2019 (3) TMI 382 - AT - Income Tax

Sales Return disallowed stating bogus - unexplained income - evidence produced - CIT-A deleted the addition based on evidence- HELD THAT - Assessee has duly proved before the CIT(A) that out of total quantity of the sale return during the year under assessment approximately 40.3% quantity of such stock was resold and approximately 22.4% of quantity was included in the closing stock being sellable goods in the subsequent years and remaining quantity of approximately 37.3% was claimed as expired / damaged stock which was not included while computing the value of the closing stock as on 31st March, 2005. So when sale returns has been duly proved with physical stock available with the assessee, CIT(A) has rightly decided the issue in favour of the assessee that the same cannot be added as unexplained income - decided against revenue. Addition on account of sale tax on sales return - allowable business loss - HELD THAT - It is the case of the assessee that at the time of making the sale the assessee has debited the account of party with value of sales and sale tax, thus, the assessee has made payment of sales tax to the Government. However, when the goods were recovered by the assessee, the sales tax paid by the assessee was never recovered and the assessee has written of the amount of sales tax as bad debt. When the factum of sales return has been proved in favour of the assessee and payment of sale tax by the assessee on the said fictitious sales is not disputed, the CIT(A) has rightly allowed the sale tax paid on sales return as business loss - decided against revenue. Foreign exchange fluctuation loss disallowed - loss on exchange loss is only notional loss and is not a real loss - CIT(A) deleted the addition relying upon decision of CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT - HELD THAT - When the factum of availing of the aforesaid loan is not disputed by the revenue then why the loss on account of exchange differences on revenue items arising on foreign currency transactions has to be treated as income / expenses during the year under consideration. So, Ld. CIT(A) has rightly deleted the addition on account of foreign exchange loss by following the decision rendered by Hon ble Supreme Court in CIT vs. Woodward Governor India Pvt. Ltd. - decided against revenue.

Summary

Issues:
1. Disallowance of sales return by AO
2. Addition of sales tax on sales return
3. Deletion of foreign exchange loss
4. General grounds of appeal

Analysis:

Issue 1: Disallowance of sales return by AO
The appellant, Deputy Commissioner of Income Tax, sought to set aside the order passed by the Commissioner of Income Tax(Appeals) regarding the disallowance of ?6,11,59,512 made by the AO on account of bogus 'Sales Return'. The AO concluded that the assessee tried to reduce sales without making corresponding additions in closing stock. The CIT(A) found that the sales return was supported by evidence, recovered from transporters, and that the assessee had provided party wise details of returned goods. The CIT(A) also noted that a significant portion of the returned stock was resold or included in the closing stock, while the rest was claimed as expired/damaged. Consequently, the CIT(A) decided in favor of the assessee, stating that the sales return was duly proved with physical stock, and thus, could not be added as unexplained income.

Issue 2: Addition of sales tax on sales return
The AO added ?40,88,589 to the taxable income of the assessee on account of sales tax paid on sales return, stating that the claim was not allowable since the sales were not actually made. However, the CIT(A) found that the assessee had debited the account of the party with the value of sales and sales tax at the time of making the sale. The CIT(A) noted that the sales tax paid on the fictitious sales was not disputed and was treated as a business loss when the goods were recovered. Consequently, the CIT(A) allowed the sales tax paid on sales return as a business loss, leading to a decision against the assessee on this ground.

Issue 3: Deletion of foreign exchange loss
The AO disallowed a foreign exchange fluctuation loss of ?66,55,166 as a notional loss. However, the CIT(A) deleted this addition, relying on a Supreme Court decision. The assessee had taken foreign currency loans and incurred the loss on account of reinstatement of revenue items at the balance sheet date. The CIT(A) held that since the fact of availing the loans was not disputed, the loss on exchange differences on revenue items should not be treated as income/expenses. Following the Supreme Court decision, the CIT(A) deleted the addition on account of foreign exchange loss, resulting in a decision against the revenue on this ground.

General grounds of appeal
The general grounds of appeal were deemed to be of a general nature and did not require specific findings. The Tribunal dismissed the appeal filed by the revenue based on the detailed analysis and conclusions reached on the specific issues discussed above.

This comprehensive analysis of the judgment provides a detailed overview of the issues involved and the reasoning behind the decisions made by the authorities involved in the case.