S.145A No Addition for stock valuation if exclusive method followed

Deviation from stock valuation method prescribed in Sec 145A cannot lead to addition if exclusive method followed

Brief of the case:

The ITAT Kolkata in the case of M/s Stone India Limited held that VAT and CST even if not included in value of closing stock do not result in undervaluation of closing stock because of its corresponding non-inclusion in Opening Stock , Purchases and Sales. Therefore, addition made on the ground of non-inclusion in the value of closing stock cannot be sustained as the same does not result in any understatement of incomes and profits.

Facts of the case:

• The assessee company was engaged in the business of manufacture and sale of equipments for railways and defence filed its return of income on 31.10.2007 declaring a loss of Rs.63,72,290/-.During the course of assessment proceedings, assessing officer on examination of valuation of closing stock observed that the CST and VAT component paid on the raw material to the extent, the same was lying in closing stock was not included by the assessee in the value of stock as required by the provisions of section 145A.
• He therefore, worked out such proportionate indirect taxes and added to them the value of closing stock which resulted in addition of income to the tune of Rs. 40,73,440/-.
• CIT(A) on appeal , deleted the addition made by AO and held that the CST had already been debited to P&L a/c in the year of purchase and non-inclusion of VAT in stock is made good by its non-inclusion in Sales & Purchase which makes the entire exercise revenue neutral.
• Aggrieved by the order of CIT (A), assessee is in appeal before ITAT.
  

Contention of the Assessee:

• It was submitted that since no set off was permissible on account of CST paid on raw material , the was debited to P&L A/c as expenditure of the year under consideration as no credit of the same is available and it was also included in the value of stock of raw material.
• As regards VAT, it was submitted that the assessee was entitled to set off the VAT paid only on raw material against VAT recovered by it on sales and the same, therefore, was not debited to the Profit & Loss Account and consequently was not included in the value of stock of raw material.
• If at all the VAT was to be included in the value of opening as well as closing stock as done by the Assessing Officer in accordance with the provisions of section 145A, the same should be done even in respect of purchases and sales and if it is so done, there would be no impact on prof it and loss of the year under consideration.
  

Contention of the Revenue:

The learned counsel for the revenue supported the order of AO that there was deviation from the valuation method prescribed in Sec 145A , therefore, the addition made by AO was justified.

Held by ITAT Kolkata:

• Tribunal observed that the CST paid by the assessee on the raw material purchased was claimed as expenditure by debiting the said amount to the Prof it & Loss A/c, because as per VAT law the assessee was not entitled to claim in set off for the same . As such an item which had already been expensed out cannot be included in the value of closing stock.
• As regards VAT the assessee was entitled to set off the same against the VAT collected by it was not included in the value of opening and closing stock as the assessee was entitled to claim set of off VAT paid on purchase against VAT payable on sale and for that the input paid was kept in a separate account classifiable under current assets.
• As reported by the auditors in Form 3CD such adjustments if made as per the provision of section 145A on account of VAT in respect of opening and closing stock as well as purchases and sales, the impact on prof it and loss of the year under consideration was going to be NIL. Therefore, there is no validity of the addition made by AO for non-inclusion of sales taxes in the closing stock. The method so followed by assessee was exclusive method instead of inclusive method prescribed by Sec 145A was also held valid.
• In result the appeal filed by the revenue was dismissed.