2022 (8) TMI 131 - AT - Income Tax

Addition on failure to show the gitty expenses in Closing Stock or WIP - addition based on audit objection - material purchased from Udaipur on 31/02/2010, were in transit - CIT-A deleted the addition - HELD THAT - AO is of the opinion that the purchases as per separate bills issued on 31/3/2010 were not consumed but represent the stock in transit, in that case, it was imperative on his part to cite cogent evidence in reassessment to prove that the material was not received earlier but retained in transit. It was held that there is no iota of evidence that the material was in transit. CIT(A) further held that the stand of assessee that he included the cost of material in sales is correct as it is evident in the ledger account of GHV India Private Limited and the sale consideration income of assessee took the amount as included in the sale construction income. CIT(A) appreciated the facts that the assessee is a contractor, the material which was used in the contract work and has been correspondingly billed and consequently stand included in sales. If the same is again added as closing stock in that case, the value of sales will have reduced by corresponding figure and the same does not have any tax effect - CIT(A) further held that if the addition amount is included in the value of closing stock in that case corresponding deduction is allowable to assessee in subsequent year by increasing of opening balance of stock. On the basis of aforesaid observation, CIT(A) held that explanation of assessee that supplier raised separate bills on account of supplies made on different dates through different challans appears to be quite legible, otherwise, the supplier would have raised only a single bill if the item is supplied on a particular day. We find that the CIT(A) also examined the facts of the case on other angle as well and held that, if the impugned amount is considered as closing stock in that case, the profit of assessee will go up to Rs. 50,88,594/- which is around 20% of sales, which is not feasible considering the fact that work was started only in the month of January, 2010. On observation of ld. CIT(A), we find that the Assessing Officer passed the order in haste and it seems that the addition is made only for the reasons that some audit objection was raised. We also perused the alleged audit objection and find that such objection is raised without application of mind. The assumption of audit objection might be based on the idea that the office of the assessee is situated in Surat, so the material could be in transit to Surat. Though, the facts on the records were otherwise. Thus, we affirm the order of ld. CIT(A) with this additional observation. - Decided against revenue.

Issues Involved:
1. Justification of the addition of Rs. 45,15,000/- by the Assessing Officer (AO) on account of "gitty" expenses.
2. Validity of the reopening of the assessment under Section 148 of the Income Tax Act.
3. Acceptance of assessee's submissions regarding the inclusion of material costs in sales.
4. Examination of the tax effect if the material is considered as closing stock.

Issue-wise Detailed Analysis:

1. Justification of the Addition of Rs. 45,15,000/- by the AO:
The AO added Rs. 45,15,000/- to the assessee's income, arguing that the "gitty" purchased from M/s Charbhuja Crushing Plant, Udaipur on 31/03/2010 should have been shown in the closing stock or work in progress (WIP) since it was in transit. The AO noted that the assessee failed to establish why the goods in transit were not shown as closing stock or WIP, as per the mercantile system of accounting. However, the assessee contended that the material was consumed at the construction site before 31/03/2010 and included in the sales figures, thus not shown in the closing stock.

2. Validity of the Reopening of the Assessment Under Section 148:
The assessee challenged the reopening of the assessment, arguing that the information regarding the "gitty" purchases was already available during the original assessment, and no new information necessitated the reopening. The CIT(A) noted that the reopening was based on the same facts considered in the original assessment, indicating a change of opinion, which is not permissible without new information.

3. Acceptance of Assessee's Submissions Regarding the Inclusion of Material Costs in Sales:
The assessee explained that the material was supplied through various challans on different dates, but invoices were raised on the last day of the month. The material was used at the construction site and included in the sales figure. The CIT(A) found the assessee's explanation credible and noted that the AO did not provide any reason to reject this submission. The CIT(A) further observed that if the material was included in the closing stock, the corresponding amount would need to be reduced from the sales, having no tax effect.

4. Examination of the Tax Effect if the Material is Considered as Closing Stock:
The CIT(A) analyzed that if the material was considered as closing stock, the profit would increase significantly, which was not feasible given the work started only in January 2010. The CIT(A) concluded that the addition was not sustainable and deleted it. The Tribunal affirmed this view, noting that the AO's addition seemed influenced by an audit objection without proper consideration of the facts.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order. It concluded that the AO's addition of Rs. 45,15,000/- was unjustified, as the material costs were already included in the sales figures, and the reopening of the assessment was based on a change of opinion without new information. The Tribunal also noted that considering the material as closing stock would have no tax effect, supporting the CIT(A)'s decision to delete the addition.

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