COMMISSIONER OF INCOME TAX, ROHTAK vs. M/S CAPSUGEL HEALTHCARE LTD

PDF · subscribers
ITA/273/2011HC Punjab & HaryanaPHHC01095602201128 August 2012Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE GURMEET SINGH SANDHAWALIA5 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the appeal was dismissed as no substantial question of law arose. Regarding Question No. (ii), the Court noted that the Revenue did not dispute that this issue was concluded against them by the Apex Court's decision in Commissioner of Income Tax v. Woodward Governor India P. Limited. Therefore, the assessee was entitled to capitalize the foreign exchange fluctuation for increase in the cost of assets and claim depreciation thereon. Regarding Question No. (i), the Court found no error in the findings of the CIT(A) and the Tribunal. The CIT(A) had noted that the assessee's accounting policy was to value inventories at cost or net realizable value, whichever is lower, in consonance with Accounting Standard 2. The CIT(A) observed that the AO misunderstood the accounting treatment and that the provision for devaluation/depreciation of inventory was a valid charge to the trading account and correctly claimed as a deduction under Section 37(1). The Tribunal had affirmed this, and the Revenue had not filed an appeal against a prior similar order of the Tribunal for earlier assessment years. Consequently, the appeal was dismissed.

What were the facts?

The Revenue (Commissioner of Income Tax, Rohtak) appealed against an order of the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2003-04. The ITAT had deleted disallowances made by the Assessing Officer (AO). The disputed amounts included Rs. 28,45,951/- for provisions on ageing of inventory (work-in-progress and finished goods) and Rs. 1,47,876/- for depreciation on capitalized foreign exchange fluctuation. The AO had also made additions for exchange fluctuation loss on debtors/creditors, and for personal use of telephone, postal, and car expenses, and labour welfare expenses. The CIT(A) and ITAT had deleted these additions, with the ITAT relying on the Supreme Court decision in CIT v. Woodward Governor India P. Limited for the foreign exchange fluctuation issue. The Revenue's appeal to the High Court focused on the inventory ageing provision and the depreciation on foreign exchange fluctuation.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances of Rs. 28,45,951/- made on account of provisions for ageing of inventory of work-in-progress and finished goods? (Question of law) 2. Whether, on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances made on account of depreciation at Rs. 1,47,876/- claimed on amount capitalized on account of foreign exchange fluctuation, when Section 43A of the IT Act was not applicable? Assessee's contentions: The assessee argued that the provision for ageing of inventory was a valid charge to the trading account and correctly claimed as a deduction under Section 37(1) of the Income Tax Act, 1961, as it represented an ascertained loss due to permanent impairment of inventory, in line with its accounting policy and Accounting Standard 2. For the foreign exchange fluctuation issue, the assessee relied on the Supreme Court decision in CIT v. Woodward Governor India P. Limited. Revenue's contentions: The Revenue argued that Section 43A of the IT Act was not applicable to the capitalization of foreign exchange fluctuation, and therefore, depreciation on such capitalized amount should not be allowed. The Revenue also disputed the deletion of disallowances for inventory ageing.

Which sections of the Income-tax Act were involved?

Section 260A,Section 43A,Section 37(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 273 of 2011 Date of decision: 28.8.2012 The Commissioner of Income Tax, Rohtak -----Appellant Vs. M/s Capsugel Healthcare Limited, Rewari ----Respondent CORAM:- HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE GURMEET SINGH SANDHAWALIA Present:- Mr. Inderpreet Singh, Advocate for the appellant. Ajay Kumar Mittal,J.

1.

The revenue has preferred this appeal under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 10.1.2011 passed by the Income Tax Appellate Tribunal, Delhi Bench 'A' New Delhi in ITA No.2124/Del/2008 and C.O. No.313/Del/2009 for the assessment year 2003-04, claiming following substantial questions of law:- “i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances of Rs.28,45,951/- made on account of provisions made towards ageing of inventory of work in progress and finished goods? ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances made on account of depreciation at Rs.1,47,876/- claimed on amount capitalized on account of foreign exchange fluctuation for increase in cost of liability due to capitalization of foreign exchange rate fluctuations when section 43A of the IT Act was not applicable to the facts of the case?

2.

Briefly, the facts as narrated in the appeal may be noticed. Return in this case was filed on 25.11.2003 declaring nil income under the head 'income from business or profession'. Assessment was completed after making additions of ` 1,83,25,364/- under various heads. During the course of assessment proceedings, it was noticed that the assessee debited an amount of ` 28,45,951/- on account of provisions made towards ageing of inventory of work in progress and finished goods and addition was made by the Assessing Officer accordingly. The CIT(A) deleted the said addition. The Tribunal dismissed the appeal of the department. Further, the assessee added `5,91,505/- to capital cost on account of exchange fluctuation loss and depreciation of ` 1,47,876/- was claimed on this account. The CIT(A) deleted the disallowance made on this account. The Tribunal dismissed the appeal of the department. The assessee also debited loss at ` 2,61,469/- due to exchange fluctuation in respect of debtors and creditors and therefore, addition of this amount was made. The CIT(A) deleted the addition and the Tribunal dismissed the appeal of the department relying upon decision of the Apex Court in Commissioner of Income Tax v. Woodward Governor India P. Limited, (2009) 312 ITR 254. Further, addition of ` 36,067/- on account of telephone and postal expenses, car expenses of ` 1,18,520/- and ` 84,043/- on account of labour welfare expenses was made for personal usage. The CIT(A) disposed of the appeal on the same lines as in the assessment year 2002-03. The assessee filed cross objections for sustenance of the above disallowances. The Tribunal allowed the cross objections of the assessee and dismissed the appeal of the department. Hence the revenue is before this Court through the present appeal.

3.

Learned counsel for the revenue did not dispute that Question No.(ii) stands concluded against the revenue by the Apex Court decision in Woodward Governor India P. Limited,'s case (supra). Accordingly, the said question is answered against the revenue and in favour of the assessee. It is held that the assessee was entitled to capitalize on account of foreign exchange fluctuation for increase in cost of the asset due to fluctuations of foreign exchange rate and accordingly claim depreciation thereon.

4.

Adverting to question No.(i), the primary issue that arises for consideration is whether the assessee was justified in claiming Rs.28,45,951/- on account of provisions made towards ageing of inventory of work in progress and finished goods. The CIT(A) while adjudicating the issue in favour of the assessee had noticed as under:- “The appellant company has its accounting policy to value inventories of finished goods & WIP at cost or net realisable value whichever is lower. Reference has been made to Schedule 17 of Annual Accounts for the year ending 31.3.2003 in this regard. This accounting policy is also in consonance with the Accounting standard 2 on valuation of inventories issued by the Institute of Chartered Accountants of India. The AO has not understood the accounting carried out by the company. He has stated that 'once the inventory valuation

has been completed

as per manufacturing/trading account nothing requires to be allowed as a deduction to Profit and Loss Account either on account of provision for devaluation of stock or permanent impairment of asset or on account of write off of the stock whether finished goods or work-in- progress.' The treatment followed by the assessee company was that while determining the manufacturing/trading account valuation of inventory was carried and the realisable value determined. The amount of depreciation/impairment of the finished goods and work in progress had to be reflected separately as per the Accounting Standards. Reference is drawn to Schedule 10 which shows the increase/decrease in stock which is part of the trading stock. A perusal of this Schedule will show that the amount of devaluation of Rs.28,45,951/- has been reflected in the Schedule by reducing the difference between the opening and closing stock and taking the balance to the Profit and Loss account. On the contra side the debit had to be made to the Profit and Loss account as an extra ordinary item arising out of the devaluation/depreciation of the inventory. The fact that Rs.28,45,951/- was reflected separately in the Profit and Loss account was only because of the presentation. The amount could have easily been shown in the Profit and Loss account against Schedule 10 at a figure of Rs.23,92,687/- (Rs.453264 – 2845951). The result would have been same. This disproves the understanding of the AO that the provisions have been made for loss after the determination of the trading account. This is not so as this debit of Rs.28,45,951/- has to be read as part of the trading account determination. The disclosure of Rs.28,45,951/- is merely reflection of the manner of presentation required as per Accounting Standards. It has been reiterated that Rs.28,45,951/- is a valid charge to the trading account and correctly claimed as per law as a deduction. It has further been submitted that the impugned loss claimed was ascertained loss as there has been permanent impairment of asset i.e. inventories as explained above and accordingly is fully allowable as business loss under Section 37(1) of the Income Tax Act, 1961.”

5.

The aforesaid order was affirmed by the Tribunal following its earlier order dated 7.11.2008 in the case of the assessee for the assessment years 2000-01 and 2001-02 passed in ITA Nos.3952 and 2558. Learned counsel for the revenue fairly submitted that no appeal had been filed against the aforesaid order of the Tribunal. No error could be shown in the findings recorded by the CIT (A) and affirmed by the Tribunal.

6.

In view of the above, no question of law much less substantial question of law arises for consideration.

7.

Accordingly, the appeal is dismissed. (Ajay Kumar Mittal) Judge August 28, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge

More judgments on Section 43A

All 273 judgments and leading authorities on Section 43A →

Recent GST High Court judgments

Search GST case law →