Shri Hetalkumar Indravadan Shah, Bhavnagar V. The ACIT.,Circle-1, Bhavnagar

ITA 227/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6433 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 07-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 23-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRAKASH DUBEY
• Assessee Lawyers: M K PATEL
• Keywords: Business income; Opportunity of being heard

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, A BENCH (BEFORE S/SHRI G.D. AGARWAL, VICE-PRESIDENT AND D.K. TYAGI, JUDICIAL MEMBER) ITA NO.227/AHD/2009 [ASSTT. YEAR : 2005-2006] HETALKUMAR INDRAVADAN SHAH PROP: M/S.GOLDEN ARC ATALBHAI CHOWK, BHAVNAGAR. VS. ACIT, CIR.1 BHAVNAGAR. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.K. PATEL REVENUE BY : SHRI PRAKASH DUBEY O R D E R PER G.D. AGARWAL, VICE-PRESIDENT : THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF IN COME-TAX (APPEALS)- XX, AHMEDABAD DATED 24.10.2008 FOR A.Y.2005-2006. 2. THE FIRST GROUND RAISED IN THIS APPEAL READS AS UNDER: 1. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING ADDITION OF RS.51,55,658/- ON ACCOUNT OF ALLEGED SU PPRESSION IN VALUATION OF CLOSING STOCK. 3. THE FACTS OF THE CASE ARE THAT FOR THE YEAR UNDE R CONSIDERATION, THE ASSESSEE FILED RETURN DECLARING TOTAL INCOME AT RS. 9,97,022/- . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESSEE TO FURNISH METHOD OF VALUATION OF THE CLOSING STOCK AND ALSO T HE DETAILED WORKING OF THE CLOSING STOCK AS ON 31-3-2005. IN RESPONSE TO WHICH, THE ASSESSEE FURNISHED THE VALUATION OF THE CLOSING STOCK VIDE H IS SUBMISSION DATED 24- 8-2007. THE AO HAS REPRODUCED THE SAME IN PARA-3 O F THE ASSESSMENT ORDER AND FOR READY REFERENCE WE ALSO REPRODUCE THE SAME HEREIN BELOW: ITA NO.227/AHD/2009 -2- CLOSING STOCK VALUATION :- OPENING STOCK RS.10,10,500/- ADD: PURCHASES R.1,97,94,800/- LESS: COST OF SALES RS.1,80,19,828/- RS.27,85,472/- CLOSING STOCK RS.27,85,490/- COST OF SALES:- SALES RS.2,64,93,747/- LESS: GP 32% (APPROX.) 84,73,919/- COST OF SALES 1,80,19,828/- WHEN THE AO VERIFIED THE DETAILS FURNISHED BY THE A SSESSEE FOR VALUATION OF CLOSING STOCK, HE FOUND FOLLOWING MISTAKES IN TH E WORKING OF THE ASSESSEE (I) PURCHASES TAKEN AT RS.1,97,94,800/- WA S NOT CORRECT AND (II) THE ASSESSEE OMITTED TO CONSIDER EXPENSES DEBITED T O TRADING ACCOUNT AT RS.15,04,625/-. AFTER CORRECTING THESE MISTAKES, H E WORKED OUT THE CLOSING STOCK AT RS.79,41,148/- AS UNDER: OPENING STOCK AS PER AUDITED TRADING A/C RS.10,10,5 00 EXPORT TRADING RS.6,74,910 PIG IRON IMPORT RS. NIL INDIGENOUS TRADING RS.3,35,590 TOTAL OPENING STOCK RS.10,10,500 ADD: PURCHASES INCLUDING EXPENSES, IF ANY, AS PER AUDITED TRADING ACCOUNT: EXPORT TRADING RS.1,02,23,396 PIG IRON IMPORT RS.93,81,628 ITA NO.227/AHD/2009 -3- TRADING INDIGENOUS TRADING RS.38,36,747 TOTAL PURCHASES RS.2,34,41,771 RS.2,34,41,771 EXPENSES FORMING PAR OF AUDITED TRADING A/C.: EXPORT TRADING EXP. 15,04,625 TOTAL 2,59,56,896 LESS: COST OF SALES AS WORKED OUT HEREUNDER 1,80,15,748 CLOSING STOCK 79,41,148 ============= COST OF SALES: SALES AS PER TRADING A/C. EXPORT TRADING RS.1,60,60,953 PIG IRON RS.65,36,203 INDIGENOUS TRADING RS.38,96,591 TOTAL SALES 2,64,93,747 RS.2,64,93,747 LESS: GP 32% (APPROX.) AS ADOPTED BY THE ASSESSEE RS.84,7 7,999 COST OF SALES RS.1,80,15,748 ============== ACCORDINGLY, THE AO MADE AN ADDITION OF RS.51,55,65 8/- ON ACCOUNT OF DIFFERENCE IN THE CLOSING STOCK. ON APPEAL, THE CI T(A) SUSTAINED THE ADDITION, HENCE THIS APPEAL BY THE ASSESSEE. 5. AT THE TIME OF HEARING BEFORE US, IT WAS STATED BY THE LEARNED COUNSEL THAT THE BUSINESS OF THE ASSESSEE WAS IN TH REE PARTS, (I) EXPORT TRADING, (II) PIG IRON IMPORT TRADING AND (III) IND IGENOUS TRADING. THAT IF THE FIGURE ADOPTED BY THE AO IS CONSIDERED IN EA CH TRADING ACCOUNT SEPARATELY THEN IN PIG IRON IMPORT TRADING ACCOUNT THERE WOULD BE CLOSING STOCK OF RS.49,37,010/- WHICH IS FACTUALLY INCORREC T BECAUSE IN PIG IRON IMPORT TRADING ACCOUNT, THERE WAS NO STOCK AND ENTI RE IMPORT OF GOODS ITA NO.227/AHD/2009 -4- WAS SOLD ON HIGH-SEA. THUS, THERE WAS NO CLOSING S TOCK IN THE BOOK IN PIG IRON TRADING ACCOUNT. THAT THE AO WRONGLY PRESUMED THE GP AT 32% IN EACH ACCOUNT WHILE IN FACT THERE WAS A LOSS IN PIG IRON TRADING ACCOUNT. HE HAS STATED THAT IF THE LOSS IN THE PIG IRON TRAD ING ACCOUNT IS CONSIDERED AS AGAINST THE GP RATE OF 32%, THEN THE DIFFERENCE IN THE CLOSING WOULD BE NEGLIGIBLE. HE ALSO POINTED OUT THAT THE GP IN THE PRECEDING YEAR I.E. A.Y.2004-2005 WAS 17.95% AND IN A.Y.2006-2007 23.93 %. THUS, THE GP OF 32% TAKEN FOR WORKING OUT THE VALUE OF THE CL OSING STOCK WAS NOT CORRECT. HE FURNISHED THE REVISED WORKING OF EACH TRADING ACCOUNT SEPARATELY SO AS TO CONTEND THAT THE DIFFERENCE IN THE VALUE OF THE CLOSING STOCK WAS INCORRECTLY WORKED OUT BY THE AO. 6. THE LEARNED DR, ON THE OTHER HAND, RELIED UPON T HE ORDER OF THE AUTHORITIES BELOW AND HE HAS STATED THAT THE AO HAS NOT DISTURBED THE METHOD OF DETERMINATION OF THE CLOSING STOCK. HE H AS SIMPLY TAKEN THE CORRECT FIGURE OF PURCHASE AND THE EXPENSES INCURRE D ON PURCHASES WHICH IS DEBITED BY THE ASSESSEE IN THE RESPECTIVE TRADIN G ACCOUNT. HE POINTED OUT THAT THE FIGURE OF PURCHASE TAKEN BY THE AO IS AS PER THE ASSESSEES AUDITED BALANCE SHEET, WHILE THE FIGURE OF PURCHASE TAKEN BY THE ASSESSEE IS INCORRECT. THAT THE GP RATE OF 32% TAKEN BY THE AO IS THE SAME AS TAKEN BY THE ASSESSEE HIMSELF IN WORKING OF THE VAL UATION OF THE CLOSING STOCK. THE AO HAS ONLY SUBSTITUTED THE CORRECT FIG URE OF PURCHASE AND EXPENSES AND ALL OTHER FIGURES I.E. OPENING STOCK A S WELL AS THE GP RATE ARE THE SAME AS TAKEN BY THE ASSESSEE HIMSELF. HE THER EFORE SUBMITTED THAT THE EXPLANATION BEING GIVEN AT THIS STAGE IS A LAME EXCUSE TO EXPLAIN THE UNDERVALUATION OF THE CLOSING STOCK. ITA NO.227/AHD/2009 -5- 7. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THA T IN THE AUDITED ACCOUNTS, THE ASSESSEE HAS GIVEN THE METHOD OF VALU ATION FOR CLOSING STOCK AS AT COST OR AT THE MARKET PRICE WHICHEVER IS LOW ER. HOWEVER, THE ASSESSEE HAS NOT VALUED THE CLOSING STOCK AT COST OR AT THE MARKET PRICE WHICHEVER IS LOWER, BUT HAS VALUED THE CLOSING STO CK BY ESTIMATING THE GP. THE AO HAS NOT DISPUTED THE ASSESSEES METHOD OF VALUATION OF THE CLOSING STOCK, BUT HE FOUND THAT THE ASSESSEE HAS N OT TAKEN THE FIGURE OF PURCHASES CORRECTLY AND THE ASSESSEE HAS ALSO NOT C ONSIDERED THE EXPENDITURE WHICH ARE DEBITED TO THE TRADING ACCOUN T. THE ASSESSEE HAS FURNISHED THE AUDITED ACCOUNTS BEFORE US AND WE FIN D THAT IN THE AUDITED ACCOUNTS THERE ARE THREE TRADING ACCOUNTS, VIZ. I) EXPORT TRADING, II) PIG IRON IMPORT TRADING AND III) INDIGENOUS TRADING ACC OUNT. THE SAME ARE AT PAGE NO.37, 38 AND 39 OF THE ASSESSEE PAPER BOOK. FROM THESE TRADING ACCOUNTS, WE FIND PURCHASES IN EACH TRADING ACCOUNT AS UNDER: I) EXPORT TRADING : RS.1,02,23,396/- II) PIG IRON IMPORT TRADING : RS. 93,81,628/- III) INDIGENOUS TRADING : RS. 38,36,747/- THUS, THE TOTAL PURCHASES IN ALL THE THREE TRADING ACCOUNTS AMOUNTED TO RS.2,34,41,771/-, WHILE THE ASSESSEE HAS TAKEN THE PURCHASES AT RS.1,97,94,800/-. AT THE TIME OF HEARING BEFORE US , THE LEARNED COUNSEL FOR THE ASSESSEE COULD NOT GIVE ANY SATISFACTORY EX PLANATION FOR TAKING THE PURCHASES AT LOWER THAN THE ACTUAL PURCHASE DEBITED IN THE TRADING ACCOUNT. HE TRIED TO EXPLAIN THE DIFFERENCE BY STA TING THAT IN THE PIG IRON IMPORT TRADING ACCOUNT, THERE WAS LOSS, WHICH WAS A DJUSTED AGAINST THE PURCHASES. WE ARE UNABLE TO ACCEPT THIS CONTENTION OF THE LEARNED ITA NO.227/AHD/2009 -6- COUNSEL. IF THE ASSESSEE HAS PREPARED A CONSOLIDAT ED ACCOUNT FOR ALL THREE TRADING ACCOUNTS FOR WORKING OUT THE CONSOLIDATED C LOSING STOCK, THEN THERE HAS TO BE A TOTAL OF OPENING STOCK, PURCHASE AND SALE OF ALL THE THREE TRADING ACCOUNT. IN FACT, THERE IS NO MISTAKE IN T AKING OPENING STOCK AS WELL AS THE SALES OF ALL THREE ACCOUNTS. ONLY MIST AKE COMMITTED BY THE ASSESSEE IS IN TAKING THE AMOUNT OF PURCHASE AND WE FIND THAT THE AMOUNT OF PURCHASES TAKEN BY THE AO IS CORRECT AS PER THE ASSESSEES AUDITED TRADING ACCOUNTS. 8. THE AO HAS FURTHER ADDED A SUM OF RS.15,04,625/- BEING THE EXPENSES DEBITED IN THE EXPORT TRADING ACCOUNT. HO WEVER, FROM THE PERUSAL OF THE EXPORT TRADING ACCOUNT, WE FIND THAT THESE EXPENSES ARE EXPORT RELATED EXPENSES. IN OUR OPINION FOR DETERM INING THE VALUE OF CLOSING STOCK, THE EXPENSES INCURRED ON PURCHASES C AN BE TAKEN INTO ACCOUNT, BUT NOT THE EXPENSES INCURRED ON SALE. WI TH THE NOMENCLATURE OF THE EXPENSES, IT CLEAR THAT THE EXPENSES ARE RELATI NG TO THE EXPORT SALES BECAUSE IN THE TRADING ACCOUNT THE EXPENSES ARE SHO WN AS EXPORT RELATED EXPENSES. IF THE EXPENSES ARE RELATING TO THE EXPOR T, THE SAME CANNOT BE CONSIDERED WHILE DETERMINING THE VALUE OF CLOSING S TOCK. WE, THEREFORE, REVISE THE WORKING MADE BY THE AO AND HOLD THAT THE RE IS NO REQUIREMENT OF DEBITING THE SUM OF RS.15,04,625/- WHILE DETERMI NING THE CLOSING STOCK. ACCORDINGLY, THE CORRECT CLOSING STOCK IS D ETERMINED AS UNDER: I) CLOSING STOCK TAKEN BY THE AO : RS.79,41,148/- II) LESS: EXPORT RELATED EXPENSES : RS.15,04,625/- RS.64,36,523/- ========== THE STOCK DISCLOSED BY THE ASSESSEE WAS RS.27,85,47 2/-. ACCORDINGLY, ADDITION REQUIRED TO BE SUSTAINED IS RS.36,51,051/- . WE THEREFORE SUSTAIN ITA NO.227/AHD/2009 -7- THE ADDITION OF RS.36,51,051/- AGAINST THE ADDITION OF RS.51,55,656/- MADE BY THE AO. 9. GROUND NO.2 OF THE ASSESSEES APPEAL READS AS UN DER: 2. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN NOT DIRECTING THE AO TO GRANT DEDUCTION OF RS.38,850/- IN AY 2006-07 WHICH WAS DISALLOWED U/S.40(A)(IA) DUE TO NON PAYMENT OF TDS WITHIN THE SPECIFIED PERIOD. 10. AT THE TIME OF HEARING BEFORE US, IT IS STATED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE PAYMENT OF TDS IS MADE BE FORE THE DUE DATE OF FILING OF THE RETURN. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT THE B BENCH OF THE ITAT I N THE CASE OF SHRI KANUBHAI RAMJIBHAI VS. ITO, IN ITA NO.3983/AHD/2008 ORDER DATED 3- 12-2010 HAS CONSIDERED THE IDENTICAL ISSUE AND AFTE R DETAILED EXAMINATION CAME TO THE CONCLUSION THAT THE AMENDMENT IN THE SE CTION 40(A)(IA) BY THE FINANCE ACT, 2010 IS RETROSPECTIVE IN NATURE. NO C ONTRARY DECISION IS BROUGHT TO OUR KNOWLEDGE. WE THEREFORE RESPECTFULL Y FOLLOWING THE ABOVE DECISION OF THE ITAT HOLD THAT THE AMENDMENT IN THE SECTION 40(A)(IA) BY THE FINANCE ACT, 2001 IS REMEDIAL IN NATURE AND IT WAS DESIGNED TO ELIMINATE UNINTENDED CONSEQUENCES WHICH MAY CAUSE U NDUE HARDSHIP TO THE TAXPAYERS AND THEREFORE THIS AMENDMENT WOULD BE RETROSPECTIVE IN NATURE AND ACCORDINGLY APPLICABLE TO THE ASSESSMENT YEAR UNDER APPEAL. WE THEREFORE DIRECT THE AO TO EXAMINE THE PAYMENT O F TDS BY THE ASSESSEE AND IN RESPECT OF PAYMENT FOR WHICH TDS IS DEPOSITED BEFORE THE DUE DATE OF FILING OF THE RETURN NO DISALLOWANCE UN DER SECTION 40(A)(IA) ITA NO.227/AHD/2009 -8- WOULD BE MADE. HOWEVER, IN RESPECT OF THE ITEM WHE RE EITHER NO TDS IS DEDUCTED OR AFTER THE DEDUCTION THE SAME IS NOT DEP OSITED BEFORE THE DUE DATE FOR FILING OF THE RETURN, DISALLOWANCE WOULD B E SUSTAINED. NEEDLESS TO MENTION, THE LEARNED AO WILL RE-ADJUDICATE THE I SSUE AFTER GIVING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . 12. GROUND NO.3 OF THE APPEAL READS AS UNDER: 3. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN NOT GRANTING DEDUCTION OF RS.13,321/- WHICH WAS DISALLOWED U/S.4 0(A)(IA) OF THE ACT ON ACCOUNT OF HIRE PURCHASE FINANCIAL CHARGES C ONTRARY TO THE DIRECTIONS GIVEN IN CBDT INSTRUCTION NO.1425 DTD. 1 6/11/1981. 13. AT THE TIME OF HEARING BEFORE US, IT WAS STATED BY THE LEARNED COUNSEL THAT AS PER CBDT CIRCULAR NO.1425 DATED 16- 11-1981, THE TDS IS NOT REQUIRED TO BE DEDUCTED FROM THE PAYMENTS MA DE ON FINANCIAL CHARGES PAID IN RESPECT OF VEHICLE LOANS. WE FIND THAT THIS CIRCULAR WAS NOT POINTED OUT BY THE ASSESSEE BEFORE THE AO, THER EFORE, HE HAS NOT CONSIDERED THE SAME. IN OUR OPINION, IT WOULD MEET THE ENDS OF JUSTICE IF THE ISSUE IS SET ASIDE TO THE FILE OF THE AO FOR RE -ADJUDICATION. WE ORDER ACCORDINGLY AND DIRECT THE AO TO RE-ADJUDICATE THE ISSUE AS PER CBDT CIRCULAR. NEEDLESS TO MENTION, HE WILL ADJUDICATE THE ISSUE AFTER GIVING SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 14. GROUND NOS.5 AND 6 ARE AGAINST 10% DISALLOWANCE OUT OF VEHICLE AND TELEPHONE EXPENSES. AFTER CONSIDERING THE ARGU MENTS OF BOTH THE SIDES, WE ARE OF THE OPINION THAT PERSONAL USER OF THE VEHICLE AS WELL AS TELEPHONE CANNOT BE RULED OUT. THE DISALLOWANCE MA DE AT 10% CANNOT BE ITA NO.227/AHD/2009 -9- SAID TO BE EXCESSIVE OR UNREASONABLE. WE THEREFORE UPHOLD THE SAME AND REJECT THE GROUND NO.5 & 6 OF THE ASSESSEES APPEAL . 15. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 17 TH JUNE, 2011 SD/- SD/- (D.K. TYAGI) JUDICIAL MEMBER (G.D. AGARWAL) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 17-06-2011 C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD