RACOLD THERMO PRIVATE LIMITED (FORMERLY KNOWN AS RACOLD THERMO LIMITED),PUNE vs. INCOME TAX OFFICER,

PER R.S.SYAL, VP : These two appeals by the assessee relate to the assessment years 2007-08 & 2010-11. Since some common issues are raised in these appeals, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.

A.Y. 2007-08 : 2. The first issue raised in this appeal is against the confirmation of disallowance of Rs.25,02,000/- for obsolescence of inventories.

order, are that the assessee made a provision for obsolescence of

inventory amounting to Rs.25.02 lakh. The Assessing Officer (AO)

required the assessee to furnish the details of inventory valuation.

The assessee furnished the inventory valuation policy, which has

been reproduced on page 3 onwards of the assessment order. The

AO made addition of Rs.25.02 lakh on the ground that the assessee

did not have any documentation to suggest that the said items of

inventory had market value at Nil/half of cost price. The ld. CIT(A)

affirmed the action of the AO, against which the assessee has come

up in appeal before the Tribunal.

on record, it is observed from the Table on page 7 of the impugned

order that the assessee did not create any provision for obsolescence

for the year under consideration, which is captured as under: -

Particulars F.Y.05-06 F.Y.06-07 F.Y.07-08 F.Y.08-09 F.Y.09-10 Opening provision 5816 5816 2502 2985 16540 Add :Additional 0 0 483 13555 0 provision Less : Reversal of 0 3314 0 0 7728 provision Closing Balance 5816 2502 2985 16540 8812

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of the provision for the year under consideration was at Rs.58.16

lakh. The assessee did not make any provision for the year. Earlier

provision of Rs.33.14 lakh was reversed on account of incurring of

expenses, thereby leaving the closing balance of provision at

Rs.25.02 lakh. It is this amount which has been added by the

authorities below. We have also gone through the Profit and loss

account and balance sheet of the assessee, which fortify the contents

of the above Table as are relevant for the year under consideration.

In order to make any disallowance, it is elementary that there should

be a claim for deduction of such an amount. Since no actual

provision was created during the year by way of debit to the Profit

and loss account, meaning thereby, no deduction was claimed, there

could have been no reason to make any disallowance. This ground

is, therefore, allowed.

confirmation of addition of Rs.89,66,000/- on account of change in

method of accounting for valuation of inventory.

profit by Rs.89.66 lakh arising on account of change in the method

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of valuation of stock from the First in First Out (FIFO) method to

Weighted Average method. The AO did not approve the change

and hence made addition for the said sum, which came to be

countenanced in the first appeal.

material on record, it is observed that the assessee admittedly

changed its method of valuation of inventories from FIFO to

Weighted Average method. There can be no bar on the assessee in

changing the method of valuation provided such change is to a

recognized method and the same is consistently followed in the

succeeding years as well. Undoubtedly, weighted average is a

recognized method for valuation. Though the ld. AR submitted that

the changed method was consistently followed, he could not place

on record any material to indicate so. In such circumstances, we

set-aside the impugned and remit the matter to the file of the AO for

allowing the deduction of Rs.89.66 lakh if the changed method of

valuation has been consistently followed by the assessee in the

succeeding years. In the otherwise scenario, the AO will be free to

deal with the situation as per law.

confirmation of addition of Rs.1.50 crore on account of Provision of

warranty.

the assessee made a provision for warranty of Rs.1.50 crore for the

assessment year under consideration. On being called upon to

substantiate the same, the assessee furnished a tabulation which has

been incorporated on page 15 of the assessment order, showing that

the additional provision was made for Rs.1.94 crore and the actual

warranty expenses were also at the same level, namely, Rs.1.94

crore. The assessee demonstrated that Rs.1.50 crore was the

opening balance of provision of warranty, which remained at the

same level at the end of the year. The AO made disallowance of

Rs.1.50 crore, which came to be echoed in the first appeal.

material on record. The tabulation from page 15 of the assessment

order is reproduced as under :

(All amounts in thousands of rupees) Particulars A.Y.2008-09 A.Y.2007-08 A.Y. 2006-07 A.Y. 2005-06 Gross sales/turnover 13,51,594 12,66,246 12,07,607 8,67,971 during the year Carrying amount of 15,000 15,000 7,068 7,068 provision as on Ist April Additional provision of 23,171 19,465 23,943 Nil warranty made during the year Actual warranty 23171 19,465 16,011 Nil expenses Carrying amount of 15,000 15,000 15,000 7,068 provision as on 31st March

assessment year under consideration there was opening balance of

Rs.1.50 crore. The assessee made additional provision of Rs.1.94

crore; incurred actual warranty expenses of Rs.1.94 crore and

carried forward the provision at Rs.1.50 crore. Thus, it is evident

that the amount of provision for the year is exactly equal to the

amount of warranty expenses incurred during the year. Had it been

a case of direct debit of expenses on account of repairs to the Profit

and loss account, there would not have been any disallowance. It is

only because of the assessee creating provision and spending equal

amount that the AO has gone with the making of addition and that

too, for the closing balance of the provision, which has no relation

with the creation of provision for the year under consideration. As

actual expenditure of warranty is equal to the amount of provision,

we hold that no disallowance can be made or sustained. This

ground is, ergo, allowed.

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A.Y. 2010-11 :

of addition of Rs.55,66,289/- on account of disallowance of

Provision for obsolescence of inventory.

showed opening balance of Provision for obsolescence of inventory

at Rs.1.22 crore. During the year under consideration, such

provision was utilized to the tune of Rs.62.22 lakh and rest of the

amount of Rs.55.66 lakh was carried forward to the next year. The

AO made the addition on account of closing balance of provision at

Rs.55.66 lakh, which came to be affirmed in the first appeal.

material on record, it is seen that for the year under consideration

there was no creation of provision for obsolescence of inventory.

Some part of the opening balance of the provision has been reversed

because of incurring of actual expenses. The authorities below have

made and confirmed the addition in respect of the closing balance of

the provision, which is untenable. Since no provision for

obsolescence of inventory was claimed as deduction by way of debit

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to the Profit and loss account for the year under consideration, we

hold that there can be no question of making any disallowance on

this count. We, therefore, order to delete the addition.

Order pronounced in the Open Court on 12th December, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 12th December, 2019 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-6, Pune 4. The Pr.CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “बी” / DR ‘B’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date 1. Draft dictated on 11-12-2019 Sr.PS 2. Draft placed before author 11-12-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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