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Facts
The assessee, engaged in manufacturing de-oiled bran oil, filed a return of income for AY 2017-18 showing a loss. The AO completed the assessment at a higher income after making additions. These additions included a disallowance of 50% of the decrease in closing stock of Rice Bran Oil and DORB, and a disallowance of 25% of local freight charges.
Held
The Tribunal held that the AO's method of comparing opening and closing stock quantities to disallow a portion of the stock valuation was legally unsound and not based on any accounting principles, thus deleting the addition. Regarding freight charges, the Tribunal found that while most payments were by cheque, a significant portion was in cash, presenting a risk of inflated expenditure. Therefore, it directed that 10% of the local freight charges be sustained as an addition.
Key Issues
1. Whether the disallowance on account of decrease in the value of closing stock is justified. 2. Whether the disallowance of 25% of local freight charges is justified.
Sections Cited
Sec. 145, Sec. 145A, Sec. 143(3), Sec. 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of NFAC for the assessment year 2017-18 dated 12.9.2023 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”).
Brief Facts of the case and brief background of the case is that the assessee e-filed his return of income on 30.10.2017 for A.Y 2017- 18 declaring total income Rs.(-) 14,468/-. The case was selected for scrutiny. Statutory notices were issued by the ld. AO time to time. The assessee is engaged in manufacturing of de-oiled bran oil. The AO completed the assessment u/s.143(3), dated:03.12.2019 at the assessed income of Rs.1,20,46,130/- after making the following additions:
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 2 of 7 (i) On verification of P&L a/c of the assessee, it was seen by the AO that the company had debited Rs 1,21,44,216/- under head 'changes in inventories' which resulted in reduction of profit to the tune of Rs 1,21,44,216/-. The AO asked for details in this regard. The assessee has claimed that it was due to decrease in the value of inventory. In the closing inventory of Rice Bran Oil there has decrease in tons to the tune of 89.228 and in the DORB the decrease in tons of 596. The assessee failed to furnish documentary evidence to substantiate the claim. Therefore, the AO disallowed 50% of decrease in tons of Rice Brans Oil and DORB in finished goods. Accordingly, the difference in valuation of finished goods amounting to Rs 64,82,386/- was disallowed by the, AO and brought to tax.
(ii) The assessee had claimed Bad Debt of Rs 82,98,534/-. On verification, the AO found that assessee has intentionally claimed bad debts to reduce profit though the debtor had not become bad as claimed by the assessee. Therefore, the AO disallowed the claim of bad debt of Rs 46,91 ,395/- brought the same to tax.
(iii) The assessee had debited an amount of Rs 75,61,772/- under the head freight charges. During assessment proceedings, the assessee contended that out of freight charges of Rs 64,03,693/-, Rs 26,26,008/-paid towards local freight charges. In absence of supporting evidences, AO disallowed 25% of the expenses amounting to Rs 6,56,502/- (25% of Rs 26,26,008/-) and brought to tax. 3. On appeal, ld. CIT(A) has confirmed the addition with regard to 50% adhoc disallowance of alleged decrease in the value of closing stock amounting to Rs.64,82,386/- and also adhoc disallowance of 25% expenses amounting to Rs.6,56,502/-. Against this assessee is in appeal before us. 4. The first ground for our consideration is with regard to 50% adhoc disallowance of alleged decrease in the value of closing stock amounting to Rs.64,82,386/-.
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 3 of 7
We have heard the rival submissions and perused the materials available on record. Section 145 of the Act reads as follows: Method of accounting: Section 145: (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time [Income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2)], the Assessing Officer may make an assessment in the manner provided in section 144.]
4.1 Section 145A of the Act reads as follows: Method of accounting in certain cases. Section 145A For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,--- (i) the valuation of inventory shall be made at lower of actual cost or net realizable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognized stock exchange, or listed but not quoted on a recognized stock exchange with regularity from time to time, shall be valued at actual cost initially recognized in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realizable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 4 of 7 section 145 after taking into account the extent guidelines issued by the Reserve Bank of India in this regard;
Provided further that the comparison of actual cost and net realizable value of securities shall be made category-wise.
Explanation 1 – 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 to such payment.
Explanation 2 – For the purposes of this section—
(a) “public financial institution” shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013), (b) “recognized stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (c) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (via) of sub-section (1) of section 36.”
4.2 As seen from the above provisions of the section, the cost of value of closing stock to be valued at cost price or market price, whichever is lower. In the present case, assessee has pleaded before us that assessee’s stock position as on 31.3.2015 & 31.3.2016 is as follows: Particulars 31.03.2015 31.03.2016 Particulars 31.03.2015 31.03.2016 Qty Qty Qty Qty Opening Sales stock RB Oil 237.34 261.06 RB Oil 1,700.58 1,616.24 DORB 1,171.83 2,036.63 DORB 6,959.74 7,973.46 Closing Stock Purchased RB Oil 261.06 171.83 during the year RB Oil 163.53 36.00 DORB 2,036.63 1,440.91 DORB 3.72 -- Produce during the year RB Oil 1,560.77 1,491.01 DORB 7,820.82 7,377.74 Total 10,958.01 11,202.44 Total 10,958.01 11,202.44
4.3 The ld. AO herein comparing the opening stock of Rice bran oil with closing stock of Rice bran oil as on 31.3.2016 and worked out
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 5 of 7 the same at 261.058 (-) 171.83 = 89.228) and brought the value of this stock at 50% as undisclosed income of the assessee worked out at Rs.2,63,226/- and similarly, he compared the difference in opening stock in the D Oiled Rice Bran Oil with that of closing stock i.e. 2036.630 (-) 1440.910 i.e. equivalent to 596 tonnes valued at 50% of the same at Rs.38,50,160/- totalling of Rs.64,82,386/-. For clarity, the working of the ld. AO is reproduced herein below: Finished goods manufactured and sold:
S.No. Particulars Qty. in Tons 1. Rice Bran Oil Op. Stock 261.058 2. Manufactured 1,491.012 3. Purchase 36.000 Total 1788.070 Sales 1616.240 Closing Stock 171.830 Decrease tons 89.228
(a) DORB Qty. manufactured sold and stock: S.No. Particulars Qty. in Tons 1. DORB – Op. Stock 2,036,630 2. Manufactured 7,377,742 3. Total 9,414,372 Sale 7,973.462 Closing Stock 1,440.910 Decrease tons 596.000
(b) The valuation remaining 50%: Particulars Rate per ton Qty in tons Amount (Rs.) (50%) Rice Bran Oil 59,000/- 44.614 26,32,226 DORB Oil 12,920/- 298.000 38,50,160 Total 64,82,386
4.4 In our opinion, the above computation made by ld. AO by comparing the quantity of opening stock with the closing stock of respective item is having no legal sanction and not approved by any principles of law or accounting method to be adopted by the assessee.
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 6 of 7 There cannot be any law to hold that the opening stock and closing stock to be same so as to deduce true profit or loss of the assessee’s concern. The closing stock of the assessee at the end of year depends upon the opening stock, purchase/production, sales/consumption, etc. and the quantity of opening stock and closing stock need not be same at all times. It is always variable component depending upon the above facts. Being so, the exercise done by the ld. AO as well as the ld. CIT(A) is having no legs to stand, accordingly, the addition is deleted. 5. Next ground in this appeal is with regard to adhoc addition of 25% towards freight charges at Rs.6,56,202/-. The assessee has claimed an expenditure at Rs.75,61,772/- under the head “freight charges”. Out of this, an amount of Rs.26,26,008/- computed towards local freight charges. The ld. AO has disallowed 25% of the same worked out at Rs.6,56,508/- on reason of self-vouchers. On appeal the same has been confirmed by the ld. CIT(A). Against this assessee is in appeal before us. 6. The ld. A.R. has submitted that out of amount of Rs.26,26,008/-, major portion has been paid by way of cheque and balance only by way of cash which is supported by cash vouchers. There cannot be any disallowance on this count. 7. The ld. D.R. has submitted that the assessee has not placed any evidence to support that payment has been evidenced by proper vouchers. 8. We have heard the rival submissions and perused the materials available on record. In our opinion, most of the payment has been made by way of cash and there is every chance of inflating expenditure on this count. Accordingly, in the interest of justice, we direct the ld. AO to sustain the addition to the tune of 10% of Rs.26,26,008/-, which is worked out at Rs.2,62,600/- only. The assessee will get partial relief on this issue.
ITA No.879/Bang/2023 M/s. Parimala Agro Foods & Feeds (P) Ltd., Shivamogga Page 7 of 7
In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 16th Jan, 2024
Sd/- Sd/- (George George K.) (Chandra Poojari) Vice President Accountant Member
Bangalore, Dated 16th Jan, 2024. VG/SPS
Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order
Asst. Registrar, ITAT, Bangalore.