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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: SHRI PRAMOD KUMAR & SHRI MAHAVIR PRASAD
PER MAHAVIR PRASAD, JUDICIAL MEMBER
These three appeals have been preferred by the Department against the order of the ld. CIT(A). Grounds are common in all the Assessment Years only
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 2 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 figures and Assessment Years are different. Therefore, for the sake of convenience, we would like to dispose of all the appeals together.
In ITA No. 1293/Ahd/2014 for A.Y. 2010-11, Department has taken following grounds of appeal: 1. The Ld. Commissioner of Income-Tax (Appeals)-l, Ahmedabad has erred in law and on facts in deleting the addition of Rs.3,39,51,765/- made on account / of unutilized MODVAT credit u/s.145A of the Act. 2. The Ld. Commissioner of Income-Tax (Appeals)-l, Ahmedabad has erred in law and on facts in deleting the addition of Rs. 1,35,88,000/- made on account of undervaluation of closing stock due to difference in stock as per statement given to Bank and valuation of stock shown in balance sheet. 3. On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-l, Ahmedabad ought to have upheld the order of the Assessing Officer. 4. It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-l, Ahmedabad may be set-a-side and that of the order of the Assessing Officer be restored.
During the course of assessment proceedings it was observed that the assessee had shown the amount receivable on account of unutilised/closing balance on account of MODVAT/CENVAT credit under "Loans and Advances" and the same was not included in the value of closing stock. Since the provisions of section 145A of the Act requires that the taxes/duty/cess/fees related to stock need to be included in the value of closing stock, so vide letter of this office dated 29-08-12, the assessee was requested to justify its claim vis a vis the provisions of section 145A of the Act.
In response to the same the assessee vide its letter dated 12-01-13 has submitted as under.
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 3 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 "Your good selves have asked the assessee company to explain. whether MODVAT/CENVAT have been included in valuing the closing stock or not and if the same is not included in dosing stocks then to explain as to why the same should not be added to the closing stock as per the provisions of section 14SA of the Act. In this regards, it is submitted that the assessee company has complied with the provisions of section 145 A. At the time valuation of closing stock for the purpose of preparing its return of income, the company has included the amount of excise duty in its valuation. Moreover, the excise duty on closing stock has been disallowed in the return of income in accordance with the provisions of section 43B, which can be seen from the copy of return of the assessee for the year under consideration. Had the assessee company followed exclusive method for tax purpose, the question of disallowing excise duty on closing stock would not have arisen. Moreover, your goods selves have referred to Annexure - 13 of TAR stating that the amount of MODVAT/CENVAT credit with Excise/sales tax authorities is Rs,2,79,58,915/-. In this regards, it is submitted that the said balance is the MODVAT credit unutilized and the same has no relation with the valuation of closing stock.
Further, your good selves have referred to Annexure - 2 of the Tax Audit Report, wherein your good selves have observed that the auditor of the company has certified that if the element of excise duty is included in closing stock then the value of raw material would have increased by Rs. 1,64,29,067/- and value of WIP would have increased by Rs. 60,33,168/-.
In this respect, the assessee company invites your attention to Annexure -2 of tax audit report, (copy of which is attached herewith vide Annexure - 2). -On perusal of this statement, it can be seen that the net impact of complying with the provisions of section USA is NIL on profits. The same has been certified by the auditors. Had the excise duty included in the value of opening and closing stocks, there would have been increase in net profits by Rs. 27.88 crores and simultaneously, there would have been decrease in the net profits by Rs. 27.88 crores and hence, the net impact of the same upon profits is NIL. In this reference, your kind attention is invited to the note mentioned at Annexure 2 of the Tax Audit Report which is reproduced hereunder for your ready reference: "The company follows "Exclusive Method" for the accounting of CENVAT credit whereby cost of purchase of raiu materials is accounted for net of CENVAT credit. Consequently, the value of closing stock of raw materials does not include the excise duty
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 4 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 and the education cess thereon, paid on purchase of the same for which CENVAT credit is claimed. Had the excise duty paid on raw1 materials purchased been included in cost of purchase and consequently in the valuation of closing stock, as required by section 145A of the Income tax Act, 1961, there would be no impact on the profit for the year." Hence, the net impact of the provisions of section 145'A upon profits is NIL."
The assessee submissions have been considered carefully and found not acceptable. The Auditor in the report u/s 44AB of the Act has reported that the assessee has followed the exclusive method of accounting and has also enclosed in statement to show that even after following the inclusive method of accounting there is no effect/impact in the P & L account. The Auditor in the report u/s 44AB of the Act has reported that the finished stock valuation includes element of excise duty, but the same is not true in respect of raw material. In the said statement the Auditor has added the element of duties in the Opening stock, Sales, Purchases and closing stock to arrive at his conclusion that there is no impact in P & L account. The assessee's contention to the extent of duties paid during the year is acceptable as the same has not been debited in the P & L account under exclusive method. However the duties which are not paid during the year and remained outstanding as on 31.03.2010 and for which the assessee is having closing/unutilised balance in the books, need to be adjusted in value of stocks. The unutilized credit of taxes viz. Modvat/Cenvat is a kind of subsidy and incentive given by the Government. It cannot be treated as advances given to the Government on account of Sales tax/excise duty payable. In fact, Modvat/Cenvat received/claimed by the assessee .on purchase of raw material is benefit given by the Government. It can be set off against the liability of the assessee on
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 5 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 account of excise duty payable on the finished product manufactured by the assessee company.
There is no doubt that the stock should be valued in accordance with the method of accounting regularly employed by the assessee as provided in Clause (a) of section 145A of the Act, However the clause (b) of section 145A the Act further provides to include the taxes, duty, cess or fee, if the same is not included in the value of closing stock. Section 145A of the I.T, Act which has been brought on statute by the Finance Act 1998, w.e.f 01.04.1999 stipulates as under. "Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "profits and gains of business or profession" shall be- (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of tax, duty, cess or fee (By whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.
Explanation- For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence of such payment"
In view of above referred provisions of .section 145A of the Act,, all the taxes/duty/cess/fee, which have been paid/incurred by the assessee to bring the goods to the place or condition, must be included while valuing the closing stock of inventory.
It is an admitted fact that the assessee has never valued its closing stock as per , the provisions of section 145A of the Act, though the same has been brought
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 6 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 on statute w.e.f 01.04.1999, It is settled legal principle that the last year's closing stock has to be brought forward as opening stock of current year. The change, if any, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes. Reliance in this respect is placed on the decision of Hon'ble Bombay High Court in the case of Melmould Corporation vs. CIT reported in 202 ITR 789 (Bom), wherein the Hon'ble HC held as under. "Thus, the value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, became the value of the opening stock of the next year. If instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change; and correspondingly the value of the opening stock of that year and so on".
Further reliance is placed on the decision of Hon'ble Madras High Court in the case 'of CIT vs. Carborandum Universal Ltd. reported in 149 ITR 759 (Mad), wherein the Hon'ble HC held as under. "On a due consideration of the matter, we are inclined to agree with the view of the Tribunal, If the assessee is called upon to apply the new method of valuation to the opening stock of the accounting year as well, then in consequence the value of closing stock of the year will also get altered to previous year to the accounting year and that will result in the modification of the assessment for the previous year. It is for this reason the Tribunal has stated that though by adoption of the new method of valuation of the closing stock alone the assesses may appear to get some unintended benefit, in course of time it will get adjusted and the Revenue will not be a loser. Even apart from this reason, if the Revenue's contention that the new method should be adopted for both to opening stock and closing stock even in the first year of the introduction of the new method is accepted then, it will lead to position that the assessee can not at all change the method or the assesses has to revalue the closing stock of the previous year which will lie the opening stock of this year, and such a revaluation on the
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 7 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 new basis as per the assessee is not ordinarily possible, When a new method of valuation of stock is adopted in any particular year the assessee can go along on that basis leaving intact the valuation of the opening stock at the old method has been laid down is series of cases".
After the provisions of, section 145A have been brought on statute, there is no doubt that the assessee is bound to value its closing stock inclusive of such taxes/duty/cess/fee which has been incurred by the assessee for inventory and w.e.f. 01.04.1999, the assessee is not entitled to value the closing stock exclusive of such taxes/duty/cess/fee. Reliance in this respect is placed on the decision of the Hon'ble ITAT in the case of ACIT vs. SP Fabricators (P) Ltd. reported in 10 SOT 652, wherein the Hon'ble ITAT has held as under. "We have carefully considered the rival submissions and have gone through the record. In our view, the contentions of the Revenue have some force. As already explained, the provisions of section s. 145A were introduced by the Finance (No. 2) Act, 1988 with a view to end the litigation which existed prior to that. In order to ensure that the values of the opening stock and closing stock are the correct values an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the legislature proposed to introduce s. 145A right from asst. yr. 1986-87. The aforesaid provision in a way seeks to recognize and make it compulsory to value the stock in an inclusive method as against the prevailing practice of the valuing the same by exclusive method. When the said retrospective amendment was objected very strongly by the taxpayers, the amendment was made prospective in nature and was made applicable from asst. yr. 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall ahvays include the element of tax, duty, cess or fee paid. Therefore in the year when the provisions are implemented for the first time, there is bound, to be an impact in that year, whereas in the subsequent year whatever valuation is put to closing stock will surface as opening stock and thereby a debit to that year's P & L a/c, in other words, the changed method will have neutral tax effect over the years. Only the method of valuation of closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year, the debit to this year's
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 8 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 P&L a/c by means of addition to the opening stock will reduce the taxable income and will only result in not applying the provision* of ,s, 145A of the Act in the year under question. The provision, in our view, as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchase and inventory. It will not have an impact on the closing stock carried forward because, what can be debited to this year's P& L a/c is the closing stock of the earlier year. There can be no exception to the rule that the closing stock of the earlier year will have, to he necessarily the opening stock of this year. The change in the method of valuation of the dosing stock as a result of s. 145A has an overriding effect on s. 145 relating to method of accounting itself. In other words, notwithstanding what is contained in s. 145, the provisions of s. 145A shall prevail': The sum and substance of that intent can only be achieved by making an addition to be value to the closing stock by its element of tax, duty, cess or fee, etc., and not by altering the opening stock. Whenever the assessee changed their method of accounting from one recognized method to another recognized method, there is bound to be tax effect in the year of change. But, over the year it. is tax neutral. On the same analogy, when the legislature has imposed a new system of valuing the closing stock it is bound to have an impact in that year, but becomes neutral in nature in the subsequent year. We, are, therefore, of the view that the CIT(A) was not justified in accepting the claim of the assessee. Accordingly, the order of the CIT(A) on this issue is reversed and that of the AO is restored".
Further reliance is placed on the decision of Hon'ble Mumbai ITAT in the case of Croydon Chemical Works Ltd, Vs. AC1T reported in 11 SOT 295 wherein the Hon'ble Tribunal held as under: - "We have considered the arguments of both the sides, perused the material on record and the orders of lower authorities. We are of the view that as per the provisions of newly introduced s. 145A, inventory has to be valued by including the element of tax, duty, cess or fee etc. There were two alternative methods that were prevalent up to 31st March, 1999 being, one inclusive and the other is exclusive. In the inclusive method, the element of tax, duty, cess or fee was always included as an element of cost. In the exclusive method which was in force up to 31st March, 1999 the element of tax, duty, cess or fees etc., were excluded. With effect from 1st April, 1999, the element of tax, duty, cess or fee should always be treated as a part of the cost and the inclusive method has to be only adopted. It is in this direction that the aforesaid amendment had been made by the Finance (No.2)
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 9 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 Act, 1998 by introducing s. 145A, The closing stock of the earlier year which is accepted by the Department should be taken as the opening stock of the year under consideration and any change as a result of the provisions of s. 145A of the Act is only upon the closing stock. There is no ambiguity in the provisions of S.145A of the Act.
Further the Hon'ble "J” Bench of Mumbai Tribunal in the case of The West Coast paper Mills Ltd. In (ITA Nos. 3187 and 3750/M/2003, dt. 3 April, 2006) has held as under: "In order to ensure that the values of the opening stock and closing stock the correct value, an amendment was made to provide that such values shall be determined only after considering the element of tax, duty, cess or fee paid in relation thereto. In fact, the legislature proposed to introduces Sec. 145A right from the asst. year 1986-87, which seeks to recognize and make in compulsory to value the stock in an inclusive method as against the prevailing practice of the valuing the same by exclusive method. When the said retrospective amendment was objected very strongly by the tax payer, the amendment was made prospectively in nature and was made applicable from the A.Y. 1999-2000. As a result of this amendment, the purchases and sales as well as inventory shall always include the element of tax, duty, cess or fee paid. Therefore, in the year when the provisions are implemented for the first time, there is bound to be an impact in that year, whereas in the subsequent year whatever valuation is put to the closing stock will surface as opening stock and thereby a debit to that year's P & L a/c. In other words, the changed method will have neutral tax effect over the years. Only the method of valuation of the closing stock gets switched over from exclusive method to inclusive method. If the assessee is allowed to adjust the opening stock of the year in question then it would amount to distortion of the value of the closing stock of the earlier year. Unless such addition is made in the earlier year, the debit to this year's P & L a/c by means of addition to the opening stock will reduce the taxable income and will only result in not applying the provisions of s. 145A of the Act in the year in question. The provisions, in our view, as introduced will have only to take into consideration the element of the tax, duty, cess or fee paid in the sales, purchases and inventory. It will not have an impact on the closing stock carried forward because what can be debited to this year's P&L a/c is the closing stock of the earlier year. There can be no exception to the rule that the closing stock of the earlier year will have to be necessarily the opening stock of this year. The change in the method of valuation of the closing stock as a result of s. 145A
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 10 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 has an overriding effect on s. 145 relating to method of accounting itself. In other words, notwithstanding what is contained in s. 145, the provisions of s. 145'A shall prevail. The sum and substance of that intent can only be achieved by making an addition to the value of the closing stock by its element of tax, duty, cess or fee etc,, and not by altering the opening stock. Whenever the assessee changed their method of accounting from one recognized method to another recognized method, there is bound to be tax effect in the year of change. But, over the year it is tax neutral. On the same analogy, when the legislature has imposed a new system of valuing the closing stock is bound to have an impact in that year, but becomes neutral in nature in the subsequent years. We, therefore, do not find any, infirmity in the order of the CIT(A) on this issue and confirm the same."
In view of above factual and legal position, the assessee's contention that the unutilized balances of taxes, viz. with Excise Authorities at Rs. 27250195/-, MOD VAT credits included under loan & advances at Rs. 6701570/- totaling to Rs.33951765/-should not be taken into account while valuing the closing stock cannot be accepted and hence the same is herewith rejected. In view of the express provisions of section 145A of the Act the said unutilized balances of taxes need to be included in the value of closing stock. Since the assessee has not included the said sums of Rs. 33951765/- in value of closing stock so the said sum of Rs. 33951765/ is included in value of closing stock as on 31.03.2010. Accordingly a sum of Rs. 33951765/ being the amount of unutilized balances of taxes, is added back to total income.
Undervaluation of Closing Stock
During the course of assessment proceedings the assessee was requested to (,, submit the details of secured loan obtained during the year and whether any stocks have been pledged / hypothecated with the bank for obtaining such secured loan. The assessee was also requested to submit the copy of statement
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 11 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 of stocks submitted to the Bank. In response to the same the assessee vide its letter dated 09-01-13 has submitted the details of Secured loan obtained and also copy of Stocks statement as oil 31.03.2010 submitted to the Bank. From the perusal of such stocks statement submitted to Axis Bank it was observed that the value of stock reflected therein did not match with the value of Stocks as per Balance Sheet. In view of same vide order sheet entry dated 09-01-13 the assessee was requested to show cause why the difference should not be added to the income of the assessee?
In response to the same the assessee vide its letter dated 12-01-13, the assessee has submitted as under. "Your goodselves have asked the assessee company to provide justification in respect of difference amounting to Rs. 135.88 lacs arising between stock as per stock statement submitted to .bank amounting to Rs. 2,934.17 lacs and stock as shown in Balance sheet of the company, amounting to Rs, 2,798.29 lacs for the year under consideration. In this regards, the assessee company would like to state that it had submitted the stock statement to bank after the end of relevant year on an estimated basis, However, the finalization of, accounts and audits takes place at a later date. During the said process some changes take place in valuation of goods, on the basis of analysis of accounts and suggestions by the auditors. Therefore, there can be some difference in the value reported in stock statement submitted to bank find the value reported in the balance sheet. Furthermore, there is no difference in the quantities in the statement submitted to the bank and the annual account prepared.
Further, in context of the same, reliance is placed on the following decisions:
a. 166 TAX MAN 226 (RAJ.) CIT v/s Udipur Chemicals & Fertilisers (P.) Ltd. The brief facts of which are stated as follows: "The assessee-company, engaged in manufacture of single superphosphate form processing of raw phosphate with sulphuric acid, filed a loss return for the assessment year 1982-83. The Assessing Officer found that the value of closing stock, debts and advances declared by assessee
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 12 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 in the books of account was lesser as compared to value disclosed to the bank in that regard. He held that difference of these two values represented the income of the assessee by way of undervaluation of stock and thus added said difference to the income of the assessee. The Commissioner (Appeals) deleted the addition observing that in absence of any material to the contrary indicting any real discrepancies in the quaintly of stock as reflected in the books of accounts vis a vis the quantity of stock pledged with the bank, the addition was unjustified. The Tribunal affirmed the order of the Commissioner (Appeals). The revenue's application under section 256(1) for reference to the High Court was also rejected.”
It was held that- "The order passed by the Assessing Officer made out that the difference in the closing stock declared in the books of accounts and that declared to the bank urns of the similar nature as that of the earlier year and the Assessing Officer proceeded on the premise that because the assessee was not accepted for the earlier year the same ivas required to be rejected for the relevant assessment year too. Then, the Assessing Officer pointed out that a communication was addressed to the bank to know the exact value of the goods hypothecated and declared by the assessee, and that as the reply to the bank was not received and the case was getting time - barred, the Assessing Officer adopted the valuation as per the record available with him and made addition to the tune of the difference between the two figures. The Commissioner (Appeals) in appeal noted that in absence of any material to the contrary indicating any real discrepancy in the quantity of the stock as reflected in the books of account vis a vis the quantity of stock pledged with the bank, the addition was not justified. The Tribunal again noted that it was not brought out by the Assessing Officer as to whether the alleged discrepancy was only in the value or was in the quantity too, and hence, the contention of the department was not accepted [Para 9] There was no finding on the fundamental aspect of the matter as to if there was any discrepancy in the quantity of the stock as stated to the bank and as stated in books. The Assessing Officer had merely proceeded on the discrepancy in the two figures in valuation of the closing stock, debtors and advances as per the books of account and as declared to the bank and had directly proceeded to make addition of the difference amount. Mere variation in the valuation of assets as declared to the bank and as stated in the books of account- was not conclusive, and the amount of difference itself could not have been taken up for addition
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 13 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 without further requisite inquiry about the true stock position and value of the assets. [Para 10] The Assessing Officer preferred to rely merely upon the fact that for such discrepancy addition was made in the earlier year, and on the basis alone, founded the addition far the year in question. It had been noted by the appellate authorities that such addition made for the earlier assessment year 1981-82 had not been countenanced in appeal, and the Tribunal had. pointed out that under the similar facts and circumstances, reference application moved by the revenue for the assessment year 1981-82 was rejected. Irrespective of that, for the year in question, i.e., assessment year 19S2-83, the Assessing Officer could not have additions merely with reference to the variation in two valuations without coming to a conclusion that there was actual variance in the quantity of stock, and without finding as to when such discrepancy, if at all, occurred. The appellate authorities could not be said to have erred in deleting such addition made without requisite inquiry and without essential finding about actual variation in the stock. [Para 11] Hence, there was no ground to call for a reference in. the instant case. The reference application was to be rejected.
b. ACIT V/s Jyoti Woolen Mills 125 TTJ 810 (DELHI), the gist of which has been mentioned hereinafter- "The assessee was in the business of manufacturing of woolen and shoddy yarn and had taken loan against hypothecation of stock from SBI. During the assessment proceedings, the Assessing Officer found that the assessee had submitted a statement of stock to the bank as on 21-3-2005 showing the value of the stock at Rs. 35,55,589/- whereas stock as per books and balance sheet as on 31-3-2005 was shown at Rs. 23,38,886/- which was submitted with the return of income. By recalculating the other figures of manufacturing - aim - trading account, the Assessing Officer found that the stock had been shown lower by Rs. 17,45,954 and therefore, made addition of the same under section 69. Held that the credit facility was extended by the bank t the assessee against the hypothecation of stock and the valuation of the stock declared to the bank was higher than the actual stock available in the books of account and this inflation of the stock was done by the assessee to obtain higher credit limit from bank. The Assessing Officer had not brought on record any evidence to show that the assessee was in fact in possession of higher quantity of stock.
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 14 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 Therefore, on mere comparison of the stock declared to the bank and the one shown in the books of accounts, addition could not be made of the difference between the two. Thus, the addition was to be deleted.” In view of the above referred case laws, it can be said that no addition can be made on account of some difference in value of stock as per statement submitted to bank as shown in the balance sheet, if there is no deference in quantity of stock.
The assessee’s reply has been considered carefully and found not acceptable. From the reply of the assessee, it can be seen that the assessee has given only general explanation that the difference on account of valuation only. However, the assessee has not given any proof in support of its claim. The assessee has even not given the basis of valuation adopted for Bank and for the books in support of its claim as to why the difference is there is the value of the stock as on 31.03.2010 as per statement given to Bank vis-a-vis the Balance sheet. Further from the reply of the assessee it can be seen that there is value wise difference in the stock as per books and as per statement submitted to the bank. The statement of stock to the Bank has been submitted by the assessee itself and it is not the case that the revenue is relying on the statement given by some third party. Once the assessee has given an undertaking before the Bank authorities then it cannot deny the same with some other authority. Once there is difference between the books stock and the stock statement submitted to the Bank, then it is the assessee's duty to explain such difference with cogent proof. The Hon'ble Madras HC in the case of Coimbatore Spinning & Weaving Co. Ltd. reported in 95ITR 375 has held as under. Regarding submission that the Tribunal should have taken judicial notice of the practice followed by the business houses of declaring larger stocks to the banks purely for the purpose of getting higher loans or overdraft facilities, it was to be held that such practice was shown to exist or that it had been recognized in the commercial circles or by courts. Even assuming that such a practice existed the Tribunal was not expected to take judicial notice of such sub-standard morality on the part of the
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 15 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 assessee so as to enable them to go back on their own sworn statements given to the banks as to the stocks held and hypothecated by them to the banks. In a case where the assessee is confronted with his own sworn statements which show a different state of affairs than the one shown in his own books of account, heavy burden lies on the assessee to prove that the books of account alone give the correct picture, and the sworn statements given to the banks were motivated.
In view of above referred facts and legal position the assessee's submissions in this respect is rejected. The assessee has shown, value of closing stock as on 31,03.210 as per balance sheet at Rs. 2798.29 lacs/- whereas the assessee has shown value of stock as on 31.03.2010 as per statement given to the bank at Rs. 2934.17 lacs. Hence, it held that the assessee has undervalued the stock in its books of accounts by Rs. 135.88 lacs and hence the same is added to the total income.
Against the addition of Rs. 3,39,51,765/- made on account of unutilized MODVAT credit u/s. 145A of the Act and addition of Rs. 1,35,88,000/- made on account of undervaluation of closing stock due to difference in stock as per statement given to Bank and valuation of stock shown in balance sheet, assessee preferred first statutory appeal before the ld. CIT(A) who granted relief to the assessee.
Now Department has come by way of appeal before us.
We have gone through the relevant record and impugned order. Ld. A.O. has discussed first ground at page No. 12 to 13 of Para 6.7 and ld. CIT(A) has discussed issue at page no. 21 of Para 9.2. Ld. CIT(A) stated that as fact of the current case are identical with the facts of earlier years, following the order of his predecessor. Ld. CIT(A) in appellant’s own case addition of Rs. 33951765/-
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 16 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 was deleted. In support of its contention, assessee relied a judgment of ITAT in assessee’s own case in ITA No. 2584/Ahd/2012 for A.Y. 2009-10 dated 11.06.2018. In similar circumstances, in assessee’s own case, ITAT dismissed the appeal f the Department and operative Para of the said judgment is reproduced: 4. Ground no,2 relates to addition of Rs.2,90.28,909/- made by the AO U/S.I45A, which was deleted by the CITY A), The learned AR submitted that the aforesaid ground represents addition on account of unutilized CENVAT/MODVAT credit, which is not permissible in view of the principles laid down by the hon'ble Gujarat High Court in case of CIT vs. Bell Granito Ceremica Ltd., Tax Appeal Nos. 436-437 of 2011. judgment dated 13.06.2012, The learned AR next submitted that the CIT(A) has correctly concluded the issue in favour of the assessee also having regard to the fact that effect of provisions of Section .1.45A would he nil in the case of assessee. We find that the C!T(A) has analyzed the issue objectively in detail as per para 5 of its order. The conclusion drawn by the C1T(A) is in consonance with the decision of the hon'ble Gujarat High Court in case of Bell Grantio (supra). We also take note of the decision of the hon'ble Gujarat High Court in the ease of Pr.CIT vs. Oracle Granito Pvt. Ltd.. Tax Appeal No. 1030 of 2017, order dated 14th February. 2018, which supports the ease of the assessee squarely. Therefore, we decline to interfere with the order of the CITY A) in this regard. Ground no.2 of the Revenue's appeal is therefore dismissed.
Since ld. CIT(A) has followed earlier year in assessee’s own case and in similar circumstances, ITAT has dismissed the appeal of the Department. Therefore, we dismiss this ground of appeal.
Now we come to ground related to deleting the addition of Rs. 1,35,88,000/- made on account of undervaluation of closing due to difference in stock as per
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 17 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 statement given to Bank and valuation of stock shown in the balance sheet. Ld. A.O. had discussed this issue at page 16 to 17 of Para 7.4 and ld. CIT(A) has discussed the issue at page no. 29 of Para 11.5.
In this case, Assessing Officer has observed that appellant has shown value of closing stock at year end at Rs. 2798.29 lakhs whereas value shown in statement given to bank was Rs. 2934.17 lakhs which means that it has under-valued the stock in the books of account by Rs. 135.88 lakhs. Therefore, the Assessing Officer observed that as there is discrepancy in book stock in comparison with stock statement given to bank, differential amount is required to be added to the total income of the assessee.
In appeal, ld. CIT(A) cited an order of CIT vs. N. Swamy 241 ITR 363 has held as under: "Section 143 of the Income-tax Act, 1961 - Assessment - Additions to income -Assessment year 1977-78 - Whether assessee "s income is to be assessed on basis of material which is required to be considered for purpose of assessment and not on basis of statement which assessee may have given to a third party even if it be a bank - Held, yes - Assessing Officer noticed that value of stock in assessee's books of account was lower than value declared to bank - Assessee contended that value as declared to bank was inflated to acquire higher overdraft facility - However, Assessing Officer treated difference between two values as income from undisclosed sources - Whether, where revenue failed to prove that closing stock declared in statement to bank was corroborated by other materials relevant to assessment, Tribunal was justified in deleting addition on account of undisclosed income.”
Ld. CIT(A) deleted the addition.
Before us, ld. A.O. placed a decision of Jurisdictional High Court in the matter of CIT vs. Veerdeep Rollers Pvt. Ltd. reported in 323 ITR 341.
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 18 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 23. In this case, addition was made on account of difference in closing stock furnished before the bank authorities for availing of credit facility as against the same disclosed in the books of account furnished before the Income-tax authorities. It was found that the assessee had submitted bank statement with inflated price of stock, while there was no difference in quantity stock. In this case following find of the Tribunal were upheld by the Hon’ble Gujarat High Court. "We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that the assessee in his paper book has submitted the original application filed by the assessee in the bank to obtain the cash credit facility of Rs. 20 lakhs. The bank has given the cash credit facility of Rs. 15 lakhs. The Assessing Officer has verified the stock statement which was submitted along with the return. Moreover, the Assessing Officer has also worked out the closing stock of emery power and machinery spares as per the return and the value comes to Rs. 14,07,156. We find that the Assessing Officer has verified the value of stock which was given to the bank, wherein the assessee has inflated the value of stock and shown the value at Rs. 21,23.680 which can be verified from page 1 of the assessment order, The assessee has submitted the bank statement with inflated price of the stock, There is no difference in quantity of the stock. The difference is only of inflated price of the stock which was given to the bank. We find that the As Officer in support of his finding has relied on the decision of the hon'ble Madras High Court in the case of Coimbatore Spinning and Weaving Co. Ltd. v. CIT [1974] 95 ITR 375. the decision of the hon'ble Supreme Court in the case of Dhansiram Aganvalla v. CIT [1993] 201 ITR 192 (Gauhati) and concluded that the assessee was unable to discharge the onus to prove that books of account alone give the correct picture and the statement given to the bank was motivated. In the present case at hand, it is not disputed by the Revenue that in order to avail of cash credit facility against hypothecation of stock to the bank, the assessee has submitted the inflated stock and not the actual stock. The inflated stock was hypothetical and not pledged. The bank official had not verified the said statement showing the inflated stock so produced by the assessee or the same was ascertained from the bank. Considering all these aspects of the case, we are of the considered view that the decision of CIT v. Khan and Sirohi Steel Rolling Mills [20061 200 CTR 595 is applicable to the present case, wherein the decision in the case of Coimbatore Spinning and Weaving Co. Ltd, v. CIT [ 1974] 95
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 19 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 ITR 375 has been relied on. In the case of AshokKumar v. ITO [2006] 201 CTR 178, the hon'ble High Court of Jammu and Kashmir has held : 'Addition could not be made on the basis of difference between closing stock declared in the trading account and the stock shown in the statement submitted by the assessee to the bank as the stock position shown to the bank was on estimate basis and inflated value was shown to avail of more credit from bank1. Their Lordships have applied the decision of CIT v. N. Swamy [2000] 241 ITR 363 (Mad). In view of the above, there is no justification for making any addition on the allegation of inflated stock shown to the bank. We may mention here that this Bench had occasion to deal with identical issue in some cases and the same has been resolved hi favour of the assessee. In the case of Deputy CIT v. Patidar Silica (P.) Ltd. in I.T.A. Nos. 2104 and 388/RJT/2004 dated 30-11-2005 ; in the case of ITO v. Sphykar Aluminium Extrusion (P.) Ltd. in I.T.A. No. 626/RJT/2004 dated 26-11-2005, this Bench of the Income-tax Appellate Tribunal has deleted similar addition. The Commissioner of Income- tax (Appeals) has sustained the addition at 10 per cent, of the excess stock of Rs. 80,25,662 (i.e., Rs. 1,42,86,870 the stock as per the bank statement minus Rs. 62,61,202 as shown in the regular books of account. In view of our finding that no addition can be made on this count, the order of the Commissioner of Income-tax (Appeals) confirming the addition cannot be sustained. The order of the Commissioner of Income-tax (Appeals) is, therefore, reversed and the addition of Rs. 9,75,476 made on account of undisclosed investment is deleted." 4. Whether the value of the stock shown in the books of account is genuine or not has been considered by the Tribunal and considering the facts discussed by the Tribunal referred to above, we see no reason to hold that the finding of the Tribunal is perverse.
Respectfully following the jurisdictional High Court, we dismiss this ground of appeal of the Revenue and in our considered opinion, ld. CIT(A) has passed detailed and reasoned order citing CIT vs. N. Swamy 241 ITR 363. Therefore, we are not inclined to interfere at our end.
In the result, this ground of appeal is dismissed.
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 20 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 26. Now we come to ITA No. 2409/Ahd/2015 for A.Y. 2011-12. The department has taken following grounds of appeal:
“Whether the Ld. CIT(A) is right in law and on facts in deleting the addition of Rs. 5,51,04,778/- u/s 145A of the Act being the amount of unutilized balances of taxes included in the closing stock.” 2. “Whether the Ld. CIT(A) is right in law and on facts in deleting the addition of Rs. 32,66,000/- made by the A.O. on account of under-valuation of closing stock.”
Since, we have given relief to the assessee in connecting Appeal No. 1293/Ahd/2014, therefore, following the preceding year, we dismiss this appeal as well.
In the result, appeal filed by the Department is dismissed.
Now we come to ITA No. 564/Ahd/2017 for A.Y. 2013-14. The department has taken following grounds of appeal:
“Whether the Ld. CIT(A) is right in law and on facts in deleting the addition of Rs. 3,77,70,690/- made on account of valuation of closing stock u/s. 145A of the Act.” 2. “Whether the Ld. CIT(A) is right in law and on facts in deleting the addition of Rs. 34,000/- made on account of undervaluation of closing stock.”
In its appeal for assessment year 2013-14 since in the assessment year of 2010- 11 and in the assessment year 2011-12 on similar ground, we have dismissed the appeal of the Revenue. Thus, following the same, we dismiss this appeal of the Revenue as well.
ITA Nos. 1293/Ahd/14, 2409/Ahd/15 21 & ITA No. 564/Ahd/2017 . A.Ys. 2010-11, 2011-12 & 2013-14 31. In the result, all the three appeal filed by the Revenue are dismissed.
Order pronounced in Open Court on 29- 10- 2018
Sd/- Sd/- (PRAMOD KUMAR) (MAHAVIR PRASAD) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad: Dated 29 /10/2018 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