Failure of assessee to explain allowability of freight expenditure and labour charges payable, claimed in closing stock: ITAT dismisses appeal [Read Order]

The Chennai Bench of Income tax Appellate Tribunal (ITAT) held that due to no explanation of assessee for allowability of freight expenditure and labour charges, claimed by assessee in closing stock.

The assessee in this case is TCP Limited. The Assessing Officer (AO) while framing assessment and on perusal of audited balance sheet and profit & loss account of the assessee noticed that the assessee has reported a sum of Rs.61.24 crores under the head ‘current liabilities’.

The assessee explained and filed details of sundry creditors for expenses of Rs.5,60,85,668/- out of which, the assessee has created provision for Rs.2,52,68,564/- towards raw materials, stores and spares.

According to AO, this is merely a provision for future liability and liability is contingent in nature and yet to be incurred. Hence, according to him, this is not an allowable deduction. The AO disallowed the liability which is yet to be incurred for the provision of Rs.2,52,68,564/-.

Aggrieved, assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) on perusal of paper-book and in particular, noticed that the provision was made for freight expenses payable and labour charges payable and these expenses could not have been included in the closing stock as claimed by the assessee. Hence, he confirmed the disallowance to the extent of provision created for chemical division for an amount of Rs.6,40,274/-.

Further aggrieved, assessee filed an appeal before the Tribunal .

The bench comprising of Mahavir Singh, Vice President and Manjunatha.G, Accountant Member noted that the assessee could not explain how these expenses which are claimed by assessee in the closing stock is allowable i.e., provision in regard to freight expenses payable and labour charges payable. The assessee has not made any payment during the year and even there is no liability incurred for this, rather this is merely a provision. Hence the Tribunal confirmed the order of CIT(A), and dismissed the appeal filed by assessee.

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