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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI INTURI RAMA RAO & SHRI S. S. VISWANETHRA RAVI
ORDER
PER INTURI RAMA RAO, AM:
This is an appeal filed by the assessee directed against the order of ld. Commissioner of Income Tax (Appeals)-6, Pune [‘the CIT(A)’] dated 14.02.2018 for the assessment year 2013-14.
The appellant raised the following grounds of appeal :- “1 :
0. Re.: Disallowance of provision for obsolescence of inventory :
1 : 1 The Commissioner of Income-tax (Appeals) has erred in confirming the disallowance on account of provision for obsolescence of inventory amounting to Rs. 27,00,000/-. 1 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, no disallowance whatsoever is called for out of the provision made by the Appellant for obsolescence of inventory and the stand taken by the Assessing Officer in this regard is erroneous and not in accordance with law and the Commissioner of Income-tax (Appeals) ought to have held as such. 1 : 3 The Appellant submits that the Assessing Officer be directed to delete the disallowance and to re-compute its total income accordingly.”
Briefly, the facts of the care are as under : The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and trading of water heating equipments and solutions. The return of income for the assessment year 2013-14 was filed on 29.11.2013 declaring total income of Rs.16,17,56,460/-. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Circle-10, Pune (‘the Assessing Officer’) vide order dated 15.12.2016 passed u/s 143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.16,44,56,460/-. The disparity between the returned income and assessed income is on account of addition made by the Assessing Officer by disallowance of the provision of obsolete inventory. The factual background of the above addition is as under : The appellant is engaged in the manufacturing and trading of water heaters like electric water heaters, gas water heaters, solar water heaters, etc. Due to technological advancements and the development of the markets with respect to water heaters and technology used in it, any unsold goods (finished goods as well as spares) over a period of one year starts becoming obsolete. This obsolete is on account of newer and better models being launched in the market (with additional features) and / or new technology being used in the entire product line. It is stated that during the previous year relevant to the assessment year under consideration, the appellant company made a provision towards obsolete inventory of finished goods amounting to Rs.184 lacs. It is also stated that the appellant company had reversed the provision during the subsequent year, when it was not required and the provision for obsolete items was made based on the following methodologies :- “Methodology to be applied for the identification of partially obsolete finished products codes. To assess any potential loss of value of finished products it is necessary to analyse the finished products stock on the closing date according to the following stock cover index: Stock Cover Index (SCI) = Inventory at the end of the period Sales of the period Therefore in the case of yearly analysis, the SCI will be as follows: Finished products stock value at 31-12-20XX Sales of the year 20XX Assessment of the obsolescence of the finished product stock. The turnover of finished products stock according to the above index will allow the identification of potential “slow moving” which will then undergo further analyses. In detail, the codes identified as potentially obsolete will undergo a depreciation according to some depreciation rates as outlined in the table below: SCI Depreciation % <1 0% 1 – 2 10% 2 – 3 10% 3 – 4 25% 4 – 5 25% 5 – 6 40% 6 -7 40% > 7 60% As it can be observed, provision for obsolescence is created only on finished goods and spare which are in stock and are slow moving for more than 1 year (refer SCI column in the table above). No provision for obsolescence is created for finished goods and spares manufactured during the year under consideration or which are not slow moving.”
The above-said contentions of the appellant company were rejected by the Assessing Officer stating that the closing inventory of finished goods and spare parts is required to be valued either cost price or market price, whichever is less and in the absence of any evidence that the market value of the inventory is Nil, the claim of the appellant company cannot be accepted. Accordingly, the Assessing Officer rejected the claim of the assessee and brought to tax sum of Rs.27,00,000/-. Even on appeal before the ld. CIT(A), the action of the Assessing Officer was confirmed.
Being aggrieved, the appellant is in appeal before us in the present appeal.
It is contended that the provision for obsolete stock should be allowed following the decision of Hon’ble Bombay High Court in the case of Alfa Laval India Vs. DCIT, 186 CTR 390 (Bom.) as confirmed by the Hon'ble Supreme Court in the case of CIT Vs. Alfa Laval India Ltd., 295 ITR 451(SC) and also the Co-ordinate Bench of Tribunal and also the Hon’ble Rajasthan High Court in the case of CIT vs. Wolkem India Limited 221 ITR 767 (Raj) and the Hon’ble Delhi High Court in the case of CIT Vs. Hotline Teletube & Components Ltd. (2008) 175 Taxman 286 (Del). 7. On the other hand, the ld. Sr. DR opposed the submissions of assessee and submitted that the provision was not based on the Accounting Standard No.2, but based on the accounting policy which may not be really the identified percentage of obsolete stock. 8. We heard the rival submissions and perused the material on record. The issue in the present appeal is with regard to the allowance of provision for obsolete inventory of finished goods and spare parts. The identical issue was considered by this Tribunal in assessee’s own case for assessment year 2011-12 in ITA No.499/PUN/2017 order dated 22.03.2022 wherein the issue was remitted to the file of the Assessing Officer with direction the provision for obsolete items be allowed as deduction subject to satisfying by the Assessing Officer that the valuation is done based on the principle that at cost or market price or net realizable value, whichever is less. The relevant para 13 and 14 of the said order of the Tribunal (supra) are reproduced hereunder :- “13. We have heard the rival contentions and perused the record. The issue in the present ground of appeal
relates to the allowance of provision for obsolescence of finished goods and spares. There can be no dispute that inventory should be valued either at cost or market price, whichever is lower. In the present case, the appellant company followed inventory valuation policy, based on which item-wise analysis was carried out to determine whether a particular item or a part of finished goods has become obsolete or not and it also adopted a methodology for identification of obsolete finished goods, etc. Thus, the provision for obsolete items is clearly allowable, in view of the settled position of law that inventory should be valued at cost or market price whichever is lower in view of decision of Hon’ble Bombay High Court in the case of Alfa Laval India Vs. DCIT 266 ITR 418 is clearly applicable, wherein the Hon’ble Bombay High Court has held as under:
8. In the present case, there is no dispute that the duly certified auditor's report placed before the AO clearly justified valuation of obsolete items at 10 per cent of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent of the cost. Under the circumstances, it could not be said that the valuation of the obsolete items done by the assessee and certified by the auditors was not proper or arbitrary. The AO in fact has arbitrarily valued the items in question at 50 per cent of the cost without disclosing the basis of such valuation. The AO had not doubted the correctness of the certificate of the auditors regarding the valuation of obsolete items. The summary of the obsolete items were before the AO. There is nothing on record to show that the assessee was called upon to furnish the list of obsolete items or that the assessee was called upon to establish that the items were not moving for 3 years. Under these circumstances, it could not be said that the assessee has failed to furnish list of obsolete items and failed to establish that the said items were not moving. In the absence of any basis for valuing the obsolete items at 50 per cent of the cost, the Tribunal could not have upheld the findings of the AO on the ground that the list of obsolete items were not produced by the assessee. Accordingly, we answer the question No. 1 in the negative, that is, in favour of the assessee and against the Revenue.”
In the present case, though the appellant made a provision for obsolescence of stock of finished goods following a methodology but it was not demonstrated before us that there was no under-valuation of the finished goods or spares and the excess provision, if any, was written back in the succeeding year or in the year of sale of obsolete stock, etc. nor was it demonstrated that obsolete stock was valued at lower of cost or net realizable value. In the circumstances, in principle, we hold that the provision for obsolete stock is allowable but it requires to be satisfied that the value of obsolete items of finished goods is valued on the cost or market price whichever is less. In the circumstances, we remand the matter back to the file of Assessing Officer with a direction that the provision for obsolete stock be allowed as deduction subject to satisfying himself that the valuation is done based on the principle that at cost or market price or net realizable value, whichever is less. Thus, this ground of appeal
is allowed for statistical purposes.”
9. Since there is no change in facts and law in the present case, we remand the issue to the file of the Assessing Officer as similar lines, as indicated in the earlier order of this Tribunal in assessee’s own case for assessment year 2011-12 in order dated 22.03.2022. Accordingly, the ground of appeal is partly allowed for statistical purposes.