SHASHI CABLES LIMITED,KOLKATA vs. DCIT, CPC, BANGALURU

This is the appeal preferred by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the ld. CIT(A)”], passed u/s 250 of the Income-tax Act, 1961 (hereinafter the ‘Act’), dated 16/12/2021 for the Assessment Year 2018-19. 2. The assessee has raised the following grounds of appeal:- “1. For that adjustment, by way of addition of Rs.37,13,674/- representing write-back of MS Drum Written off, to the returned income which was claimed as not taxable ought to have been deleted by Ld. CIT(A).

The only issue regarding addition of Rs.37,13,674/- representing write-back of MS Drum Written off.

We have heard rival contentions and perused the material placed before us. An addition of Rs.37,13,674/- made by the CPC in the return processed u/s 143(1) of the Act considering the income of the assessee at Rs.4,30,36,880/- as against Rs.3,91,58,601/-. The total adjustment of Rs.38,78,279/- out of which disallowance u/s 36(1)(va) of the Act was Rs.1,64,605/- which has not been pressed by the assessee. The remaining amount of Rs.37,13,674/- which was claimed as an addition to the capital account for the year but treated as income by the CPC. Before us, ld. Counsel for the assessee referred to the written submission filed before the ld. CIT(A), which reads as follows:- “These grounds are with respect to adjustment of Rs 37,13,674/- made to returned income as referred above. First, the facts relating to these grounds may be stated. The assessee started using MS Drums for delivering its finished goods being cables to its customers since financial year 2016-17. These MS Drums were returnable by the customers. The assessee had used MS Drums costing Rs 55,42,797/- during FY 2016-17 and had charged the whole amount to Profit & Loss Account under the sub-head 'Packing Material' which was shown under the main head 'Cost of Materials Consumed'. The deduction for the same was also claimed in corresponding assessment year, i.e. 2017-18. However, during the current year, i.e. FY 2017-18, the assessee changed its accounting policy for which reference may be made to Note No 26 of Financial Statement a copy of which is enclosed herewith. The assessee decided to write off 33 % of value of MS Drums put to use on reducing balance method. As per this new accounting policy, the write off of MS Drums was excess by Rs 37,13,674/- in FY 2016-17 and accordingly, this amount was shown as addition to accumulated profit brought forward from the preceding year under the head Reserves & Surplus' In the return, this amount was shown under the head 'Exempt Income' as the same did not partake the character of income and was merely book entries. The Income tax Act does not prescribe any amortization for MS Drum Expenses. So, deduction for whole amount of MS Assessment Year: 2018-19 Shashi Cables Limited 3 Drums used in Asst Year 2017-18 was correctly claimed as deduction in that year because these expenses were incurred in that year in terms of section 37 of the Act. The entries in the books for the same are not germane to allow-ability of expenses. The mere write back of the amount allowed as deduction in the earlier year does not result in any income because this write back was not for the reason that liability to pay for MS Drums had ceased. It was merely for accounting purpose and can not affect the taxable income. Please also note that MS Drum written off during the previous year (FY 2017-18) relevant to year under appeal (Asst Year 2018-19) amounted to Rs 50,60,683/-. This write off included Rs 12,25,512/- made out of the above amount of Rs 37,13,674/-. Accordingly, this sum of Rs 12,251,512/- was suo muto disallowed by the assessee in its return as will be apparent from the Computation of Income being filed. So, while Rs 3713674/- was written back at the same time, out of that figure, Rs 1225512/- was written off. So, net write-back amounted to Rs 24,88,162/- only. So, if department raises any dispute, it can only be with net amount of Rs 2488162/-. Even in subsequent years also, the amount written off out of this sum of Rs 37,13,674/- was suo muto disallowed by the assessee. The amount so disallowed by assessee on its own was Rs 821,093/- in Asst Year 2019-20 and Rs 550,133/- in Asst Year 2020-21. The computations for those two years are also enclosed. So, write back of MS Drum has not resulted in double deduction at all. Thus, the total suo muto disallowance made by assessee out of MS Drum Written off for the reason that they pertained to amount written back over Asst Year 2018-19, 2019-20 and 2020-21 amount to Rs 25,96,738/- (1225512+821093+550133). So, sustaining the addition of Rs 3713674/- will result in double addition to the extent of Rs 25,96,738/-.”

From going through the above written submissions and also going through the computation of income for Assessment Year 2018-19 placed at page 27 of the paper book, audited financial statement for Financial Year 2017-18 placed at page 4 to 20 of the paper book and also considering the note on change in accounting policy, which has been mentioned by the auditor in the audited balance sheet and appearing at page 21 of the paper book, we notice that assessee used to book the cost of MS Drums purchased during the year as an expenditure and directly debiting them to the profit and loss account. However, since this item which is a packing material was returnable and reusable, they have been in the possession of the assessee company, a change was made in the accounting policies and rather than booking 100% expenditure, it was decided to apportion the cost by 33% per annum. This change in the accounting policy has been duly noted in the financial statement. As per this new accounting policy, the write off of MS Drums was Assessment Year: 2018-19 Shashi Cables Limited 4 excess by Rs.37,13,674/- in the preceding Financial Year 2016-17 and the same was thus brought into the books by showing it under the head ‘reserve and surplus’ and 33% of this sum at Rs.12,25,512/- has been suo moto added to the income in the computation of income for Assessment Year 2018-19.

Under these given facts and circumstances, we are of the considered view that due to change in the accounting policy, certain adjustments have been made in the books and in order to complete the double entry system, so that on one hand MS Drum in use appear as an asset and on the liability side, the amount is shown under the head reserve and surplus and further, 33% of the cost of MS Drum is apportioned as expenditure. Therefore, ld. CIT(A) erred in sustaining the disallowance of Rs.37,13,674/- as it would tantamount to double addition because the assessee has written off Rs.12,25,512/-, Rs.8,21,093/- and Rs.5,50,133/- for the Assessment Year 2018-19, 2019-20 and 2020-21 and the copy of computation of income supports this fact. We, therefore, set aside the finding of the ld. CIT(A) and delete the addition of Rs.37,13,624/- and allow the grounds raised