2013 (7) TMI 517 - AT - Income Tax

Non inclusion of VAT in the closing stock - CIT(A) deleted the addition - whether provisions of section 145A do not exempt such inclusion of VAT for any reason? - Held that - It is an admitted position of fact that the amount of VAT paid by the assessee was not included in the cost of purchase and the same was not debited in the P & L account. Under these facts, even if closing stock has to be valued after including the amount of VAT, the amount of purchase is also required to be inclusive of VAT and if this is done, there is no impact on the profit or loss of the assessee on account of non inclusion of VAT in the value of closing stock. Hence the addition made by the A.O. is not sustainable. In favour of assessee. Loan to related persons - disallowance u/ 40A(2)(b) - Deletion of excessive interest of 6% by CIT(A) out of interest paid by the assessee @ 18% even when the maximum prevalent bank rate for similar enterprises was 12% - Held that - Held that - It may be correct that banks are charging interest @ 12% and even some parties may offer charging of interest @ 12% but the difference in facts has to be considered that assessee has borrowed unsecured loan without providing any security and, therefore, such interest rate of secured loan cannot be made a benchmark to consider the reasonableness of interest payment by the assessee in respect of unsecured loan. Thus payment of interest @ 18% in respect of unsecured loan as compared to payment of interest @ 12% in respect of secured loan cannot be said to be excessive for the purpose of making disallowance u/ 40A(2)(b) and hence, disallowance made by the A.O. is not sustainable. In favour of assessee.

Summary

Issues:
1. Non-inclusion of VAT in closing stock.
2. Disallowance of excessive interest paid.

Issue 1: Non-inclusion of VAT in closing stock:
The revenue appealed against the deletion of an addition of Rs.20,239 for non-inclusion of VAT in the closing stock for the assessment year 2008-09. The CIT(A) allowed the relief based on the argument that the VAT amount was not included in the opening stock, and no such addition was made in the assessment for the following year. However, the ITAT found that even if the closing stock had to be valued including VAT, the purchase amount should also include VAT. As the VAT paid was not part of the purchase cost debited to the P & L account, it did not impact the profit or loss. Therefore, the addition made by the Assessing Officer was deemed unsustainable, and the ITAT rejected ground No.1 of the revenue's appeal.

Issue 2: Disallowance of excessive interest paid:
The second issue revolved around the disallowance of 6% interest paid by the assessee to certain parties, amounting to Rs. 11.58 lakhs, out of the total interest paid at 18%. The CIT(A) noted that only 6 out of 21 parties were related to the appellant, and in a previous order, disallowance of interest was deleted considering the market rate of interest for unsecured loans. The ITAT concurred with the CIT(A)'s decision, emphasizing that unsecured loans from related parties often entail higher interest rates due to the absence of security. The ITAT highlighted that the rate of interest for secured loans by banks cannot be a benchmark for assessing the reasonableness of interest on unsecured loans. Therefore, the disallowance made by the Assessing Officer was considered unsustainable, leading to the dismissal of the revenue's appeal.

In conclusion, the Appellate Tribunal ITAT Ahmedabad dismissed the revenue's appeal concerning the non-inclusion of VAT in closing stock and the disallowance of excessive interest paid by the assessee. The judgments by the CIT(A) were upheld based on the specific legal and factual considerations outlined in the detailed analysis for each issue.