2016 (9) TMI 753 - AT - Income Tax

Addition u/s.145A - inclusion of unutilized CENVAT credit and other taxes to the closing stock. - assessee submitted that it follows exclusive method of accounting and does not debit the CENVAT and other taxes to the Profit & Loss Account (P&L A/c.) - Held that - It is an undisputed fact that assessee is following exclusive method of accounting whereby it does not debits the taxes paid to the purchases, consumption of stock and the aforesaid method of accounting of taxes has been consistently followed by the assessee in earlier and succeeding years and is also stated to have been accepted by Revenue. We find that the Hon ble Apex Court in the case of CIT vs. Indo Nippon Chemicals Co.Ltd. reported at (2003 (1) TMI 8 - SUPREME Court ) has observed that unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. Decided in favour of assessee Disallowance of sales commission - assessee has failed to prove the nature of services rendered by the respective parties to the assessee - Held that - Even before us, assessee has not placed any material on record by which it could be demonstrated the nature of services rendered by those parties to the assessee. However, as far as payment of sales commission to Devkalpi Dyes & Intermediates is concerned, we find from the chart of commission that has been placed by assessee in the paper-book that assessee had paid ₹ 47,775/- in AY 2008-09, ₹ 78,975/- in AY 2009- 10 and ₹ 1,14,338/- in AY 2010-11. The commission payments to this party has not been disallowed while framing the assessment u/s.143(3) of the Act; meaning thereby that the nature of services, as far as this party is concerned, is not doubted by the Revenue in subsequent years. Before us, Revenue has also not placed any material on record to demonstrate that no services were rendered by it to the assessee. In view of the aforesaid facts, out of the total disallowance of ₹ 7,15,111/-, we direct the deletion of ₹ 47,302/- being the amount of commission paid to Devkalpi Dyes & Intermediates and uphold the balance addition(s) of commission made to other parties. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Addition of unutilized balance of various taxes u/s.145A of the Income Tax Act.
2. Disallowance of sales commission.

Issue-wise Detailed Analysis:

1. Addition of Unutilized Balance of Various Taxes u/s.145A:

The Assessee, a partnership firm engaged in manufacturing and trading of reactive dyes, filed its return for AY 2007-08 declaring an income of ?1,35,05,470/-. The AO, during scrutiny, noticed unutilized balances of various taxes amounting to ?20,03,604/- which were not included in the closing stock valuation. The AO added these balances to the closing stock as per Section 145A of the Income Tax Act, resulting in a revised total income of ?1,62,24,190/-. The CIT(A) upheld this addition, stating that even under the exclusive method of accounting, the assessee must show the effect of Section 145A by including taxes in the closing stock. The CIT(A) noted that the opening stock of the current year must match the closing stock of the previous year, and since the taxes were not included in the previous year's closing stock, they could not be included in the current year's opening stock.

Upon appeal, the ITAT referenced the Supreme Court's decision in CIT vs. Indo Nippon Chemicals Co.Ltd., which held that unavailed MODVAT credit cannot be construed as income, and thus no tax liability arises from it. The ITAT also cited a similar case, ACIT vs. Shri Paragbhai Ramanlal Patel, where it was decided that the assessee must show the effect of Section 145A by following the inclusive method but excise duty added to the closing stock should be allowed under Section 43B on a payment basis. The ITAT concluded that no addition could be made in the present case, thus allowing the assessee's appeal on this ground.

2. Disallowance of Sales Commission:

The AO disallowed a sales commission of ?7,15,111/- paid to various parties, citing a lack of evidence to prove the genuineness of the payments and the services rendered. The assessee's argument that TDS was deducted on these payments was not accepted by the AO. The CIT(A) upheld the AO's decision, emphasizing that merely having agreements, payments, and TDS deductions does not prove the services rendered. The CIT(A) noted that the assessee failed to provide any correspondence or evidence of services rendered by the commission recipients.

On appeal, the ITAT noted that the assessee failed to demonstrate the nature of services rendered by the parties. However, it was observed that the commission payments to one party, Devkalpi Dyes & Intermediates, were accepted in subsequent assessment years without disallowance. Therefore, the ITAT allowed the commission payment of ?47,302/- to Devkalpi Dyes & Intermediates but upheld the disallowance of the remaining commission payments, partly allowing the assessee's appeal on this ground.

Conclusion:
The ITAT partly allowed the appeal, deleting the addition of unutilized taxes under Section 145A and partially allowing the sales commission by accepting the payment to Devkalpi Dyes & Intermediates while upholding the disallowance for other parties.