2012 (8) TMI 712 - HC - Income Tax

Disallowance of reconciliation loss - whether the said figure of 3.46% of the purchases did or did not include gas in the pipeline ? - Held that - As AO following the directions of the Tribunal furnished for this year accordingly restored the matter to the file of the AO for this year also ignoring a clear finding that loss of about 4% of purchases is reasonable subject to verification - As the loss of 3.4% is borne out by audited accounts, which is lower than the average loss of about 4%. Therefore, there seems to be no reasonable cause to make the disallowance of reconciliation loss by stating that the details of stock lying in pipe lines were not furnished in qualitative or quantitative terms as what had to be verified was whether the loss was in the vicinity of 4%, which has been held to be reasonable by the Tribunal. The matter be remitted to the AO for the purposes of determining / verifying as to whether gas in the pipeline in respect of the assessment year 2005-2006 has been included in the figure of closing stock or not. If the Assessing Officer finds that there is gas in the pipeline, which has not been included in the closing stock, to that extent, the same shall be added back to the closing stock and insofar as the figure of 3.46% of the purchases is concerned, the same shall be modified accordingly.

Summary

Issues:
- Dispute over inclusion of gas in the pipeline in the closing stock for assessment year 2005-06.

Analysis:
1. The appeal by the revenue concerns the order passed by the Income Tax Appellate Tribunal regarding the figure of 3.46% of purchases shown as a reconciliation difference by the assessee for the assessment year 2005-06. The assessee claims this figure represents normal wastage, excluding gas in the pipeline. The revenue argues that similar issues arose in previous years, where the Tribunal found a percentage loss of around 4% of purchases to be reasonable. The Tribunal set aside the order in the earlier years for fresh assessment.

2. In the present assessment year, a similar order was passed initially, but the Assessing Officer added back the entire reconciliation difference without verifying if gas in the pipeline was included. The Commissioner of Income Tax (Appeals) overturned this decision. The Tribunal's impugned order highlighted that the loss of 3.4% was lower than the acceptable 4%, and the revenue's appeal was dismissed based on this reasoning.

3. The core issue revolves around whether gas in the pipeline was correctly included in the closing stock. The revenue contends it should be part of the closing stock and not considered as reconciliation difference or wastage. The respondent argues that gas in the pipeline was already included in the closing stock for the current year, distinguishing it from previous years.

4. Both parties agree that verification is necessary to determine if gas in the pipeline is part of the closing stock. The High Court directs the matter to be remitted to the Assessing Officer for this verification. If gas is found in the pipeline but not included in the closing stock, it should be added back. The figure of 3.46% of purchases should be adjusted accordingly, and past years' losses should be compared after excluding gas in the pipeline to assess the normalcy of the loss/wastage.

5. The High Court modifies the Tribunal's order with these directions, emphasizing the need for accurate verification regarding the inclusion of gas in the pipeline in the closing stock for the assessment year 2005-06.