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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 ..... k 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 as per Income Computation and Disclosure Standards II Valuation of Inventories (ICDS-II). He should have appreciated the fact that Income Computation and Disclosure Standards I Valuation of Inventories prevails over the provisions of Section 145A of the Income Tax Act, 1961. Even before the applicability of ICDS, under the provisions of Section 145A (pre-amendment), purchases, sales and inventory were required to be valued by including there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the adjustment of VAT therein. The overall impact of the adjustments made on the appellant income is nil. Therefore, the addition made of on account of incorrect application of ICDS-II cannot be sustained and the appeal is allowed on these grounds of appeal. We have mentioned the said facts during our appeal proceedings which too was not considered: Sl. No. Case title Order No. Exhibit No. 1. Thuruthel Drug Lines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation 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 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. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 inventory shall be adjusted to include the amount of any trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods", 14. The learned Assessing Officer by adding Value Added Tax only on closing Stock, makes the closing stock a source of profit, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) 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 made. 20. We also rely on the judgment of Honourable High Court of Delhi in the case of CIT vs Mahavir Alluminium Ltd. reported in 297 ITR:77 in which it has been held that paragraph 23.13 of the guidance note (Guidance Note on Tax Audit under Section44AB of the Income Tax Act, 1961 issued by ICAI) itself makes it clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 Tax Act as well as Income Computation and Disclosure Standards Il 'Valuation of Inventories' and made the adjustment of VAT therein. The overall impact of the adjustments made on the appellant income is NIL. Therefore, the addition made of Rs. 1,02,910 on account of incorrect application of ICDS-ll cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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