2016 (3) TMI 444 - AT - Income Tax

Addition made on account of adjustment due to deviation u/s 145A - accounting entry made for adjustment of element of excise duty in the closing stock u/s 145A - Held that - Since the payment of excise duty on grey cloth had to be made w.e.f. 01.4.2003, the assessee had to make adjustment on account of valuation of grey cloth as at the end of the year. Assessee carried out this exercise in the computation of income, wherein the assessee made addition of ₹ 35,16,309/- u/s 145A of the Act. The assessee has also placed Annexure-1 being a computation of the P & L a/c, by both methods, viz. inclusive and exclusive method, i.e. in terms of section 145A of the Act, as per which the business profit increased by ₹ 35,16,309/-; i.e. from ₹ 62,90,312/- to ₹ 98,06,621/-, Thus, the above amount of ₹ 35,16,309/- which was offered for taxation by way of adjustment u/s 145A of the Act, was the amount of profit after increasing the value of inventory with the amount of excise duty paid on the same. In the computation of income filed along with the return of income for the year under consideration, the above said amount has been reduced for the purpose of adjustment u/s 145A of the Act. The Assessing Officer has considered the same as claim of deduction. The said impression of the Assessing Officer was for the reason that net effect of increasing the opening stock and the closing stock by the value of excise stock shall be nil. However, w.e.f. 04.10.2004, the assessee surrendered its excise registration, which meant that the assessee was not availing Cenvat Credit. The assessee has also enclosed Annexure-2 with the computation of income filed alongwith the return of income for the year under consideration, which is placed on record, wherein it has shown that the profit of ₹ 35,16,309/- by way of adjustment u/s 145A of the Act in the immediate preceding Assessment Year i.e. AY 2004-05 was added to the opening stock in the year under consideration. Thus, there is no confusion that whatever is added to the closing stock in any year, automatically becomes the opening stock in the next year, and it is precisely what the assessee has done u/s 145A of the Act, as far as the amount of ₹ 35,16,309/- is concerned. CIT(A) rightly deleted the addition - Decided against revenue Whether any excise duty is deemed to be added to the closing stock of the assessee? - Held that - When because of surrender of excise registration w.e.f. 04.10.2004, no cenvat credit was available at the end of the year, the closing stock has been valued at cost or market value whichever is lower. Therefore, it was the presentation made by the assessee which gave the impression that profit has been reduced by ₹ 35,16,309/-. If the assessee had not separately carried out the above adjustment u/s 145A of the Act in the statement of income and had given the above effect in the P & L a/c., then also the business profit would have been ₹ 1,03,82,028/- and not ₹ 1,38,98,337/-. The action of the Assessing Officer in adding back the amount of ₹ 35,16,309/- means the above amount was not utilized by the assessee and remained at the end of the year was not correct. In view of the above discussion, the CIT(A) was justified in deleting the amount of ₹ 35,16,309/- made by the Assessing Officer u/s 145A of the Act.- Decided against revenue

Summary

Issues Involved:
Appeal against deletion of addition made due to deviation under section 145A of the Income Tax Act for Assessment Year 2005-06.

Analysis:

Issue 1: Deletion of addition of Rs. 35,16,309 made on account of adjustment due to deviation u/s 145A of the I.T. Act.
The case involved a firm engaged in the business of manufacturing and sale of grey cloth. The original return was filed, and the assessment was reopened due to a reduction in profit made by the firm under section 145A of the Act. The Assessing Officer disallowed the adjustment of Rs. 35,16,309, stating that the firm's accounting method did not comply with the inclusive method required by section 145A. The assessee argued that it had paid excise duty before filing the return and had adjusted the excise duty in its accounting. The First Appellate Authority granted relief to the assessee, and the Tribunal upheld the deletion of the addition, stating that the adjustment was correctly made as per section 145A.

Issue 2: Deletion of books adjustment u/s 145A of the I.T. Act.
The Tribunal found that the assessee had correctly adjusted the excise duty in its closing stock as required by section 145A. The surrender of excise registration by the assessee led to the utilization of the available Cenvat credit and payment of excise duty through PLA. The Tribunal concluded that the adjustment made by the assessee was in compliance with the provisions of section 145A, and therefore, upheld the deletion of the books adjustment made by the Assessing Officer.

Issue 3: Upholding the order of the Assessing Officer.
The Revenue contended that the CIT(A) erred in deleting the addition made by the Assessing Officer under section 145A. However, the Tribunal, after considering the arguments from both sides and examining the record, found that the CIT(A) had correctly deleted the addition as the adjustment made by the assessee was in accordance with the law. Therefore, the Tribunal dismissed the appeal of the Revenue and upheld the order of the CIT(A).

In conclusion, the Tribunal upheld the deletion of the addition made under section 145A of the Income Tax Act, stating that the adjustment made by the assessee regarding excise duty in the closing stock was in compliance with the law. The appeal of the Revenue was dismissed, and the order of the CIT(A) was confirmed.