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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
Date of hearing 07-03-2018 Date of pronouncement 14-03-2018 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of the CIT(A)-28, Mumbai dated 29-12-2015 and it pertains to AY 2011-12. The revenue has raised the following grounds of appeal:- (i) "On the facts and circumstances of the case and in Law, the Ld. CIT(A) erred in deleting the addition of Rs.2,26,648 on account of closing stock. (ii) "On the facts and circumstances of the case and in Law, the Ld. CIT(A) erred in deleting the addition of Rs.32,96,881/- made by the AO on account of unutilized credit reflecting distortion of Sales."
2. The brief facts of the case are that the assessee is an individual and 2 ITA 1142/Mum/2015 proprietor of M/s Arun Enterprises engaged in the business of wholesaler and importer of chemicals and drugs, filed his return of income for AY 2011-12 on 23-09-2012 declaring total income of Rs.40,98,030. The case has been selected for scrutiny and the assessment was completed u/s 143(3) on 17-02-2014 by determining the total income at Rs.77,78,569 interalia making addition towards valuation of closing stock of Rs.2,26,648, distortion in sales of Rs.32,96,881 and disallowance of certain expenses of Rs.1,57,005.
Aggrieved by the assessment order, assessee preferred appeal before CIT(A).
Before the CIT(A), assessee has filed various details to justify valuation of closing stock to argue that he had followed inclusion method for valuation of closing stock which includes excise duty paid.
Therefore, there is no reason for the AO to make addition towards estimated difference in closing stock valuation on the ground that the assessee has not clarified whether he has followed inclusion method or exclusion method for valuation of closing stock. The assessee also filed re-conciliation to explain the valuation in closing stock as well as addition made by the AO towards shortage of sales to argue that he had accounted sales and purchases net of VAT and the unutilized portion of VAT has been treated as current assets, therefore, the AO was incorrect in treating unutilized VAT as suppressed sales. The assessee also filed
3 ITA 1142/Mum/2015 detailed explanations for adhoc disallowance of expenses to argue that the AO was erred in disallowing expenses by ignoring the fact that the expenses are wholly and exclusively incurred for the purposes of business and they are neither capital expenditure nor personal expenses. The CIT(A), after considering relevant submissions of the assessee allowed appeal filed by the assessee wherein he has deleted addition made by the AO towards adhoc disallowance of expenses, addition towards difference in closing stock valuation and addition towards suppression of sales on account of unutilized credit of MVAT.
Aggrieved by the order of CIT(A), revenue is in appeal before us.
The first issue that came up for our consideration is addition made by the AO towards difference in valuation of closing stock. The AO made addition of Rs.2,26,648 on the ground that the assessee has failed to explain valuation of closing stock whether he had followed inclusion method or exclusion method to include indirect taxes to arrive at value of closing stock, therefore, made estimation on the basis of stock turnover ratio at 2.04% on total indirect taxes and added back to the closing stock for Rs.2,26,648. It is the contention of the assessee that he had already included indirect taxes for valuation of closing stock, and further addition on estimate basis amounts to double addition, therefore, there is no reason for the AO to make adhoc estimation without pointing out that the closing stock value arrived at is not inclusive of indirect taxes.
4 ITA 1142/Mum/2015 5. Having heard both the sides and considered material available on record, we find merits in the arguments of the assessee for the reason that the assessee has filed detailed reconciliation of valuation of closing stock before the Ld. CIT(A) which has been extracted by the CIT(A) in his order wherein it was explained that closing stock valuation is made including indirect taxes. Therefore, we are of the view that the AO was incorrect in making adhoc estimation of indirect taxes component and added to the closing stock valuation. The Ld.CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
The next issue that came up for our consideration is addition made by the AO towards shortage in sales on account of unutilized credit for MVAT on the ground that the assessee has failed to explain whether he had accounted purchases and sales inclusive of VAT or maintains separate account for VAT. According to the AO, as per the VAT audit report filed, there is a difference in gross turnover shown in P&L Account and gross turnover reported in VAT report and accordingly opined that the assessee has failed to explain unutilised credit under sales-tax; this would lead to inference that assessee is maintaining sales-tax account separately. Therefore, made addition towards unutilized credit of VAT
5 ITA 1142/Mum/2015 as shortage of sales. It is the contention of the assessee that it was accounting purchases and sales net of VAT and transferred unutilized VAT credit to the current assets, therefore, the AO was incorrect in making addition towards unutilized VAT as shortage of sales. The assessee also filed detailed re-conciliation explaining the turnover reported in VAT audit report and turnover as per P&L Account which has been enclosed in paper book page 72.
Having heard both the sides and considered material on record, we find merit in the arguments of the assessee for the reason that the assessee has filed detailed re-conciliation statement explaining the sales reported in VAT audit report and sales as per P&L Account. As per re- conciliation filed by the assessee, the assessee has accounted sales excluding VAT collected and transferred unutilized VAT credit to the current asset. In the circumstances, the unutilized sales-tax credit cannot be assessed as suppression of sales. The AO, without appreciating the fact has made addition towards unutilized VAT credit by following the decision of Hon’ble Supreme Court in the case of British Paints 188 ITR 44 (SC). The Ld.CIT(A), after considering relevant facts has rightly deleted addition made by the AO towards suppression of sales on account of unutilized VAT credit. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold findings of the CIT(A) and dismiss appeal filed by the revenue.
6 ITA 1142/Mum/2015 8. In the result, appeal filed by the revenue is dismissed.
Order pronounced in the open court on 14th March, 2018.