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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R.S. SYAL & SHRI PARTHA SARATHI CHAUDHURY
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.
ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
Briefly stated, the facts of the case, as noted in the assessment
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.
Having heard both the sides and perused the relevant material
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
3 ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
It can be seen from the above Table that the opening balance
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.
Ground No.2 of the assessee’s appeal is against the
confirmation of addition of Rs.89,66,000/- on account of change in
method of accounting for valuation of inventory.
The facts apropos this ground are that the assessee reduced its
profit by Rs.89.66 lakh arising on account of change in the method
4 ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
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.
Having heard the rival submissions and perused the relevant
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.
ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
The last ground of the assessee’s appeal is against the
confirmation of addition of Rs.1.50 crore on account of Provision of
warranty.
The facts concerning this ground are that the AO observed that
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.
We have heard the rival submissions and perused the relevant
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
ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
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
It can be seen from the above tabulation that for the
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.
7 ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
In the result, the appeal is partly allowed.
A.Y. 2010-11 :
The only issue raised in this appeal is against the confirmation
of addition of Rs.55,66,289/- on account of disallowance of
Provision for obsolescence of inventory.
Briefly stated, the facts of the case are that the assessee
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.
Having heard the rival submissions and perused the relevant
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
8 ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
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.
In the result, the appeal is allowed.
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
ITA Nos.2919 & 2921/PUN/2016 Racold Thermo Private Limited
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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