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Income Tax Appellate Tribunal, DELHI “G” BENCH: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI CHANDRA MOHAN GARG
ORDER
PER CHANDRA MOHAN GARG, JM :
This appeal filed by the Revenue against the order of Ld. CIT(A)-9, New Delhi dated 08.11.2018 in Appeal No.65/2016-17 for the assessment year 2013-14.
Ground No.3 raised by the Revenue is general in nature, needs no adjudication hence, dismissed. Remaining effective Ground Nos.1 & 2 read as under:-
1. “On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in deleting the addition on account of disallowance u/s 40A(3) of Rs.15,38,940/-.
2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in deleting the addition on account of disallowance of valuation of closing stock of spare rods of Rs.1,55,00,000/-.” 1 | P a g e Ground No.1 3. Ld.Sr.DR drew our attention towards para 4 of the assessment order, submitted that the assessee has made impugned payments in violation of section 40A(3) of the Income Tax Act, 1961 (“the Act”). He further submitted that AO was right in dismissing the plea of the assessee that the impugned payment should be allowed considering the nature of transaction because from the facts, it was very clear that the expenditure was incurred in violation of provision of section 40A(3) of the Act, defeating the motive of legislation to prevent the cash transaction in the business dealings and to avoid the tax evasion. Ld. Sr. DR submitted that Ld.CIT(A) has granted relief to the assessee without any basis therefore, impugned first appellate order may kindly be set aside by restoring that to the AO.
Replying to the above, Ld.AR vehemently supporting the first appellate order and drawing our attention towards paras 6 to 6.7 of the first appellate order, submitted that Ld.CIT(A) rightly considered the facts and circumstances of the case alongwith Remand Report filed by the AO. Ld.AR submitted that Ld.CIT(A) has discussed the issue in detail and had confirmed part disallowance of Rs.2,40,823/- granting relief to the assessee regarding remaining part of addition. Therefore, there is no fault or defect in the first appellate order, same may kindly be confirmed, dismissing the ground of Revenue.
On careful consideration of the above submissions from the assessment order, para 4 to file that the AO after mentioning the details of payments has observed that the impugned payments have been made in contravention of provision of section 40A(3) of the Act whereas relevant paras of first appellate order i.e. paras 6 to 6.7, we clearly note that the assessee claimed before the authorities below that the expenses are below the amount of Rs.20,000/- but since the same have been accounted by clubbing together therefore, appeared to be greater than Rs.20,000/-. In para 6.7, Ld.CIT(A) after considering the Remand Report of the AO and re-joinder of the assessee alongwith cash book and noted that he clubbing of various expenditure together not to the value of this expenditure to exceed above the threshold limit of Rs.20,000/- as per provision of section 40A(3) of the Act. On being asked by the Bench, Ld. Sr. DR could not controvert these findings recorded by Ld.CIT(A) passed on the Remand Report, re-joinder and cash book of the assessee. Therefore, we are unable to see any ambiguity, perversity or any other valid reason to interfere with the findings arrived by Ld.CIT(A). Thus, we uphold the same. Accordingly, Ground No.1 raised by the Revenue is dismissed. Ground No.2 6. Ld. Sr. DR pressing into Ground No.2 of the Revenue submitted that since the assessee has changed its method of accounting as per its choice and deviation from valuation method which was being regularly followed by him. Therefore, the amount of difference in valuation of closing stock of assessee company was rightly disallowed and added back to the income of the assessee.
Ld. Sr. DR submitted that Ld.CIT(A) has granted relief to the assessee without having any valid and plausible reason. Therefore, impugned order may kindly be set aside by restoring that to the AO.
Replying to the above, Ld.AR took us through paras 7 to 7.4 of the first appellate order and submitted that reason behind changed in accounting policy was considered by Ld.CIT(A) while granting relief to the assessee. Justifying the change by the assessee in accounting policy, Ld.AR submitted that there was a certificate from an expert which throws light to the fact that new accounting policy was justifiable on technical grounds and the changed accounting policy was accepted by the AO in the subsequent Assessment Year. Therefore, keeping in view the principle of consistency, Ld.CIT(A) granted relief to the assessee.
On careful consideration of the above submissions and material placed on record, we are of the considered view that Ld.CIT(A) has granted relief to the assessee by observing as under:-
7.2. “I have considered the submissions of the appellant, the grounds of appeal and the order of the Assessing officer. The brief facts of the case are that, the appellant, during the year under consideration, had changed its accounting policy of valuing the closing stock of its consumable stock of drilling rods, thereby leading to a reduction in the value of closing stock to the tune of Rs 1,55,00,000. During the proceedings, the AO, not being satisfied from such changed accounting policy, proceeded to make an addition of such reduced profit, amounting to Rs 1,55,00,000. 7.3. Before me, the appellant contended that it has not changed the accounting policy, which is First in First Out, but has rather changed the method of calculating the cost of such spares. The appellant contended that prior to the year under consideration, its was charging calculating the cost of such rods, basis the landing cost of such goods, irrespective of the fact as to whether such material was ever used or not. This, the appellant claimed, led to ignoring the 4 | P a g e reduction in the value of the rods which were used till the end of the Financial Year. Thereafter, the appellant stated that to bridge this gap of non recording of complete expenditure, it had obtained a certificate from its technical expert, which claimed that life of such rod is 12 months. Thereafter, the appellant, in line with its new accounting policy, allocated the total life of the rod over the period of 12 months, thereby leading it to recognize the utilised amount as expense incurred during the year and the balance to be transferred to closing stock. The appellant claimed that the present method is more scientific, just and reliable, bonafide and commercially prudent over the predecessor method. The appellant also claimed that the said method is consistently being followed in the subsequent years, and that the said method has been accepted in the year, subsequent to the year under consideration. 7.4. I have considered the submissions of the appellant. The appellant, in its submissions, has clearly highlighted the reasoning behind change in accounting policy. The change is also justified from the very fact that there exists a certificate, from an expert, which throws light to the fact that the new accounting policy is justifiable on the technical grounds as well. Further on, the very fact that the changed accounting policy has been accepted by the AO, in the year, subsequent to the year under consideration, simply means that the AO himself has assented to the such changed accounting policy. Therefore, while the appellant has truly justified the reasoning behind such changed accounting policy, it is also a principle of consistency, that makes the assessee eligible to claim relief from the addition. Therefore, the addition is deleted and hence, the ground is upheld.”
10. In view of the above and after considering the rival submissions of the parties, first of all we may point out that AO noted that the assessee has reduced the value of Rods (part of spares) from Rs.2,7,45,479/- to Rs.87,33,574/- and thus there was a reduction/difference of Rs.1.55 crores in the valuation of closing stock due to change of method of valuation. In support of such valuation of closing stock, the assessee also submitted that a certificate from the supplier for certifying the useful life of such Rods. By placing reliance on the judgement of Hon’ble Supreme Court in the cases of CIT vs British Paints India Ltd. 188 ITR 44 (SC) and CIT vs MCMilan & Co. 33 ITR 182 (SC), the AO made addition as a difference in the valuation of closing stock of the assessee company. During first appellate proceedings, the Ld.AR of the assessee submitted that a detailed written submissions, justifying the changed accounting policy and also relied upon the various judgements. After considering the basis taken by the AO and submissions of the assessee, Ld.CIT(A) observed that the appellant, as per his new adopted accounting policy, allocated the total life of Rod above the period of 12 months leading to recognize the utilized amount as expenses incurred during the year and balance was transferred to closing stock. Ld.CIT(A) also noted that this change of accounting policy has a basis of certificate of expert and thereafter, allowed the claim of the assessee that the present method is more scientific, just and reliable bonafide and commercially prudent over the earlier method. Ld.CIT(A) after considering the certificate issued by an expert which was also considered by the AO held that when the AO himself has accepted the changed accounting policy in the year subsequent to the year under consideration then it is to be presumed that the AO himself has agreed to such changed accounting policy of the assessee for valuation of closing stock. Finally, Ld.CIT(A) had rightly held that reasoning behind such changed accounting policy was fully justified and as per principle of consistency, the assessee is eligible for making valuation and relief from the addition.
11. Ld. Sr. DR could not point out any specific defect, omission or discrepancy in the findings arrived by Ld.CIT(A) except supporting the order of the AO.
12. In view of the foregoing discussion, we compel to hold that we are unable to see any valid reason to interfere with the findings arrived by Ld.CIT(A) and thus, we uphold the same. Accordingly, Ground No.2 raised by the Revenue is also dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 08th July, 2022.