Change in closing stock to include VAT-Excise us 145A required corresponding adjustments for opening stock, Payment of Excise and VAT out of Cash/Bank but not debited in P & L Account – ITAT
ABCAUS Case Law Citation:
ABCAUS 2128 (2017) (11) ITAT
The Assessing Officer (AO) noted from the Tax Audit report that assessee did not include amount of Excise duty and VAT while making valuation of the closing stock. Accordingly, he gave a show cause to assessee for deviating from the provisions of the Section 145A of the Income Tax Act, 1961.
The assessee submitted that it was following exclusive method of accounting in view of Accounting Standard -2 (AS- 2) issued by the Institute of Chartered Accountant of India (ICAI). However, if the accounts are re-casted on inclusive method, no further adjustment would be required since corresponding adjustment would be required to be made not only in closing stock and sales but also in opening stock and purchases. Further, no amount of Excise duty is pending to be paid, therefore, no further adjustment at all would be needed.
The assessee company submitted detailed working to the AO showing the effect of adjustment at NIL amount as under;
| Sl. No. | Description | Amount (Rs.) |
| (A) Increase in Profits | ||
| 1. | Increase in sales due to inclusion of Excise Duty & VAT | 1,85,99,125 |
| 2. | Increase in value of Closing stock due to Inclusion of Excise Duty and VAT | 64,85,914 |
| Sub Total (A) | 2,50,85,039 | |
| (B) Decrease in Profits | ||
| 1. | Increase in value of opening stock by Inclusion of Excise Duty & VAT | 1,11,65,317 |
| 2. | Excise Duty and VAT on the purchases | 1,21,45,987 |
| 3. | Excise Duty & Vat paid out of cash/bank not Debited to P&L account | 17,73,735 |
| Sub Total (B) | 2,50,85,039 | |
| (C) Increase/Decrease in Profits (A-B) | NIL |
However, the AO was not satisfied and therefore he made the addition.
Being aggrieved, the assessee carried the matter before CIT(A) The CIT(A) deleted the addition. Still Being aggrieved, Revenue carried the matter before the Tribunal (ITAT).
The ITAT observed that as per the calculation made by the assessee, there was no effect in the profit due to deviation from the provisions of section 145A.
It was noted that the difference in working of the assessee and working made by the AO was mainly due to the reason that AO had not given the benefit of corresponding adjustment in the following:
(a) Value of opening stock
(b) Excise duty and VAT paid out of cash/ Bank but not debited to the P & L Account
The Tribunal noted that the Hon’ble Delhi High Court had held that if there is change in closing stock to give effect to Section 145A, there must necessarily be a corresponding adjustment in the opening stock of the year. It was also noted that similar view was expressed by the ICAI in the Guidance Note explaining the provisions of Section 145A.
The Tribunal opined that on the basis of sense of justice and equity also same inference can be drawn that if Trading and P & L Account is to be converted from ‘Exclusive’ method to ‘Inclusive’ method, then corresponding adjustment will be required to be made in all relevant heads of Income and Expenditure including the opening stock.
The ITAT opined that when the sales and closing of assessee had been enhanced by element of excise duty and VAT, the claim of assessee for enhancement of opening stock and the allowance of duties already paid was perfectly legal and valid to arrive at true profit.
Accordingly, the Tribunal deleted the impugned addition and allowed the relevant ground of appeal.
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