2013 (9) TMI 442 - AT - Income Tax

Profit under head profits or gains of business or professions for computation of deduction under section 80HHC of the Income Tax Act, 1961 - AO had made an addition of Rs.1,06,09,194/- because these expenses were unverifiable Held that - Learned AO disregarded the expenditure to be genuine and added to the income of the assessee - When the profits are recomputed by the learned AO, obviously, it shall be considered as business profits of the assessee unless there is some materials to establish that they are nor arising out of the regular business activity of the assessee and accordingly the relevant provisions of the Act has to be applied either for granting any deduction or computation of tax liability - Revenue has not produced before us any contrary decisions on this issue. Therefore, in the present case, the revenue is directed to adopt under the head profits or gains of business or professions the profits declared by the assessee as well as the addition made by the revenue for Rs.1,06,09,194/- being unverifiable expenses and accordingly compute the deduction u/s 80 HHC of the Act Decided in favor of Assessee. Valuation of closing stock - Closing stock valuation, when changed, the opening stock ought to be revalued on the same basis as adopted for closing stock Held that - Relying upon the various cases, one of which is CIT Vs Dalmia Cement (Bharat) Ltd., 1995 (5) TMI 22 - DELHI High Court , wherein it was held that two principles applicable with regard to the valuation of sock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus, clear that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. Further, in the present case no any merit in the argument of the learned AR - The learned AO had rejected the valuation of closing stock of the assessee, and in a scientific method as far as possible based on the information furnished by the assessee, had worked out the value of closing stock and made additions thereon. The valuation of the opening stock is not in dispute because the valuation of the closing stock of the preceding year is accepted to be genuine by the assessee as well as by the revenue. Further, even if, there is any error, only at that point of time when such discrepancy which is not deliberate is unearthed, such error needs a correction because only at that point of time when such discrepancy is unearthed the resultant consequence of profit and loss crystallizes. Therefore, the ground raised by Assessee is dismissed Decided against the Assessee.

Issues Involved:
1. Deduction under section 80 HHC on the addition of Rs.1,06,09,194/-.
2. Valuation of closing stock and corresponding revaluation of opening stock.
3. Deduction under section 80 HHC on the business profit of Rs.2,06,05,646/-.
4. Allowing the appeal against the rejection of application under section 154 for rectifying the mistake of not granting deduction under section 80 HHC.

Issue-wise Detailed Analysis:

Issue 1: Deduction under section 80 HHC on the addition of Rs.1,06,09,194/-
The assessee contended that since the addition of Rs.1,06,09,194/- was upheld, it should be considered as business profits for computing deduction under section 80 HHC. The Tribunal found merit in this submission, noting that the addition was due to unverifiable expenses. The Tribunal directed the revenue to adopt the profits declared by the assessee and the addition made by the AO for computation of deduction under section 80 HHC, as per section 80HHC (4C) [(baa)]. Thus, this ground of appeal was allowed in favor of the assessee.

Issue 2: Valuation of closing stock and corresponding revaluation of opening stock
The assessee argued that if the closing stock valuation is disturbed, the opening stock should be revalued on the same basis. The Tribunal reviewed various case laws and found that the assessee did not maintain accurate books of accounts or value the stock scientifically. The Tribunal upheld the AO's valuation of the closing stock, noting that the valuation of the opening stock was not in dispute and any error needs correction only when it is unearthed. Thus, the Tribunal dismissed this ground raised by the assessee.

Issue 3: Deduction under section 80 HHC on the business profit of Rs.2,06,05,646/-
The revenue contended that the CIT(A) erred in directing the AO to allow deduction under section 80 HHC on the business profit assessed. Since the Tribunal had already decided a related issue in favor of the assessee, this issue was decided against the revenue, and the ground was dismissed.

Issue 4: Allowing the appeal against the rejection of application under section 154 for rectifying the mistake of not granting deduction under section 80 HHC
The revenue argued that the CIT(A) erred in allowing the assessee's appeal against the rejection of the application under section 154. The issue related to the deduction under section 80 HHC on the business profit where an addition was made by disallowing unverifiable expenses. Since the Tribunal had already decided the related issue in favor of the assessee, this ground was deemed infructuous and dismissed.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal directed the revenue to compute the deduction under section 80 HHC considering the addition made by disallowing unverifiable expenses, and upheld the AO's valuation of the closing stock without revaluing the opening stock.

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