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Facts
The assessee, an importer of metal scrap, appealed against additions related to alleged low closing stock valuation (Rs. 61,05,295/-) and full disallowance under Section 40(a)(ia) (Rs. 32,00,844/-) for non-deduction of TDS on clearing & forwarding and commission expenses for AY 2013-14. Both additions were confirmed by the CIT(A).
Held
The Tribunal deleted the addition to closing stock, finding that the AO had double-counted direct expenses. However, it upheld the 100% disallowance under Section 40(a)(ia) as the amendment restricting disallowance to 30% is prospective from AY 2015-16, not applicable to AY 2013-14.
Key Issues
Whether the closing stock valuation by the assessee correctly included direct expenses, preventing double addition by the AO; and the applicability of the prospective amendment to Section 40(a)(ia) for TDS default in AY 2013-14.
Sections Cited
143(3), 40(a)(ia)
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
1. This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), vide order no. ITBA/NFAC/S/250/2023-24/1058033752(1), dated 17.11.2023 passed against the assessment order by Income Tax Officer, Ward 23(1)(2), Mumbai u/s. 143(3) of the Income-tax Act (hereinafter referred to as the “Act”), dated 30.03.2016 for Assessment Year 2013- 14.
Grounds taken by the assessee are reproduced as under:
Addition of an amount of Rs 61,05,295/- on account of valuation of closing stock:
a. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) erred in confirming the addition of Rs. 61,05,295 for alleged low stock valuation without appreciating the working and explanation provided. b. The Appellant prays that the addition of Rs.61,05,295 made in respect of low stock valuation be deleted. c. The Appellant prays that any penalty to be levied against above addition also to be deleted. d. The Appellant craves leave to add, amend, alter vary and / or withdraw any or all the above grounds of appeal.
2. Disallowance U/s. 40(a)(ia) of the Income Tax Act - Rs. 32,00,844/- for failure to deduct TDS on expenses: a. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) erred in confirming the addition of 100% of expenses of Rs. 32,00,844 for non-deduction of TDS on certain expenses. b. The Appellant requested that the disallowance of 100% of expenses be restricted to 30% of expenses as per amendment to Section 40(a)(ia) c. The Appellant prays for addition of only 30% of the expenses. d. The Appellant prays that any penalty to be levied against above addition also to be deleted. e. The Appellant craves leave to add, amend, alter vary and/or withdraw any or all the above grounds of appeal.
Irshad Ahmed Siddiqui, AY 2013-14 3. Brief facts of the case are that assessee is engaged in the business as importer of metal scrap and selling the same under proprietorship concern M/s. Universal Metals. Return of income was filed on 30.09.2013 reporting total income at Rs.17,72,610/-. Assessee reported net profit under the head ‘Profits and gains of business profession’ by taking into account closing stock valued at Rs.1,96,94,500/-, details of which is tabulated below:
3.1. Above detail is reproduced in the impugned assessment order in para 4.1. Assessee was asked to file details about the closing stock for its quantity, value and inclusion of direct expenses incurred on its purchases. In this respect, assessee submitted the aforesaid tabulated Irshad Ahmed Siddiqui, AY 2013-14 details along with calculation of ratio of direct expenses to total purchases made during the year to demonstrate that direct expenses have been loaded into the value of closing stock while taking it into profit and loss account and balance sheet. In this respect, assessee arrived at 31% of direct expenses for which the calculations are as submitted by him and reproduced in para 4.1 of the impugned order are extracted below:
Irshad Ahmed Siddiqui, AY 2013-14 3.2. Thus, assessee evidently demonstrated that actual value of stock of Rs.1,50,33,970/- was loaded with direct expenses at the rate of 31% of Rs.46,60,530/- to arrive at the value of Rs.1,96,94,500/- for the purpose of reporting. However, on these submissions and calculations furnished by assessee, despite accepting the percentage of direct expenses worked out at 31% of total purchases as given by assessee, ld. Assessing Officer was of the view that assessee has not added the requisite expenses to his closing stock. He accordingly, revised the value of closing stock by taking 31% of Rs.1,96,94,500/- i.e., Rs.61,05,295/- to arrive at the value of closing stock at Rs.2,57,99,795/-. He thus made an addition of Rs.61,05,295/- towards value of closing stock.
3.3. On the second issue relating to disallowance u/s. 40(a)(ia) of Rs.32,00,844/- on account of non-deduction of tax at source, ld. Counsel for the assessee fairly accepted that since TDS could not be done, it is to be disallowed. To this effect, ld. Sr. DR referred to decision of Hon’ble Jurisdictional High Court of Bombay in the case of PCIT vs. Asphalt India Corporation [2024] 167 taxmann.com 460 (Bom) whereby it held that amendment in section 40(a)(ia) by Finance Act, 2014 is prospective in nature. In the present case, it is Assessment Year 2013-14 and the amendment in Section 40(a)(ia) by Finance Act, 2014 is effective from Assessment Year 2015-16 by which the disallowance is restricted to 30% of the expenses. On both the issues, the assessee went in appeal before ld. CIT(A) and the additions so made were confirmed.
Before us, ld. Counsel for the assessee evidently demonstrated from the details of closing stock and its valuation arrived at by working out ratio between direct expenses to total purchases at 31% Irshad Ahmed Siddiqui, AY 2013-14 whereby the value of closing stock taken in profit and loss account is inclusive of the direct expenses, to counter the allegation made by the ld. Assessing Officer. We have perused the records and find that addition made by ld. Assessing Officer by again applying 31% toward direct expenses for the purpose of making addition tentamounts to including direct expenses twice. In fact, what ld. Assessing Officer has computed is much more than 31%, since this is applied on a figure which already includes direct expenses to the extent of 31%. Accordingly, the addition so made by ld. Assessing Officer is deleted. In respect of disallowance made u/s.40(a)(ia) for non-deduction of tax at source on expenses of Rs.30,56,034/- towards clearing and forwarding expenses and of Rs.1,44,810/- towards commission expenses totalling to Rs.32,00,844/-, the disallowance made by ld. Assessing Officer in view of the submission made by ld. Sr. DR is upheld. Accordingly, ground no.1 raised by assessee is allowed and ground no.2 is dismissed.
It is further noted that in the course of hearing, it was submitted by ld. Sr. DR that disallowance u/s.40(a)(ai) if sustained, would have a bearing on the calculation of ratio of direct expenses to purchases made, for the purpose of arriving at value of closing stock, for which a revised working was furnished by the ld. Counsel of the assessee. Having considered these submissions, we find that the disallowance made u/s.40(a)(ia) is pursuant to non-deduction of tax at source, there being no dispute on allowability of these expenses otherwise, by holding them as sham, bogus or non-genuine. Furthermore, clearing and forwarding expenses of Rs.30,56,034/- have already been included in arriving at the calculation of percentage of direct expenses of 31%. Also, commission expenses which are incurred on trading of goods on consignment basis do not form part of direct expenses for the Irshad Ahmed Siddiqui, AY 2013-14 purpose of valuation of closing stock. Accordingly, contention of disallowance u/s.40(a)(ia) to have a bearing on the ratio of direct expenses to purchases made for the purpose of valuing closing stock is not tenable. Thus, valuation arrived at by the assessee of closing stock at Rs.1,96,94,500/- is accepted as such.
In the result, appeal of the assessee is partly allowed.
Order is pronounced in the open court on 19 February, 2025