ACIT 1(3), MUMBAI vs. TYTAN ORGANICS P. LTD, MUMBAI

The appeal filed by the revenue and the cross-objection filed by the assessee are directed against the order dated 9.2.2011 passed by the ld. CIT(A)-2, Mumbai and they relate to the assessment year 2007-08.

We heard the parties and perused the record. The facts relating to the first issue are stated in brief. The AO noticed that the assessee has claimed deduction of Rs.11.32 crores relating to purchases and Rs.15.55 lakhs relating to the expenses only in the computation of total income. It was explained that these expenses were pertaining to the year under consideration, but booked in the succeeding year under the head “prior period expenses”. It was submitted that these expenses have not been claimed as deduction in the succeeding year. The assessee submitted that one of its employees had committed a fraud by shifting booking of expenses to the succeeding year in order to show high amount of profit. When these facts came to the light, these expenses were shown as prior period expenses in the succeeding year. Accordingly it was submitted that they have been claimed as deduction in the computation of income, since they pertain to the year under consideration. The AO did not agree with the said explanations of the assessee, since the corresponding facts on the inventory maintained by the assessee were not properly explained. The AO also noticed that the auditors have certified that management had conducted physical verification of inventory. Accordingly, the AO held that claim of purchases without proper explanations about the inventory cannot be allowed. Accordingly he disallowed both the claims referred above. In the appellate proceedings, the ld.CIT(A) allowed both the claims and hence, the revenue has filed this appeal before us.

The AO also noticed that the Employees Contribution to the provident fund and MLWF have been deposited belatedly beyond the CO No.87/Mum/2012 period prescribed in the relevant Acts. Accordingly, the AO disallowed the same under section 36(1)(va) of the Act. The ld. CIT(A) confirmed the same and hence the assessee has filed this cross-objection before us.

With regard to the deduction allowed by the ld.CIT(A), the ld. AR placed strong reliance on the order passed by the ld. CIT(A). However the ld.DR submitted that the assessee could not give proper explanations with regard to stock position relating to the purchase invoices booked in the succeeding year.

We heard the parties on this issue and perused the record. It was submitted that the purchases and expenses referred above have been booked in the succeeding year under the head “Prior Period Items“ and further it was submitted that the same has not been claimed as deduction in the succeeding year. Since these expenses pertained to the year consideration, it was submitted that the assessee has claimed them in the computation of total income. However, as submitted by the ld. DR, we find that the assessee has not offered any explanation with regard to the stock position. If these purchases have not been accounted for in the books of account, physical stock should have been found to be in excess. It is not clear as to how the excess stock was treated in the books of account. In our view, the assessee is also required to show that the corresponding stock has been taken into account in the books and inventory records during the year under consideration itself. Otherwise, the accounts shall give distorted results. Accordingly, we are of the view that the assessee should be given one more opportunity to offer proper explanations with regard to stock position, particularly in view of the fact that the auditor has certified that stock has been verified by the management. Accordingly, we set aside the order of ld. CIT(A) on this issue and restore the same to the CO No.87/Mum/2012 file of AO with a direction to examine the same afresh after affording necessary opportunity of being heard to the assessee. The assessee is also directed to offer proper explanations with regard to the stock position and also with regard to the queries that may be raised by the AO.

In the cross objection, the assessee is aggrieved by the decision of ld. CIT(A) in confirming the disallowance of employees contribution towards the Provident Fund etc. The ld. Counsel submitted that the assessee had paid these amounts before the due date for filing the return of income. Accordingly he submitted that the same is allowable as deduction as per the decision of Hon’ble Bombay High Court rendered in CIT Vs Ghatge Patil Transports Ltd. 368 ITR 749 (Bom). In view of the decision of Hon’ble jurisdictional High Court, we set aside the order of ld. CIT(A) on this issue and restore the same to the file of the AO with a direction to examine the claim of the assessee in the light of the decision of the jurisdictional High Court in Ghatge Patil Transports Ltd.(supra).

In the result, the appeal filed by the revenue and the cross-objection filed by the assessee is treated as allowed for statistical purposes.