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Facts
The assessee, engaged in manufacturing electrical components, filed an appeal against the CIT(A)'s order for AY 2003-04. The appeal concerned the disallowance of provision for obsolete/slow-moving inventory for both the LVCE division (INR 80,58,706) and the Wind Energy division (INR 1,77,41,995). The CIT(A) had upheld the disallowance for the LVCE division and, for the first time, disallowed the provision for the Wind Energy division.
Held
The Tribunal held that the provision for obsolete/slow-moving inventory for the LVCE division was created on a scientific basis, following Accounting Standard 2, and similar claims in prior years were accepted. Regarding the Wind Energy division, the Tribunal found that the CIT(A) had no jurisdiction to disallow this provision for the first time in the second round of appeal, especially when the AO and previous Tribunal orders had not raised this issue. The reasons provided by the assessee were also considered valid.
Key Issues
Whether the CIT(A) was justified in disallowing the provision for obsolete/slow-moving inventory for the LVCE division, and whether the CIT(A) had the jurisdiction to disallow the provision for the Wind Energy division for the first time in the second round of appeal.
Sections Cited
253, 250, 143(3), 254, 263, 145(2)
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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the Ld.CIT(A)-3, Bengaluru dated 30/09/2016 in respect of the A.Y. 2003-04 and raised the following grounds: “
Based on the facts and circumstances of the case and in law, GE India Exports Private Limited (hereinafter referred to as ''the Company" or "the Appellant") respectfully craves, leave to prefer an appeal under Section 253 of the Income- Act, 1961 ("the Act") against the order dated
30. September 2016, passed by the Commissioner of Income- tax (Appeals) - 3 [''the learned CIT(A)"] under Section 250 of the Act, on the following grounds:
That on the facts and circumstances of the case and in law: General Grounds 1. That the order passed by the learned CIT(A) / Assessing Officer ("learned AO"), is based on incorrect appreciation of facts and interpretation of law and is, therefore, bad in law and on facts and is liable to be quashed. Grounds relating to disallowance of the provision for obsolete / slow moving inventory of INR 80,58,706 for Low Voltage Component and Equipment division ("LVCE Divisions")
2. That the learned CIT(A) has erred in law and on facts, by upholding the addition made by learned AO with regard to the disallowance of provision for obsolete / slow moving inventory to the tune of INR 80,58,706.
3. That the learned CIT(A) has erred in law and on facts, in stating that the provision of obsolete / slow moving inventory for LVCE Divisions was without any basis and thus arbitrary and has completely disregarded the specific factors and reasons submitted to him and the learned AO.
4. That the learned CIT(A) has erred in law and on facts, in upholding the action of the learned AO without considering the fact that the Appellant has been making provision for obsolete / slow moving inventory year on year by following consistent method.
5. That the learned CIT(A) erred in law and on facts, by not considering the ratio laid down in various judicial precedents relied by the Appellant in support of the allowability of the provision of obsolete / slow moving inventory including ruling of the jurisdictional Hon'ble High Court in the case of CIT v/s. IBM India Ltd [2015] 55 Taxmann.com 515.
Grounds relating to enhancement of income for obsolete / slow moving inventory of Wind Energy Division amounting to INR 1,77,41,995 6. That the learned CIT(A) has erred in law and on facts. in disallowing / adding back the provision of obsolete / slow moving inventory for Wind Energy Division and enhancing the income of the Appellant by INR 1,77,41,995.
That the learned CIT(A) has failed to appreciate that the jurisdiction of the CIT(A) is restricted only to the issue restored to the file of the AO in accordance with the specific direction of the Hon'ble Income-tax Appellate Tribunal (i.e. disallowance of provision for obsolesce and slow moving stock pertaining LVCE Divisions) in the second round of appeal and thus the learned CIT(A) has erred in holding that the provision of stock obsolescence of Wind energy division forms part of the specific direction of the Hon'ble Income-tax Appellate Tribunal.
8. That the learned CIT(A) has failed to appreciate that in set aside / remanded back proceedings, the jurisdiction of the learned AO was limited only to the issue of verification of the provision for obsolete and slow moving inventory of LVCE Divisions and therefore, the learned CIT(A) exceeded his jurisdiction by enhancing the income by making addition of INR 1,77,41,995 on account of provision for slow moving inventory pertaining to Wind Energy Division.
9. That the learned CIT(A) has failed to appreciate that the powers of revision of order does not vest with the CIT(A) when the order was passed under Section 254 read with Section 143(3) of the Act pursuant to specific directions of the Hon'ble Income-tax Appellate Tribunal.
10. That the learned CIT(A) has failed to appreciate that in set aside / remanded back proceedings, the CIT(A) cannot travel beyond the addition made in the original assessment and the Appellant therefore, cannot be placed in a position more adverse than what was challenged in the appeal proceedings. 10.1 That the learned CIT(A) erred in law and facts, by not considering the ratio laid down in various judicial precedents relied by the Appellant in support of the above contention including the ruling Hon'ble Supreme Court in the case of MCorp Global P. Ltd [2009] 309 ITR 434. The Appellant submits that each of the above grounds are independent and without prejudice to one another. Further, the Appellant craves leave to add, alter, amend, vary, omit or substitute the aforesaid ground of appeal
at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”
2. The brief facts of the case are that the assessee is in the business of manufacturing residential and electrical components and low voltage electrical and control products. The assessee filed their return of income for the A.Y. 2003-04 on 31/10/2003 declaring a loss of Rs. 20,11,42,957/-. Thereafter the assessment was completed on 31/03/2006 u/s. 143(3) of the Act by determining the loss at Rs. 18,64,25,830/-. In the said order, the AO had disallowed the provision for warranty. Further, the assessee has debited an amount of Rs. 80,58,706/- towards the provision for obsolete / slow moving inventories. The AO had considered the said as liability in contingent nature and disallowed the same. As against the said order, the assessee filed an appeal before the Ld.CIT(A)-1, Bengaluru and the Ld.CIT(A) had confirmed the additions made by the AO.
3. As against the said order, the assessee filed an appeal before this Tribunal and this Tribunal vide its order dated 15/07/2011 in 186 & 187/Bang/2010 in which the Tribunal had allowed the provision for warranty. Insofar as the disallowance of provision made by the assessee for obsolete / slow moving inventories, the Tribunal had remitted the issue to the file of the assessing authority to reconsider the issue in accordance with law after taking into account the evidences filed by the assessee and also the legal precedence on the issue.
4. The AO pursuant to the remand order of the Tribunal had passed an order on 26/11/2012 in which he has again disallowed the provision for obsolete / slow moving inventories of Rs. 80,58,706/- on the ground that it is a liability in contingent nature. As against the said order, the assessee filed an appeal before the Ld.CIT(A)-3, Bengaluru. The Ld.CIT(A) had confirmed the disallowance made by the AO. In the said order, the Ld.CIT(A) had added the provision of Rs. 1,77,41,995/- made by the assessee for the obsolete / slow moving inventories of the wind energy division. This disallowance was not made by the AO in his earlier order dated 31/03/2006 and the Ld.CIT(A) had also not made any such additions while passing the order on 23/11/2009. Even when the appeal was pending before this Tribunal, the Tribunal had not made any such disallowance and in fact the department had not raised such a plea before this Tribunal in earlier round. The AO also in his order dated 26/11/2012 had not made any such disallowance in respect of the wind energy division. The Ld.CIT(A) on the appeal filed by the assessee, had made the disallowance suomoto without any application filed by the revenue.
As against the said order, the present appeal has been filed by the assessee before this Tribunal.
At the time of hearing, the Ld.AR submitted a paper book enclosing the written submissions filed before the Ld.CIT(A) and other documents in support of their case and prayed to allow the appeal. The Ld.AR also further submitted that the Ld.CIT(A), for the first time, that too in the second round of litigation again suomoto, disallowed the claim. The Ld.AR further submitted that even in the second round of litigation, the AO had not made any such disallowance but curiously the Ld.CIT(A) had made the disallowance for which he has no authority. Insofar as the disallowance of the provision for obsolete / slow moving inventories, the Ld.AR submitted that it is the normal practice of the assessee in making the provision for obsolete / slow moving inventories year on year which was accepted by the revenue and therefore it could not be disallowed for the current year. The Ld.AR also relied on the judgment of the Hon’ble Jurisdictional High Court reported in (2015) 55 Taxmann.com 515 in the case of CIT vs. IBM India Ltd. and prayed to allow the appeal.
7. The Ld.DR relied on the order of the Ld.CIT(A) insofar as the disallowance of provision made for obsolete / slow moving inventories in respect of the wind energy division and submitted that the Ld.CIT(A) has every power to enhance the income if it was found that the same is not in accordance with law. Insofar as the disallowance of the provision for obsolete / slow moving inventories of low voltage components and equipments division, the Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeals.
We have heard the arguments of both sides and perused the materials available on record.
In the present appeal, there are two disputes raised by the assessee even though in the previous round of litigation, there is a single dispute. Insofar as the first dispute about the disallowance of the provision for obsolete / slow moving inventories of low voltage components and equipments division, we have considered the submission made by the assessee that the assessee had created such provision on a scientific and reasonable basis which is based on inventory aging schedule. We have also considered the submission that the assessee had followed the Accounting Standard – 2 issued by the ICAI on valuation of inventories and therefore the provision has been created in accordance with the guidelines prescribed by the above Accounting Standard and to comply with the generally accounting and auditing principles. We have also considered the submission that the assessee company had recognised the inventory at “cost” or “net realisable value” and the lower value has been consistently followed by the company from year to year. The assessee also relied on the auditor’s report and in the said report, the statutory auditors had not given any negative remarks insofar as the provision made for the obsolete / slow moving inventories. We have also considered the fact that similar disallowances made for the A.Ys. 2002-03 and 2004-05 were also remitted by this Tribunal vide its order dated 15/07/2011 whereas the revenue had accepted the claim made by the assessee but disallowed the claim in respect A.Y. 2003-04. The revenue also not placed any materials to show that the order of the AO for the said A.Ys. were revised by the Ld.PCIT u/s. 263 of the Act. It means that the revenue had accepted the claim whereas for the present A.Y. 2003-04, the revenue had not accepted the claim even though all the facts are similar and the circumstances are also one and the same.
We have also perused the judgment of the Hon’ble Jurisdictional High Court reported in (2015) 55 Taxmann.com 515 in the case of CIT vs. IBM India Ltd. in which the Hon’ble High Court had observed that the accounting treatment given by the assessee is in compliance with the provisions of Accounting Standard – 2 and also the assessee had followed this method regularly and therefore the provision for obsolete / slow moving inventories was allowed. In the present facts also, we found that the assessee had followed the Accounting Standard – 2 notified u/s. 145(2) of the Act and also the assessee had followed the very same set of procedures in respect of the earlier years that too for the A.Ys. 2002-03 and 2004-05 in which this Tribunal had remitted this issue and therefore for the present A.Y. taking a different view than that followed by the revenue would not be a reasonable one. Further, the method adopted by the assessee is also in accordance with the principles laid down by the Hon’ble Jurisdictional High Court in the above cited judgment. Further, we have also considered the various submissions made by the assessee that they had created such provision in respect of these items and why they have reduced the cost. We are satisfied that the reasoning given by the assessee before the AO as well as before the Ld.CIT(A) in the first round as well as in the second round are in accordance with the judgements cited supra. The Revenue also not brought any new facts before us to take a different view. We, therefore allow the claim made by the assessee that the provision for obsolete / slow moving inventories amounting to Rs. 80,58,706/-, is liable to be set aside.
The second dispute involved in the present appeal is about the disallowance made for the provision of wind energy division. The assessee is having separate divisions, one for the low voltage components and equipments division, and another for the wind energy division. In the earlier paragraphs, we have considered the issue in detail and also followed the Hon’ble Jurisdictional High Court judgment and allowed the claim made by the assessee insofar as the disallowance of provision for obsolete / slow moving inventories. Even though, the provision made under the wind energy division was reflected in the financial statements, the AO while passing the first assessment order on 31/03/2006 had not disallowed the same. The Ld.CIT(A) also while deciding the appeal on 23/11/2009 had not considered the issue as a separate one since the AO had not raised this issue. Even before the Tribunal, the revenue had not filed any applications to include the addition in respect of the provision for wind energy division. Subsequent to the Tribunal order dated 15/07/2011, the AO while giving effect to the remand order of the Tribunal, had confirmed the addition insofar as the disallowance made under the low voltage components and equipments division of Rs. 80,58,706/- but not made any disallowance in respect of the wind energy division. Therefore we are of the view that for the first time, in the second round, the Ld.CIT(A) would not have any jurisdiction to disallow the provision for wind energy. If the revenue felt that the assessment order dated 31/03/2006 is erroneous order, through the PCIT, could have revised the order u/s. 263 of the Act. The revenue has an another opportunity when the AO had made the assessment pursuant to the remand order of the Tribunal on 26/11/2012 but the revenue had not find fault with the proceedings of the AO and therefore even against the order dated 26/11/2012, no revision proceedings were initiated u/s. 263 of the Act. Therefore, the Ld.CIT(A) could not have disallowed the provision for wind energy for the first time when there is no specific powers vested with him to do so. When the revenue had not invoked the powers u/s. 263 of the Act, we do not find that the Ld.CIT(A) could have disallowed the provision for wind energy.
It is not the case of the Ld.CIT(A) that the said disallowance of provision of wind energy was not within the knowledge of the authorities but everything was found place in the financial statements which were all audited. Therefore the provision was very much available in the records and based on that only, the provision for low voltage components and equipments division, the AO had disallowed the obsolete / slow moving inventories. Therefore we are of the view that the disallowance made by the Ld.CIT(A) for the first time in his order dated 30/09/2016 is not in order.
We have also considered the fact that no similar disallowances were made in respect of the other A.Ys. and therefore we are of the view that the disallowance made by the Ld.CIT(A) is unwarranted. Even on merits also, the assessee had given sufficient reasons for making the provision for wind energy division. The assessee had submitted the following reasons for making the provision for obsolete / slow moving inventories: “Absence of test certificates for the sale of these units in the Indian market; The effective discontinuation of the 600A product line at a global level by GE group; and Pre-acquisition technical/quality issues that have impacted some of the 600A currently installed in both Europe and Asia, including some premature gearbox planetary failures & main bearing wear & tear.”
As seen from the said explanations, the assessee had given valid reasons for making the provision in the wind energy division. The authorities below had not accepted the said reasons without having any other evidences. In the earlier issue, the authorities had disallowed the provision on the ground that there are no valid reasons given by the assessee for allowing the said provision whereas in the second issue, even though the assessee had submitted valid reasons, had not accepted the same as not reasonable explanations. Similar to the earlier issue, the assessee had maintained the Accounting Standard – 2 as prescribed u/s. 145 and therefore the provision made for the obsolete / slow moving inventories in the wind energy division is also in accordance with the established principles followed by the assessee from year to year. Moreover, the authorities had not disallowed the similar claim provided by the
We, therefore allow the appeal filed by the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 14th November, 2025.