO INCLUDE THE VALUE OF THE UNUTILIZED CENVAT CREDIT IN THE VALUE OF CLOSING ST OCK. THE APPELLANT RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT V. INDO NIPPON CHE MICALS CO. LTD. REPORTED IN 245 ITR 275 (SC) WHEREIN THE SUPREME COURT HELD THAT WHETHER THE ASS ESSEE FOLLOWED THE GROSS METHOD OR THE NET METHOD THE RESULT WOULD BE THE SAME. THE ABOVE CONT ENTION OF THE APPELLANT IS NOT CORRECT. AT THAT TIM E THE ISSUE BEFORE THE SUPREME COURT WAS PERTAINING T O THE A.Y. PRIOR TO A.Y. 1999-2000 WHEN SECTION 145A WAS NOT ON THE STATUTE. THE HONORABLE SUPREME COURT IN THE CASE OF CIT V. BRITISH PAINTS REPORTED IN 188 ITR 44(SC) HAS HELD THAT EXCLUDING CERTAIN EXPENSES RESULTS IN DISTORTION OF THE VALUE OF CLOSING STOCK AND HAS THE EFFECT OF SHIFTING PRO FIT FROM ONE YEAR TO ANOTHER. 3.3(II) AS FAR AS THE OPENING STOCK IS CONCERNED TH E HONORABLE BOMBAY HIGH COURT IN THE CASE OF MELMOULD CORPORATION V. CIT REPORTED IN 202 ITR 789 (BOM) HAS HELD THAT EVEN IF THE METHOD OF ACCOUNTING IS CHANGED THE VALUE OF OPENING STOCK CA NNOT BE CHANGED AS PER THE NEW METHOD AND THE CLOSING STOCK OF LAST YEAR HAS TO BE ADOPTED AS THE OPENING STOCK OF THE NEXT YEAR. 3.3(III) FURTHER THE BENCH OF THE ITAT MUMBAI IN TH E CASE OF WEST COAST PAPER MILLS LTD. V. ACIT CIRCLE 1(3) REPORTED IN 103 ITD 19 (MUM) HAS UPHELD THE ADDITION OF UNUTILIZED MOD VAT CREDIT TO THE CLOSING STOCK OF THE ASSESSEE. 3.3(IV) IN THE INSTANT CASE HOWEVER IT IS SEEN THAT THE APPELLANT WAS FOLLOWING THE INCLUSIVE METHOD O F ACCOUNTING EARLIER. HENCE THE VALUE OF THE OPENING STOCK WHILE FOLLOWING THE EXCLUSIVE METHOD OF ACCOUNTING HAD BEEN REDUCED THIS YEAR. THE AR OF TH E APPELLANT FILED DETAILED WORKING OF THE CHANGE IN ITA NO 1180/ AHD/2011 . A.Y. 2005- 06 4 PROFITS DUE TO EXCLUSIVE METHOD OF ACCOUNTING AND H AS WORKED OUT THE SAME TO BE RS.24,709/-THE ADDITION OF RS. 13,24,090/- AS MADE BY THE AO IS NO T JUSTIFIED IN THIS CASE BECAUSE THE APPELLANT WAS FOLLOWING INCLUSIVE METHOD OF ACCOUNTING IN THE EAR LIER ACCOUNTING YEAR HENCE THE VALUE OF THE OPENING STOCK, COST OF GOODS SOLD AND THE RAW MATERIALS AND FINISHED PRODUCTS LYING IN THE CLOSING STOCK WOULD HAVE TO BE CHANGED ACCORDINGLY. THE AR OF THE APPEL LANT HAS DONE A DETAILED WORKING OF THE DIFFERENCE IN PROFIT ARISING OUT OF THE CHANGE IN METHOD OF AC COUNTING AS PER THE CHART MARKED AS ANNEXURE 'A' ATTACHED TO THIS ORDER. 3.3(V) THE DETAILS MENTIONED IN THE CHART HAVE BEEN VERIFIED. IT IS SEEN THAT THE NET IMPACT OF CHANGE IN THE METHOD OF ACCOUNTING IN THIS CASE IS SHOWING PR OFITS LOWER BY RS. 24,709/-. IN VIEW OF THE ABOVE THE ADDITION MADE BY THE A.O IS REDUCED TO RS. 24,709/-. 6. AGGRIEVED BY THE ORDER OF CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. BEFORE US LD. D.R. RELIED ON THE ORDER OF A.O ON TH E OTHER HAND LD. A.R. SUPPORTED THE ORDER OF A.O AND FURTHER SUBMITTED TH AT CIT(A) AFTER CONSIDERING THE WORKING NOTED THAT THE NET IMPACT O F CHANGE IN THE METHOD OF ACCOUNTING RESULTED IN SHOWING LOWER PROF IT OF RS. 24,709/- AND THE SAME WAS ACCORDINGLY CONFIRMED BY CIT(A). A SSESSEE HAS NOT PREFERRED ANY APPEAL AGAINST THE ORDER OF CIT(A). H E THUS SUPPORTED THE ORDER OF CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT CIT(A) WHILE GRANTING PARTIAL RELIEF T O ASSESSEE HAS NOTED THAT ASSESSEE WAS FOLLOWING INCLUSIVE METHOD OF ACC OUNTING FOR VALUATION OF STOCK IN EARLIER YEARS BUT HAD CHANGED THE METHO D IN THE YEAR UNDER CONSIDERATION BY FOLLOWING EXCLUSIVE METHOD FOR VAL UATION OF STOCK. BY CHANGING THE METHOD OF ACCOUNTING, THE VALUE OF OPE NING STOCK, COST OF GOODS SOLD AND RAW MATERIAL AND FINISHED PRODUCT LY ING IN CLOSING STOCK WILL HAVE TO BE CHANGED. AFTER PERUSING THE WORKING DUE TO CHANGED METHOD OF ACCOUNTING, CIT(A) CONFIRMED THE ADDITION TO THE EXTENT OF RS. 24,709/-. BEFORE US, THE REVENUE COULD NOT CONTROVE RT THE FINDINGS OF CIT(A). WE THEREFORE FIND NO REASON TO INTERFERE WI TH THE ORDER OF CIT(A) AND THUS THIS GROUND OF REVENUE IS DISMISSED. ITA NO 1180/ AHD/2011 . A.Y. 2005- 06 5 8. IN THE RESULT THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 13 - 06- 2014. SD/- SD/- (D.K. TYAGI) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT ,AHMEDABAD