THE DCIT, ANAND CIRCLE,, ANAND vs. M/S. KHAMBHALIA WIND FARM DEVELOPERS LTD. (FORMERLY KNOWN AS ELECON WIND FARM DEVELOPERS LTD.),, ANAND

In this case, return of income declaring income of Rs. 12,71,845/- was filed on 20th Sep, 2011. Subsequently, the case was selected u/s 143(2) of the act on 1st August, 2012. The further facts of the case are discussed under the particular grounds of appeal as under:- Ground No.1 (Disallowance u/s. 40A(2)(b) of the act) 3. During scrutiny assessment the assessing officer noticed that assessee has made purchases of material to the amount of Rs. 8,06,60,810/- form Veer Energy & Infrastructure Ltd. The assessing officer has further noticed that Shri Yogesh M Shah and Shri Praksh C Shah, were MD & Executive Director in the Veer Energy and Infrastructure Ltd and their interests in the assessee company had been disclosed in the related party disclosure annexed to the notes in the account of M/s Veer Energy and Infrastructure Ltd. The assessing officer observed that the said concern was a related party to the assessee and Shri Prakash C Shah was holding 48.2% share-holding in the assessee company. Therefore, the assessing officer was of the view that Veer Energy and Infrastructure Ltd was as person specified in section 40A(2)(b) of the act. On further verification, the assessing officer noticed that Veer Energy and Infrastructure Ltd had made purchases of material from Kinetic Synergy Pvt. Ltd and supplied the same material to the assessee by increasing the cost of material by 15% over the cost of its purchase. The assessing officer observed that the Veer Energy and Infrastructure Pvt. Ltd. had sold the same material to the assessee company after purchasing the same from Kinetic Synergy Pvt. Ltd. Therefore the assessing officer held that the assessee has adopted a colourale device to divert its profit to the associate concern namely M/s. Veer Energy and Infrastructure Ltd consequently payment over the cost

During the course of appellate proceedings before us, ld. counsel has submitted paper book containing containing detail of submission made before assessing officer and ld. CIT(A). He contended that ld. CIT(A) has rightly adjudicated the case in favour of the assessee and the assessing officer has failed to bring any comparable cases as to ascertain the fair market value of the similar gods sold by the other concern. On the other hand, ld. departmental representative has supported the order of assessing officer.

We have heard the rival contentions and perused the material on record carefully. The assessee has made certain purchases as elaborated in this order from Veer Energy and Infrastructure Pvt. Ltd. The assessing officer made disallowance u/s. 40A(2)(b) of the act on the ground that assessee has made purchases at higher prices from the said concern. With the assistance of learned counsel we have gone through the material on record and observed as under:- (i) It is noticed that VEIL has sold similar product to a unrelated party( Global Windfall Farm ) at the same rate at which it has sold the same to the assessee. In this regard relevant materiel in the form of invoice was submitted before the ld. CIT(A) and the ld. CIT(A) has called remand report from the assessing officer and the assessing officer could not controvert the above material fact that on same rate the goods was sold to the unrelated party.

Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. Relevant part of decision of ld. CIT(A) is reproduced as under:- “4.3. I have considered the submissions of the learned Authorized Representative and the order of the Assessing Officer. Regarding disallowance of VAT expenses of Rs.10,88,901/- the appellant has submitted that it followed lump sum method for calculation of VAT expense in its books of accounts under which VAT was 2% of Total Works Contract sale under composite scheme plus input vat credit which was not receivable as per the said scheme. The same worked out at Rs. 15,82,624/- (2% of WCT) and Rs.17,13,729/- (which was input vat credit pertaining to Mota Gunda substation purchases which was shown as receivable in books of accounts). This totaled Rs.32,96,353/- which was transferred as expense in the Profit and Loss Account for the financial year 2010-2011. However in the VAT return of the appellant, VAT was to be shown as per Schedule Rate Method which amounted to Rs.22,07,452/-, under which the sales and purchase turnover was calculated as per the VAT Act and accordingly VAT liability was determined on sales turnover and VAT input credit receivable was determined on purchase turnover. The appellant has submitted summary of VAT as per books of accounts, Annual VAT return for F.Y.2010-2011 and extract of Gujarat VAT Act, 2003 vide "Annexure-8" of its written submission dated 9.6.2015. From the submissions it is clear that the VAT as per VAT return was less because credit of input VAT paid on purchases of Rs.10,88,901/- was shown as credit receivable which is to be carried forward for set off against future VAT liability. It has been contended by the Ld. Authorized Representative that the said input VAT credit will not available as it is laid down in the VAT Act for lump sum method and composition scheme. Therefore, the said amount will anyway not be admissible by VAT department in future at the time of VAT assessment. It has been vehemently argued by the Authorized Representative that following the concept of conservatism and prudence, the appellant company has rightly claimed the input credit of Rs.10,88,901/- as expense and included the same as VAT expense in its books of accounts for the said financial year. The treatment given by the appellant is in accordance with the convention of conservatism and doctrine of prudence in accounting. . I am inclined to accept the contentions of Ld. Authorized Representative. When it is very well clear that Input Vat credit would not be admissible in future, there is no point in overstating assets (i.e. receivable) and understating expense. This treatment is contradictory to the principles of accounting. Further since the VAT input credit was pertaining to FY 2010- 2011, it only makes most sense when the same is treated as expense in the same year to which it relates. The Assessing Officer has not given enough reason for disallowing the same in the assessment order. If the Assessing Officer's treatment of recognizing only Rs.22,07,452/- as VAT expense in profit and loss account was to be accepted, then it would amount to overstatement of assets by Rs.10,88,901/-which is in gross contravention with the principles of accounting. Therefore, the VAT claimed by the appellant company of Rs.32,96,353/- is correct expense for it for the said A.Y.2011-12 and the disallowance made by the Ld. Assessing Officer amounting to Rs.10,88,901/- is erroneous and without any fact finding and without appreciating the nature of transaction and provisions of laws laid down in this respect. Therefore, the said disallowance u/s 43B amounting to Rs.10,88,901/-is directed to be deleted. This Ground of appeal is also allowed.”

We have heard the rival contentions and perused the material on record carefully. It is noticed that during the year under consideration, the assessee company had debited VAT expenses of Rs. 32,96,353/- in its P & L a/c. However, the assessee has shown VAT under output tax in the annual VAT return at Rs. 22,07,452/-, therefore, the assessing officer has disallowed the difference of Rs. 1088901/- by considering the same to be inadmissible under the income IT Act. In this regard it is observed that the assessee company was engaged in infrastructure development business which consists of composite work contract sale and the assessee was liable to pay services tax and VAT as per rules of composition scheme of work contract. In respect of composite work contract the input credit of normal material was not available for set off against the said contract payable of its work contract sale. The VAT liability is determined on sales and in put tax credit receivable is determined on purchases.

In the result, the appeal of the revenue is dismissed.