ITO, WARD-3(2)(2), SURAT vs. SHRI PRAVINBHAI MANUBHAI PATEL, SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER ITA No. 171/Srt/2020 (Assessment Year: 2010-11) (Hearing in Physical Court) I.T.O., Shri Pravinbhai Manubhai Patel, Ward 3(2)(2), 311, Mohandeep Society, behind Vs. Surat. Haridarshan Society, Ved Road, Surat. PAN No. AIIPP 4526 E Appellant/ assessee Respondent/ revenue

Department represented by Shri Anurag Dubey, Sr. DR Assessee represented by Shri Sapnesh Sheth, CA Date of hearing 21/07/2022 Date of pronouncement 29/07/2022 Order under section 254(1) of Income Tax Act PER: PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by the revenue is directed against the order of learned Commissioner of Income Tax (Appeals)-3, Surat (in short, the ld. CIT(A) dated 13/03/2020 for the Assessment year 2010-11. The revenue has raised following grounds of appeal: “1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in allowing the appeal of the assessee and deleting the addition of Rs. 45,15,000/- made by the AO on account of assessee’s failure to show the “gitty’ expenses in Closing Stock or WIP, as the material purchased from M/s Charbhuja Cursing Plant, Udaipur on 31/02/2010, were in transit from Udaipur, without considering the fact that the assessee either during reassessment proceedings or appellate proceedings, has failed to establish that the seller used to supply materials vide challans on different dates, but made invoices on the last date of the month?

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel 2. Whether on the facts and in the circumstances of the case and in law, the ld CIT(A) was justified in accepting the submissions of the assessee that as the materials purchased from the supplier from Udaipur was sold to M/s GV India Pvt. Ltd., the same cannot be shown as closing stock, inspite of the fact that the assessee’s above contention was without any corroborative evidences to prove the same? 3. On the basis of the facts and circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer. It is therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing officer may be restored. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.” 2. Brief facts of the case are that the assessee is the proprietor of ‘Om Construction’, engaged in Civil Construction and job work filed his return of income for the Assessment Year (AY) 2010-11 on 25/09/2010 declaring income of Rs. 4,75,270/-. The case was selected for scrutiny and assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short, the Act) on 23/01/2013 by making certain additions/disallowances on account of expenses, diesel expenses and some other expenses by treating personal in nature and addition on account of household expenses thereby assessing total income of Rs. 6,52,690/-. Subsequently, the case of assessee was reopened by the Assessing officer on 28/07/2015. Notice under Section 148 of the Act was served upon the assessee. The case of assessee was reopened by the Assessing officer by 2

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

taking a view that on perusal of profit and loss account, it was noted that the assessee has shown closing stock at Rs. 2,56,332/- and the purchase expenses on gong sale (OGS) of Rs.71,07,262/- which included in the purchase of gitty amounting to Rs. 45,15,000/- from M/s Charbhuja Crushing Plant, Udaipur. The ledger of purchases revealed that the transaction was made on 31/3/2010 which was also confirmed by M/s Charbhuja Crushing Plant, Udaipur in response to notice under Section 133(6) of the Act. All the purchases were made on 31/3/2010, the assessee should have shown the same as closing stock or work in progress as the goods were in transit from Udaipur which was not done by the assessee. So on the basis of such discrepancies, the Assessing Officer made his believe that income to the tune of Rs. 45,15,000/- has escaped assessment thereby after recording reasons reopened the assessment. Notice under section dated 28.07.2015 was served on the assessee. The Assessing officer has not recorded notice under Section 148 was responded or not. The Assessing Officer straightway recorded that the Chartered Accountant/Authorised Representative of the assessee attended and submitted details. The Assessing Officer has not discussed/mentioned the details furnished by the assessee and recorded the basis of reopening and held that the assessee

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

failed to establish the fact that why the goods in transit was not shown as closing stock or work in progress. As per the Accounting standard and mercantile system of accounting, when purchases were in transit, the same cannot be claimed as expenditure, accordingly, the claim of expenditure of Rs. 45,15,000/- was disallowed and added to the income of assessee. 3. On appeal before the ld. CIT(A), the assesse challenged the validity of reopening as well as addition/disallowance on merit. On the merit of addition, the assessee submitted that the assessee was working as a sub- contractor of GHV India Private Limited. GHV India Private Limited was awarded the contract from Airport Authority of India for development (construction) of Airport at Udaipur. GHV India Private limited had given sub contract to the assessee to carry out construction work at site and to furnish bills and challans to GHV India Private Limited. The assessee as per contract executed civil work at Udaipur and submitted bills and challans to GHV Private Limited, who in turn submitted to Airport Authority and thereafter payment is released to GHV India Private Limited and thereafter, GHV India Private Limited released/ reimbursed to assessee. In the month of March, 2010, the assessee purchased gitty from Charbhuja Crushing Plant, Udaipur which was supplied through various challans on different days in

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

the month of March, 2010. The bills were raised separately for each challan on last day/single day on 31/3/2010 by supplier. Thus, it was not a case that entire purchases were made only on 31/3/2010. Material was received on various days in the month of March, 2020 and only bill was raised on the last day. The material was actually used and consumed in the construction site at Udaipur, so it was not shown in closing stock. Actually, the material was used before 31/3/2010, the assessee debited the amount in the account of GHV India Private Limited on 31/3/2010 by Rs. 55,72,112/- and accordingly it is included in the figures of sales. Accordingly, the assessee stated that there is no question of showing closing stock on the ground that the material was in transit. If the same is included in the closing stock, then the corresponding amount will have to be reduced from the sales as the same is already included in the sales figure shown in profit and loss account. 4. The assessee on the validity of reopening stated that in his case, the assessment was initially completed under Section 143(3) on 23/1/2013. There was no new information with the Assessing officer which necessitates reopening of completed assessment. The information relating to purchases of gitty from Udaipur as referred in the reopening of assessment, was very well available in the record of original assessment. Thus, it is fact that it was

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considered by the Assessing Officer in the original assessment proceedings. In fact, the Assessing Officer made enquiry from Charbhuja Crushing plant, Udaipur who filed confirmation which was on record. These facts are apparent on perusal of para 1 of reassessment order itself. Thus, the reopening of the assessment is clearly tantamount to change of opinion and the same is not permissible in absence of new information on record and no notice under Section 148 can be issued. To support such submission, the assessee also relied on certain case laws as recorded by ld CIT(A) in para-4 of his order. 5. The ld. CIT(A) after considering the submission of the assessee, noted that during reassessment the Assessing officer recorded that the assessee purchased gitty of Rs. 45,15,000/- on 31/3/2010 from Charbhuja Crushing plant, Udaipur and was included in the purchase expenses. The gitty expenses should have been included in the closing stock or work in progress as goods were in transit from Udaipur and that the assessee has not recorded entry as per mercantile system of accounting and that the assessee failed to establish why the objection in transit were not shown in closing stock or work in progress. The ld. CIT(A) observed that during the reassessment, the assessee filed his reply/letter dated 14/3/2016 wherein it

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

was explained that Charbhuja Crushing plant, Udaipur supplied the material (gitty) through challans on different dates but invoices were raised on last date of month and it was explained that due to that reason, the material produced from party were shown in the ledger account on 31/3/2010. It was also explained that the assessee raised bill for the said material on GHV India Private Limited and the same was included in the sales figure. And it cannot be shown as closing stock. The ld. CIT(A) further noted that the Assessing Officer failed to give any reason to reject the submission of assessee rather recoded that the assessee failed to establish as to why goods in transit were not shown in closing stock or work in progress. The ld. CIT(A) further noted that when the assessee explained that the material was supplied through different challans on different dates and supplier raised bill on the last date of month, the Assessing Officer ought to have made relevant enquiry from the supplier. The observation of Assessing Officer that transaction taken place as on 31/3/2010 is confirmed by Charbhuja Crushing Plant is not valid as the supplier has already confirmed in compliance of notice under Section 133(6) of the Act. Further the enquiry was made in the original assessment and no addition was made in the closing stock of the assessee. However, if the Assessing officer is of the

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

opinion that the purchases as per separate bills issued on 31/3/2010 were not consumed but represent the stock in transit, in that case, it was imperative on his part to cite cogent evidence in reassessment to prove that the material was not received earlier but retained in transit. There is no iota of evidence that the material was in transit. The ld. CIT(A) further noted that the stand of assessee that he included the cost of material in sales is correct as it is evident in the ledger account of GHV India Private Limited and the sale consideration income of assessee took the amount to the extent of Rs. 55,77,112 + Rs. 15,72,184 = Rs. 71,44,296/-, is included in the sale construction income. The assessee is a contractor, the material which was used in the contract work has been correspondingly billed and consequently stand included in sales. If the same is again added as closing stock in that case, the value of sales will have to reduced by corresponding figure and the same does not have any tax effect. The ld. CIT(A) further held that if the addition amount is included in the value of closing stock in that case corresponding deduction is allowable to assessee in subsequent year by increasing of opening balance of stock. On the basis of aforesaid observation, the ld. CIT(A) held that explanation of assessee that supplier raised separate bills on account of supplies made on different dates through

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

different challans appears to be quite legible. Otherwise, the supplier would have raised only a single bill if the item is supplied on a particular day. 6. The ld. CIT(A) also examined the case on other angle and held that, if the impugned amount is considered as closing stock in that case, the profit of assessee will go up to Rs. 50,88,594/- which is around 20% of sales, which is not feasible considering the fact that work was started only in the month of January, 2010. Thus, the ld. CIT(A) deleted the entire addition being not sustainable. 7. On the issue of validity of reopening, the ld. CIT(A) held that as the addition has been deleted, thus the adjudication of validity of issuing of notice under Section 148 became academic. Aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before this Tribunal. 8. We have heard the submissions of learned Senior Departmental Representative of the Revenue (ld. Sr. DR) and the learned authorised representative (ld. AR) of the assessee and have also perused the orders of the lower authorities carefully. The ld. Sr. DR for the revenue submits that the assessee has shown purchases of material from Udaipur on the last day of financial year. It is not possible to transport the goods from Udaipur. The assessee is following mercantile system of accounting, the assessee should

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have shown the cost of material in its closing stock or in work in progress. The ld. Sr. DR on his submission supported the order of Assessing Officer. 9. On the other hand, the ld. AR of the assessee submits that before the Assessing Officer, the assessee has filed reply on 14/3/2016. The assessee in its reply explained that GHV India Private Limited was awarded a contract for development/construction of Airport at Udaipur. GHV India Private Ltd. sublet/assigned /sub contracted work to the assessee. The assessee purchased certain material locally including gitty from Charbhuja Crushing Plant, Udaipur. The gitty/material was transported locally to the site of Airport and was consumed therein. The assessee also explained that the material was supplied by challan on different dates, however, the invoices were raised on the last day of month. The assessee furnished/deposited all original challans in the office of GHV India Private Limited who in turn submitted those original challans to the Airport Authority for clearance of bills. The ld. AR submits that there is no dispute about the purchase of material as the Assessing Officer has not disputed the quantum and purchase of material. The only objection of Assessing Officer was that the material purchased was in transit. The ld. AR of assessee further invited attention on the audit objection which was allegedly received by the

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

Assessing Officer, which was never disclosed to the assessee and for the first time placed on record before the Tribunal, wherein the audit party raised objection that the material was purchased from “Jaipur only on 31.03.101 through various invoices and was to be despatched from Jaipur and delivered at Surat”. Such observation/objection of audit report is absolutely baseless, unfounded and beyond imagination. In fact, the material was purchased from Udaipur and was consumed in the construction work at Udaipur itself. Since the office of assessee situated in Surat, the audit party presumed that the goods to be transported to Surat. The ld. AR submits that the Assessing Officer without appreciating the fact made the addition in mechanical way without refereeing the contents of reply filed by the assessee. The ld. CIT(A) appreciated the fact in proper perspective and deleted the addition. The ld. AR submits that he supports the order of ld. CIT(A) and the appeal of the revenue is liable to be dismissed. 10. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the Assessing officer made addition by just taking a view that the purchases were made on 31/3/2010 and the goods were in transit from Udaipur, the assessee should have shown the same in closing stock or work in progress and that

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the assessee failed to establish why goods in transit were not shown as closing stock or work in progress. We find that the assessee in its reply to the Assessing Officer filed on 14/3/2016, duly acknowledged by the office of ITA Ward 3(2)(2), Surat explaining that the assessee is sub-contractor with GHV India Private Limited. The Assessing officer instead of considering the contents of reply of assessee straightway held that the assessee failed to establish whey the goods in transit was not shown in work in progress or closing stock. We find that before the ld. CIT(A), the assessee reiterated the similar submission as has already been submitted before the Assessing Officer. The ld. CIT(A) after considering the submissions of assessee held that the assessee raised bill for the said material on GHV India Private Limited and the same was included in the sales figure. It cannot be shown as closing stock. The ld. CIT(A) further held that the Assessing Officer failed to give any reason to reject the submission of assessee rather recorded that the assessee failed to establish as to why goods in transit were not shown in closing stock or work in progress. The ld. CIT(A) also held that when the assessee explained that the material was supplied through different challans on different days and supplier raised bill on the last date of month, the Assessing Officer ought to have made relevant enquiry from the supplier.

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

The observation of Assessing Officer that transaction taken place as on 31/3/2010 is confirmed by Charbhuja Crushing Plant, Udaipur is not valid as the supplier has already confirmed in compliance of notice under Section 133(6) of the Act. Further the enquiry was made in the original assessment and no addition was made in the closing stock of the assessee. However, the Assessing officer is of the opinion that the purchases as per separate bills issued on 31/3/2010 were not consumed but represent the stock in transit, in that case, it was imperative on his part to cite cogent evidence in reassessment to prove that the material was not received earlier but retained in transit. It was held that there is no iota of evidence that the material was in transit. The ld. CIT(A) further held that the stand of assessee that he included the cost of material in sales is correct as it is evident in the ledger account of GHV India Private Limited and the sale consideration income of assessee took the amount to the extent of Rs. 71,44,296/- is included in the sale construction income. 11. The ld CIT(A) appreciated the facts that the assessee is a contractor, the material which was used in the contract work and has been correspondingly billed and consequently stand included in sales. If the same is again added as closing stock in that case, the value of sales will have reduced by

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

corresponding figure and the same does not have any tax effect. The ld. CIT(A) further held that if the addition amount is included in the value of closing stock in that case corresponding deduction is allowable to assessee in subsequent year by increasing of opening balance of stock. On the basis of aforesaid observation, the ld. CIT(A) held that explanation of assessee that supplier raised separate bills on account of supplies made on different dates through different challans appears to be quite legible, otherwise, the supplier would have raised only a single bill if the item is supplied on a particular day. 12. We find that the ld. CIT(A) also examined the facts of the case on other angle as well and held that, if the impugned amount is considered as closing stock in that case, the profit of assessee will go up to Rs. 50,88,594/- which is around 20% of sales, which is not feasible considering the fact that work was started only in the month of January, 2010. 13. In view of the aforesaid factual discussions, and the observation of ld. CIT(A), we find that the Assessing Officer passed the order in haste and it seems that the addition is made only for the reasons that some audit objection was raised. We also perused the alleged audit objection and find that such objection is raised without application of mind. The assumption of

ITA No.171/Srt/2020 ITO Vs Sh. Pravinbhai Manubhai Patel

audit objection might be based on the idea that the office of the assessee is situated in Surat, so the material could be in transit to Surat. Though, the facts on the records were otherwise. Thus, we affirm the order of ld. CIT(A) with this additional observation. 14. In the result, this appeal of the revenue is dismissed. Order pronounced in the open court on 29July, 2022 at the time of hearing of this appeal.

Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat, Dated: 29/07/2022 *Ranjan Copy to: 1. Assessee – 2. Revenue - 3. CIT(A) 4. CIT 5. DR 6. Guard File By order // True Copy // Sr. Private Secretary, ITAT, Surat