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2016 (6) TMI 1263 - AT - Income TaxAdjustment under Section 145A - AO has only considered the excise duty on closing stock and has not given effect to the excise duty on opening stock, purchases and consumption - Held that - We are of the view that as per Section 145A of the Income-tax Act, 1961, wherein method of valuation will be applicable not only in closing stock, but on inventory i.e. opening and closing stock as well as on both purchases and sales. Therefore, the AO is not justified in adding the excise duty in closing stock of raw materials and incidental goods. We, therefore, direct the AO to compute the total income by adding cess, duty or tax paid incurred not only in closing stock but also in purchases, opening stock, sales, wherever such excise duty is already added. The AO is directed to verify the working given by the assessee on pages 3, 4, 5, 6, 7, 8, 9 and 10 for the assessment year 2002-03 to assessment year 2009-10. The AO is directed to verify the same and pass the order accordingly.
Issues Involved:
1. Valuation of closing stock with respect to inclusion of excise duty under Section 145A of the Income-tax Act, 1961. 2. Adjustment of excise duty in opening stock, purchases, and sales. 3. Consistency in the Department's approach across different assessment years. Detailed Analysis: 1. Valuation of Closing Stock with Respect to Inclusion of Excise Duty under Section 145A: The primary issue revolves around whether the excise duty should be included in the valuation of closing stock as per Section 145A of the Income-tax Act, 1961. The assessee argued that their method of accounting, which includes excise duty in the inventory of finished goods but not in raw materials, stores, and spares, complies with AS-2 and is consistent. However, the AO contended that Section 145A overrides Section 145 and mandates the inclusion of excise duty in the closing stock valuation. The AO added ?3,34,04,090/- to the closing stock value, leading to the initiation of penalty proceedings under Section 271(1)(c). 2. Adjustment of Excise Duty in Opening Stock, Purchases, and Sales: The assessee's main contention was that the AO only considered excise duty on the closing stock without adjusting the opening stock, purchases, and sales, which would result in a distorted profit calculation. The assessee cited the Delhi High Court's decision in CIT vs. Mahavir Aluminium Limited, which held that adjustments under Section 145A should affect both the opening and closing stocks to reflect true profits. The ITAT agreed with the assessee, directing the AO to include excise duty in the opening stock, purchases, and sales, not just the closing stock, to avoid profit distortion. 3. Consistency in the Department's Approach Across Different Assessment Years: The assessee pointed out inconsistencies in the Department's approach in different assessment years. For instance, in AY 2005-06, the CIT(A) deleted an addition made by the AO, which the Department appealed against. In AY 2009-10, the AO added the difference in excise duty between the opening and closing stock but did not adjust purchases. The ITAT noted these inconsistencies and emphasized the need for a uniform approach, aligning with the principles laid out in previous judgments. Conclusion: The ITAT allowed the assessee's appeal for AY 2006-07, directing the AO to adjust excise duty in the opening stock, purchases, and sales, as well as the closing stock, in accordance with Section 145A. The ITAT dismissed the Department's appeals for AYs 2005-06, 2008-09, and 2009-10, upholding the CIT(A)'s decisions. The ITAT's order emphasized the importance of consistency and adherence to statutory provisions to ensure accurate profit computation.
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