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TMI Blog2024 (10) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... idance Note on Tax Audit u/s 44AB of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India, section 145A provides that the valuation of purchase and sale of goods and inventory for the purpose of computation of income from business or profession shall be made on the basis of the method of accounting regularly employed by the assessee but this shall be subject to certain adjustments. Therefore, it is not necessary to change the method of valuation of purchase, sale and inventory regularly employed in the books of account. The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. We have seen that the AO completed the assessment by making an addition of Value Added Tax only on the closing stock without increasing the valuation of purchase and sale and opening stock of goods with corresponding VAT and therefore the same is not in accordance with the provisions of Sec 145A of the Act. Upon perusal of the facts of case, it is observed that the assessee applied Inclusive method of valuation of inventories in compliance with Section 145A of the Income Tax Act as well as Income Computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO determined the income at Rs. 9,74,740 by making addition under the head underreporting of closing stock. The AO added the value added tax along with the value shown in the closing stock and thereby estimated the additional income of Rs. 1,02,910. As against the said order, the assessee filed an appeal before the CIT(A) and contended that the method adopted by the assessee by not including the value added tax in the value of the closing stock is correct since the assessee had adopted the practice of showing the value of the opening and closing stocks at cost price and even assuming that the method is incorrect, the AO ought to have added the value added tax in respect of the opening stock also and therefore, there is no escapement of any income as alleged by the AO. The ld.CIT(A) had dismissed the appeal by relying on the findings of the AO, and therefore, the present appeal has been filed before this Tribunal. The assessee in the present appeal had raised the following grounds:- 1. The learned Assessing Officer erred under circumstances and facts of the case and in law in making an addition of Rs. 1,02,910/- being incorrect application of section 145A which required disclosure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urces yielding interest, royalties or dividends. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other consideration 6. On plain reading of Para 3, 4 and 5 above your good self can conclude that the fact of making addition on account of undervaluation of closing stock without making any corresponding adjustment to opening stock, purchases and sales there of being the inclusive method of valuation of inventories is illogical and unjustified and on such adjustments of VAT the tax effect is neutral in general and shall not have any impact on the Revenue statement for any financial year. Further that the inclusive method of valuation of inventories is in compliance with Section 145A of the Income Tax Act and Income Computation and Disclosure Standards II Valuation of Inventories 7. The learned Commissioner of Income Tax (Appeal) in the following cases within the same jurisdiction have concluded that the appellant applied Inclusive method of valuation of inventories in compliance with Section 145A of the Income Tax Act as well as Income Computation and Disclosure Standards II 'Valuation of Inventories' and made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method of accounting regularly followed for more than a decade. The input State-Level Value Added Tax (VAT) paid on purchases cannot be included in the cost of purchases where the tax paid on inputs is available for set-off against the tax payable on sales or is refundable, it is in the nature of taxes recoverable from taxing authorities. The Accounting Standard (AS) 2 Valuation of Inventories issued by the Institute of Chartered Accountants of India (ICAI) deals with cost of inventories and cost of purchases'. As per para 6 and 7 of the said AS-2, the cost of purchases cannot include duties and taxes which are subsequently recoverable from the taxing authorities. Hence the input tax which is refundable, should not be included in the cost of purchases. The Input State- Level VAT, to the extent it is refundable, will not form part of the cost of the inventory. The inventory of inputs is to be valued at the net of the input tax which is refundable. The Assessee prepared their accounts in compliance with the AS-2 Valuation of Inventories issued by the Institute of Chartered Accountants of India. 8. According to the Guidance Note on Tax Audit under Section 44AB of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore the same is not in accordance with the provisions of Sec 145A of the Act. 11. Further the preamble of ICDS (i) Valuation of Inventories states - This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head Profits and gains of Business or profession or income from other sources and not for the purpose of maintenance of books of accounts. In the case of conflict between the provisions of Income Tax Act, 1961 ('the Act)' and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent . 12. It may be noted that under the provisions of para 7 of the Revised AS 2 Valuation of Inventories issued by ICAl, duties and taxes that are subsequently recoverable from the taxing authorities are excluded while arriving at the cost of purchase. ICDS II differs from Revised AS 2, in this respect. The ICDS prescribes an inclusive method while the Accounting Standards prescribe an exclusive method . 13. As per ICDS Il on Valuation of Inventories, the inventory shall be valued at cost or net realisable value whichever is lower. The valuation of purchase or sale of goods or services and of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the present case) then there must necessarily be a corresponding change at the other end (that is on April 1, 2018, as in the present case) otherwise the true profit would not be reflected. 18. In the present case before us the learned Assessing Officer has made an addition of Rs. 1,02,910 being the Value Added Tax (VAT) component on Closing Inventory to returned income. It is a well-settled principle of law that the valuation of closing stock has to be on the basis of the purchase cost. If the purchases include an element of VAT benefit, then the closing stock should also correspondingly include the VAT benefit. 19. As per Para 22 of the ICDS 1I value of opening inventory shall be the value of inventory as on the close of the immediately preceding previous year. The above para is not the transitional provision and needs to be applied every year. Thus, to comply with para 22 for the Asst year 2017-18, the opening inventory shall be computed by applying the provisions of Section 145A which is nothing but the inclusive method. In order to comply with the provisions of Section 145A, the inventory as on 31.3.2016, necessary adjustments as required in the said section is also to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of valuation prescribed under section 145A and the effect thereof on the profit or loss to be reported under clause 14(b) of Form 3CD. These sub-paras explain the adjustments to be made to comply with the provisions of section 145A and the procedure for the adjustments to be carried out in case of both, trading and manufacturing concerns. The illustrations given in the said Guidance Note show that the overall impact of the adjustments made to comply with the provisions of section 145A on the income of the assessee is nil. Accordingly, if an exclusive method is followed for the purpose of valuation of inventory as per AS, the taxpayer would be required to prepare the memorandum account to demonstrate that vis a vis inclusive method, it is tax neutral. This will be in compliance with section 145A and ICDS. 26. We therefore of the view that the grounds of appeal on the issue of addition on account of undervaluation of closing stock without making any corresponding adjustment to opening stock is to be accepted. 27. Upon perusal of the facts of case, it is observed that the assessee applied Inclusive method of valuation of inventories in compliance with Section 145A of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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