2024 (10) TMI 645 - AT - Income Tax

VAT addition to closing stock only while excluding from opening stock violates Section 145A consistency requirements

ITAT Cochin held that AO's addition of VAT only to closing stock while maintaining cost basis for opening stock and purchases violated Section 145A ... Underassessment of closing stock - incorrect application of ICDS-2 in the return of income filed and therefore the addition was made to the returned income - in this case the assessee is accounting purchase and sale and inventory at cost excluding Value Added Tax (VAT) as the method of accounting regularly followed for more than a decade. HELD THAT:- 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. Inventory of inputs is to be valued at the net of the input tax which is refundable. Assessee prepared their accounts in compliance with the AS-2 'Valuation of Inventories' issued by the Institute of Chartered Accountants of India. According to the Guidance 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 and Disclosure Standards Il 'Valuation of Inventories' and made the adjustment of VAT therein. 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 be sustained and the appeal is allowed on these grounds. Closing stock value should be at the cost price and rightly the assessee had followed the said system and therefore there is no mistake on the part of the assessee and infact they have followed sec.145A - AO as well as the CIT(A) had committed a mistake that when the authorities are intended to add the VAT amount along with the value of the closing stock, then the same method should be followed in respect of the opening stock which was shown on cost basis. Therefore, two different methods could not be adopted for the opening stock and the closing stock. If the AO decided to add VAT to the closing stock value, then necessarily he has to add VAT amount in the opening stock value also and in that circumstances the net effect will be neutral and no undervaluation would arise. In such circumstances, we accept the method followed by the assessee by following sec.145A of the Act and thereby hold that the method adopted by AO in taking the closing stock value after adding the VAT amount is not correct and liable to be set aside. We are also entirely in agreement with the submission of the assessee that the other orders passed by the CIT(A) in respect of other six dealers are also in accordance with the view taken by us. In coming to the above conclusion, we also relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd [2003 (1) TMI 8 - SUPREME COURT] wherein held that adopting gross method for purchases and net method for unconsumed stock at the year end is not permissible. Appeal of assessee allowed. Issues Involved:1. Incorrect application of Section 145A and ICDS-II regarding the valuation of inventories.2. Addition of Value Added Tax (VAT) to closing stock without corresponding adjustments to opening stock.3. Compliance with Income Computation and Disclosure Standards (ICDS) and Accounting Standards (AS).Issue-wise Detailed Analysis:1. Incorrect Application of Section 145A and ICDS-II:The primary issue revolves around the application of Section 145A of the Income Tax Act, which mandates that inventories should be valued by including any tax, duty, cess, or fee actually paid or incurred. The assessee contended that the method of excluding VAT from the valuation of closing stock was consistent with the practice of valuing opening and closing stocks at cost price. The Tribunal noted that the assessee had consistently followed an accounting method that excluded VAT from the cost of purchases, aligning with the Accounting Standard (AS) 2 issued by the Institute of Chartered Accountants of India (ICAI), which excludes recoverable taxes from the cost of purchases. The Tribunal found that the Assessing Officer (AO) erred in applying Section 145A by adding VAT only to the closing stock without adjusting the opening stock, purchases, and sales, which is not in compliance with the inclusive method prescribed by the section.2. Addition of VAT to Closing Stock Without Corresponding Adjustments:The Tribunal observed that the AO made an addition of Rs. 1,02,910 to the closing stock by including VAT without making corresponding adjustments to the opening stock. This approach was deemed incorrect as it did not reflect the true profit, as highlighted by the Privy Council in CIT v. Ahmedabad New Cotton Mills Co. Ltd. The Tribunal emphasized that any change in valuation at one end must be mirrored at the other end to accurately reflect profits. The Tribunal also referred to the Supreme Court judgment in CIT v. Indo Nippon Chemicals Co. Ltd., which prohibits adopting different methods for purchases and closing stock. The Tribunal concluded that the AO's method was incorrect and liable to be set aside.3. Compliance with ICDS and Accounting Standards:The Tribunal noted that the assessee's method of excluding VAT from the cost of purchases and inventory valuation was in compliance with AS-2 and the guidance provided by the ICAI. The Tribunal acknowledged that ICDS-II prescribes an inclusive method of valuation, but the provisions of the Income Tax Act prevail in case of conflict. The Tribunal found that the assessee's method was consistent with the provisions of Section 145A and the guidance notes issued by the ICAI, which allow for adjustments to be made for tax purposes without altering the method employed in the books of accounts. The Tribunal also highlighted that the inclusive method prescribed by ICDS-II was tax neutral, as demonstrated by the memorandum account prepared by the assessee.Conclusion:The Tribunal concluded that the addition of Rs. 1,02,910 to the closing stock by the AO was not justified due to the lack of corresponding adjustments to the opening stock and other related accounts. The Tribunal accepted the assessee's method of inventory valuation, which complied with Section 145A and the relevant ICDS and AS provisions. Consequently, the Tribunal allowed the appeal, setting aside the orders of the AO and CIT(A), and upheld the assessee's method as correct.