2013 (7) TMI 311 - AT - Income Tax

Increase in value of closing stock u/s 145 - inclusion of interest cost - assessee is in the business of ship breaking industry - CIT observed that there is no room to disturb the valuation of closing stock. The interest expenses are revenue expenses for capital borrowed and allowed u/s.36(1)(iii). They cannot be allocated to the closing stock. - Held that - from the orders of the revenue authorities it is not clear, as to how and when the letter of credit was discharged. - Matter needs reconsideration - matter remanded back. Unproved loan u/s 68 - CIT(A) deleted the addition - Held that - It is not very clear from the orders of both the revenue authorities as to how the addition u/s 68 was made, when all the persons, who had advanced loans to the assessee in the previous and/or earlier years, had been accepted. On the other hand, the CIT(A) also accepted the submissions of the assessee without considering the reply of the revenue. - Matter needs reconsideration - matter remanded back.

Summary

Issues involved:
1. Valuation of closing stock under section 145 of the Income Tax Act.
2. Treatment of unproved loans under section 68 of the Income Tax Act.

Detailed Analysis:

Issue 1: Valuation of closing stock under section 145 of the Income Tax Act
The appeal was filed by the department against the order of CIT(A) regarding the addition made on account of an increase in the value of closing stock under section 145. The assessee, engaged in the ship breaking industry, faced challenges in compliance due to the closure of the head office following the death of partners and relocation of the remaining partner to Dubai. The AO completed the assessment under section 144 due to non-compliance. The dispute arose over the valuation of the closing stock, particularly concerning the ship purchased and detained by authorities. The AO assumed the ship was not in possession, leading to additions in valuation. The AR argued that the loans were for business purposes, not acquiring the ship as a capital asset, and interest claimed as an expenditure was legitimate. The CIT(A) deleted the addition under section 145A, emphasizing that interest expenses were revenue expenses and not to be allocated to closing stock.

Issue 2: Treatment of unproved loans under section 68 of the Income Tax Act
The AO noticed an increase in loan figures, leading to unconfirmed loans, and made additions under section 68. The assessee contended that no ship was purchased during the year in question, and loans were for business activities. The CIT(A) deleted the balance addition under section 68 due to the inability to procure further evidence from certain parties. However, both the revenue authorities and the CIT(A) failed to provide a clear examination of the circumstances surrounding the loans and their acceptance. The ITAT set aside the orders of both authorities, directing a reexamination by the AO in light of the available evidence and the absence of partners, allowing the appeal for statistical purposes.

In conclusion, the judgment addressed the issues of valuation of closing stock and treatment of unproved loans, highlighting the importance of detailed examination and evidence in tax assessments under the Income Tax Act.