Patel Paragbhai Ramanlal, Ahmedabad vs Assessee

आदे श/ORDER I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 2 ACIT vs. Parag Ramanlal Patel PER : ANIL CHATURVEDI, ACCOUNTANT MEMBER:-

The appeal filed by the Revenue and CO by the assessee are against the order of CIT(A)-XVI, Ahmedabad dated 10-01-2011 for A.Y. 2007-08.

2. The facts as culled out from the material on record are as under.

3. The assessee is an individual stated to be engaged in the business of manufacturing of electrical stamping. Assessee filed his return of income for A.Y. 2007-08 on 15-10-2007 declaring total income, at Rs. 11,5,510/-. The case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dater 24-12-2009 and the total income was determined at Rs. 22,08,475/-. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A) who vide order dated 11/01/2011 granted partial relief to the assessee. Aggrieved by the aforesaid order of Ld. CIT(A), Revenue is now in appeal before us and assessee has also filed a CO. The grounds raised by Revenue reads as under:-

"1. The Ld. CIT(A) erred in law and on facts in deleting the additions of excise duty to closing stock to the extent it has been paid before the due date of filing return, out of total addition of Rs. 5,62,693/-.

2. The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 3,61,872/- made on account of disallowance of excess interest paid u/s. 40A(2)(b) of the Act.

3. The Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 1,41,200/- made on account of disallowance u/s. 40(a)(ia) of the Act."

I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 3 ACIT vs. Parag Ramanlal Patel On the other hand, the grounds raised by the assessee in the CO reads as under:-

"1. The Ld. CIT(A) has erred in retaining the addition in part for the undervaluation of closing stock made by the Assessing Officer after deleting the amount of excise duty pertaining to the closing stock which has been paid before the due date of filing of return.

2. The Ld. CIT(A) has erred in confirming the addition of Rs. 37,200/- made by the Assessing Officer for the alleged cash credits (unsecured loans) u/s. 68 of the Income Tax Act, 1961 being an amounts of Rs. 18650/- received form Vyas Upendrakumar Somershwar and Rs. 18,550/- from Vyas Mehul Upendrakumar."

We first take up Revenue's appeal

4. First ground is with respect to deletion of addition of excise duty to closing stock.

5. During the course of assessment proceedings, AO noticed that assessee has valued closing stock after excluding Excise and VAT. He also noticed that excise receivable was Rs. 1,13,440/- and excise credit receivable was Rs. 4,49,253/-. AO was of the view that the non-inclusive method adopted by the assessee for valuation of closing stock has resulted into understatement of closing stock and thereby the correct profit. He was further of the view that provisions of section 145A of the Act requires that the tax/debts/cess/fees related to stock needs to be included in the value of closing stock. He accordingly made addition for Rs. 5,62,693/- to the value of closing stock. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A) who deleted the addition by holding as under:-

"2.3.1 I have considered the submission made by the appellant and observation of the AO. The issue of addition of taxes to the closing stock has been fully settled. As stated by the AO in view of the I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 4 ACIT vs. Parag Ramanlal Patel decision of honorable ITAT Mumbai in the case of Croydon Chemical Works Ltd. 11 SOT 295, the decision of honorable Bombay High Court in the case of Melmould Corporation 202 ITR 789, the decision of Madras High Court in the case of Carborandurn Universal Ltd 149 ITR 759, SP Fabricators Private Ltd. 10 SOT 652 and the West Coast Paper Mills Ltd as per the provisions of section 145A the assesses is required to add excise duty, tax, cess etc. in the raw material, in goods in process, and in finished goods. If the assesses is following exclusive method of accounting, then in the tax audit report, it is required to give an adjustment sheet and all these taxes are required to be added and the deviation if any has to be added in the computation of income to the offer for tax. The assessee has admitted that it has never followed the provisions of section 145A. It is stated that the assessee has no option but to follow the provisions of section 145 A because this provision is there on the statute book. As per the provisions of Section 145A the appellant is required to include the excise duty in the closing stock. Consequent to this the assessee can debit equal amount of excise duty on the expenditure side but at that moment section 43B comes into play. Under Section 43B the same would be allowed only if the appellant pays this duty on or before the due date of filing of return. The Hon'ble ITAT Mumbai in the case of West Coast Paper Mills Ltd, [102 ITD 19] has stated as under:-

.......................................................................................... .........................................................................................

2.3.3 From the above, it is clear that even if the assessee follows exclusive method of accounting, still it has to give effect to the adjustments as per Section 145A. As stated above, the appellant is required to add the taxes, duties, etc. to both opening and closing stock as well as in the purchases and sales. However, in the first year the opening stock cannot be changed from the closing stock of the earlier year as per the basic accounting principle and as discussed by the Hon'ble ITAT in the case of West Cost Paper Mills Ltd. (Supra). This principle has been upheld by the Hon'ble ITAT, Ahmedabad also in the case of J.K. Paper Ltd. (supra)

2.3.4 In view of the above, it is clear that the requirement of Section 145A is that the assessee must include tax duties, cess etc. for valuing the closing stock. The assessee can follow the exclusive method for the book purposes but for the purpose of tax audit report and disallowance u/s. 43B it is necessary that the assessee must show the effect of Section 145A by following the inclusive method I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 5 ACIT vs. Parag Ramanlal Patel i.e. by including all tax, duties, cess etc. in the closing stock. These taxes, duties, etc, will have to be added to the closing stock of the current year in view of the above discussion. However, the assessee has to necessarily follow the closing stock of last year as opening stock of the current year. In view of this reason, the addition of excise duty to the closing stock is correct. However, as stated above, the same has to be allowed under section 43B on the payment basis. The appellant has stated that it has paid the excise duty pertaining to the closing stock in the next year before the due date of filing of return. The AO is directed to verify the same and the addition will be deleted only to the extent, the excise duty pertaining to the closing stock has been paid before the due date of the filing of return. In view of this reason, this ground of appeal is partly allowed subject to the above verification."

6. Aggrieved by the order of Ld. CIT(A), Revenue is now in appeal.

7. Before us, Ld. DR relied on the order of AO. Ld. AR on the other reiterated the submissions made before AO and Ld CIT(A) and further submitted that if to give effect to section 145A, a change is made in closing stock, corresponding adjustment must be made in opening stock also. He further placed reliance on the decision of Hon'ble Delhi High Court in the case of CIT vs. Mahavir Alluminium Ltd 297 ITR 77 (Delhi), CIT vs. Mahalaxmi Glass Works P. Ltd (2009) 318 ITR 116 Bombay and CIT vs. Sangam Structural Ltd (2013) 35 taxman 82 (Allahabad). He also placed reliance on decision of Bombai Tribunal in the case of RR Kabel Ltd vs. ACIT (2012) 25 taxman.com 559 (Mumbai). He thus supported the order of ld. CIT(A).

8. We have heard the rival submission and perused the material on record. We find that ld. CIT(A) after relying on the decision cited in the order has held that Assessee must show the effect of section 145A by following the inclusive method i.e. by including all taxes, dues, cess etc in the closing stock. He has further held that excise duty which is added to the closing stock has to be allowed u/s. 43B of the Act on payment basis. Before us, Revenue has not brought any material on record to controvert the findings of Ld. CIT(A) nor has I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 6 ACIT vs. Parag Ramanlal Patel brought any contrary binding decision in its support,. We therefore find no reason to interfere with the order of Ld. CIT(A). Thus this ground of Revenue is dismissed.

9. Second ground is with respect to disallowance made u/s. 40(a)(2)(b) of the Act.

10. On the basis of details filed by the assessee, AO noticed that assessee had made payment of interest to persons specified u/s. 40(a)(2)(b) at 18% (The list of such persons is tabulated at page 9 of the assessment order). AO was of the view that during the relevant period of general rate of interest for loans was around 12% per annum and therefore the interest paid at 18% was excessive to the extent of 6%. He therefore considered the interest at 6% (difference between 18% paid by the assessee and 12% being the general rate as per AO) to be excessive and accordingly disallowed the excess interest paid of Rs. 3,61,872/-. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A), who deleted the addition made by the AO by holding as under:-

"3.3 I have considered the submission made by the appellant and observation of the AO. The AO has brought no material on record to show that the market rate was 12%. Further, the appellant has paid 18% to both related parties as well as outside parties. Therefore the disallowance made by the AO is deleted and this ground of appeal is allowed."

11. Aggrieved by the order of Ld. CIT(A), Revenue is now in appeal before us. Before us, Ld. DR supported the order of AO. On the other hand Ld. AR supported the order of Ld. CIT(A).

12. We have heard the rival submissions and perused the material on record. We find that while deleting the addition Ld. CIT(A) has noted that AO's conclusion that the market rate on which the funds could be borrowed was 12% was not based on any material on record. He has further given a finding that Assessee had paid 18% interest to both related parties as well as the outside parties. Before us, no material has been placed on record by Revenue to I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 7 ACIT vs. Parag Ramanlal Patel controvert the findings of Ld. CIT(A). We therefore find no reason to interfere with the order of Ld. CIT(A) and thus this ground of Revenue is dismissed.

13. Ground No. 3 is with respect to deletion of addition made on account of disallowance u/s. 40(a)(ia) of the Act.

14. On perusing the details of interest paid by the assessee, AO noticed that assessee had made payment of Rs. 1,41,200/- to Kamlesh Gupta towards interest without deduction of tax at source. He also noticed that form No. 15G filed by Shri Gupta for non-deduction of TDS was invalid. He accordingly disallowed the payment of Rs. 1,41,200/- u/s. 40(a)(ia) of the Act. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A) who deleted the addition by holding as under:-

"4.3 I have considered he submission made by the appellant and observation of the AO. I agree with the appellant that the appellant had obtained Form number 15G and after that there was no liability to deduct TDS. In view of this reason, the disallowance made by the AO is deleted and this ground of appeal is allowed."

15. Before us, Ld. DR relied on the order of AO. On the other hand, Ld. AR supported the order of Ld. CIT(A).

16. We have heard the rival submissions and perused the material on record. We find that while deleting the addition Ld. CIT(A) has noted that assessee had obtained form no. 15G from Shri Kamlesh Gupta and therefore there was no liability on the part of assessee to deduct TDS. Before us, Revenue has brought any material on record to controvert the findings of Ld. CIT(A). We therefore find no reason to interfere with the order of Ld. CIT(A) and thus this ground of revenue is dismissed.

17. In the result, the appeal of the revenue is dismissed.

Now we take up the CO of assessee I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 8 ACIT vs. Parag Ramanlal Patel

18. Before us Ld. AR submitted that the ground no. 1 raised by the assessee is interconnected with ground no. 1 raised by Revenue. We have heard the rival submissions and perused the material on record. We while deciding ground no. 1 of revenue's appeal hereinabove and for the reasons stated therein have dismissed the ground of Revenue. We for similar reason also dismiss the present ground of assessee also.

19. Ground No. 2 is with respect to confirming the addition made u/s. 68 of the Act.

20. On perusing the details of unsecured loan accepted by the assessee, AO noticed that assessee has accepted aggregate amount of Rs. 37,200/- (From Vyas Upendrakumar. Someshwar and Rs. 18,550/- and from Vyas Mehul Upendrakumar). From the copy of the form filed by the assessee, AO noticed that these two parties have stated to have given loans in F.Y. 2007-08 and was also reflected in assessee's balance of F.Y. 2006-07. He therefore considered the aggregate amount of Rs. 37,200/- as unexplained cash credit and added u/s. 68 of the Act. Aggrieved by the order of AO, Assessee carried the matter before Ld. CIT(A). Ld. CIT(A) confirmed the addition by holding as under:-

"5.3 I have considered the submission made by the appellant and observation of the AO. The appellant has not denied that the year mentioned is different and not the current year. The appellant has also not made any attempt to rectify the confirmation, and has therefore not filed any other evidence to show that the loan was taken during the year from these parties. Since these parties have stated that the loan was given in the different year these confirmations cannot be applied to the loans taken during the year. The addition made by the AO is therefore confirmed and this ground of appeal is dismissed."

21. Aggrieved by the order of Ld. CIT(A), Assessee is now in appeal before us.

I.T.A No. 832/Ahd/2011 & CO No. 99/Ahd/2011 A.Y. 2007-08 Page No 9 ACIT vs. Parag Ramanlal Patel

22. Before us, Ld. AR reiterated the submissions made before AO and Ld. CIT(A). He therefore submitted that the addition be deleted. Ld. DR on the other hand supported the order of AO and Ld. CIT(A).

23. We have heard the rival submissions and perused the material on record. We find that while confirming the addition, Ld. CIT(A) has noted that assessee had not made any attempt to rectify the mistake of the year shown in the Form nor had filed any evidence to show that the loan was taken during the year from those parties. Before us, no material has been placed on record by the Assessee to controvert the findings of Ld. CIT(A). We therefore find no reason to interfere with the findings of Ld. CIT(A). In the result, this ground of assessee is dismissed.

24. In the result, the appeal of the revenue and CO of assessee are dismissed.

Order pronounced in open court on the date mentioned hereinabove at caption page

Sd/- Sd/-

(SHAILENDRA KR. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad Dated 23/01/2015 ak

आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद