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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by revenue is directed against the order of ld. CIT(A)-2, Mumbai dated 16.12.2016, which in turn arises from the assessment order dated 07.12.2016 passed under section 143(3) for Assessment Year 2012-13.The revenue has raised the following grounds of appeal: (1) "Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the addition of Rs 6,16,55,838/- being diminution in the value ~ of closing stock and claiming depreciation thereon, without appreciating that the A.O. has given categorical finding in the assessment order on the said issue?" (2) "Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the addition of Rs 6,16,55,838/- by relying on the judgement in the case of Alfa Laval (India) Ltd. 295 ITR 451 is totally M/s. Concorde Motors (India) Ltd.
distinguishable on the facts and circumstances of the case, as in the said case,' the issue was that the assessee had reduced the value at a fixed rate of 10% from the cost in respect of its obsolete stock, which is not the case in hand?" (3) "Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the addition of Rs 6,16,55,838/- being diminution in the value of closing stock in arriving at the book profit, without appreciating that diminution in the value of stock in trade is to be adjusted in view of Clause-i inserted in Explanation-1 to sub-section 2 of section 115JB?"
Brief facts of the case are that the assessee is a subsidiary of Tata Motors Ltd. engaged in the business of dealership of passenger vehicles.
The assessee purchases vehicle from its subsidiary i.e. Tata Motors Ltd. in the capacity of dealer and sales to its customers. The assessee filed return of income for Assessment Year 2012-13 on 29.09.2012 declaring total loss of Rs. 8.94 lakhs. The assessee offered income under section 115JB at Rs. 1.30 Crore (approx.). The assessee thereafter filed revised return of income on 28.03.2014 declaring total income of Rs. 2,71,853/- and offered income under section 115JB of Rs. 1.45 Crore (approx.).
The case was selected for scrutiny. During the assessment, the Assessing Officer noted that the assessee has debited an amount of Rs. 6,16,55,838/- as stock depreciation from the gross total of closing stock value. The assessee was given show-cause notice to explain why the closing stock should not be disallowed. The assessee filed its reply dated 05.03.2015, wherein the assessee stated that closing stock is valued in M/s. Concorde Motors (India) Ltd. accordance with accounting slandered -2(AS-2), the closing stock was valued at cost or Net Realizable Value (NRV), whichever is lower. The contention of assessee was not accepted by Assessing Officer. The Assessing Officer made addition of Rs. 6,16,55,838/- in valuation of stock as on 31.03.2012 (being difference between the cost and NRV) holding that the depreciation on closing stock is not allowable. The Assessing Officer also made addition of the disallowed amount while computing book profit under section 115JB. On appeal before the ld. CIT(A), the action of Assessing Officer was reversed. Aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before us.
We have heard the submission of ld. Departmental Representative (DR) for the revenue and ld. Authorized Representative (AR) of the assessee and perused the material available on record. Ground No.1 & 2 relates to deletion of addition of Rs. 6,16,55,838/-. The ld. DR for the revenue submits that assessee claimed diminution of value and depreciation of closing stock. The stock is a current asset on which depreciation can be claimed. The assessee is a trader of Automobiles, Auto Parts and Accessories and also provides service to Automobiles. The assessee is a sole trader/agent of Tata Motors Ltd. During the assessment, the assessee claimed that inventory is valued at the NRV as some of the models of the Automobiles in its inventory, may have turned outdated and may fetch a lesser price in the market whenever showed. The 3 M/s. Concorde Motors (India) Ltd. assessee is claiming double deduction by way of cost of purchase as well as by diminution of value. The diminution of value is not recognized in any accounting principle. The ld. CIT(A) granted relief to the assessee in a non-speaking order by accepting the version of the assessee. The ld. DR for the revenue submits that the finding of ld. CIT(A) may be set aside by restoring the order of Assessing Officer.
On the other hand, the ld. AR of the assessee submits that the valuation of closing stock was done as per AS-2. The closing stock valued by Auditor in financial statement cannot be rejected without any basis.
Inventory wise summary of valuation of closing stock as on 31.03.2012 in respect of each category of closing stock was furnished. The ld. AR of the assessee submits that the breakup of depreciation claimed was furnished by assessee to the lower authorities. The ld. CIT(A) has recorded the breakup of the depreciation in para-3.1 of his order. The Assessing Officer failed to appreciate that as per AS-2 issued by Institute of Chartered Accountants in India (ICAI), valuation of stock is to be done at the cost or NRV whichever is lower, the relevant extract of AS-2 is placed on record. The assessee is consistently valuing its closing stock at lower of the cost or NRV since past several years following the rule of consistency. The deduction in value of cost of inventory represents the wear and tear of the stocks over time which is lying in inventory. It was submitted that pricing old models of cars/vehicles 4 M/s. Concorde Motors (India) Ltd. reduced, due to time gap, technology upgradation and launch of new models and in cost competition due to other various external factors. To support its submission that valuation of closing stock is to be done at lower of the cost or NRV on the following decision: United Commercial Bank (240 ITR 355) (SC). Hughes Communication India Ltd. (215 Taxman 136) (Del HC). Indian Sugar & Gen. Industry Export Import (349 ITR 38) (Del HC). Alfa Laval (India) Ltd. (133 Taxman 740) (Hom HC). Edelweiss Capital Ltd. (ITA No. 5324/Mum/2007). Edel Commodities Ltd. (170 ITD 402) (Mum Trib.).
The ld. AR of the assessee submits that the ld. CIT(A) while granting relief to the assessee followed the decision of Alfa Laval (India) Ltd. (supra).
We have considered the rival submission of the parties and perused the material available on record. During the assessment, the Assessing Officer made addition of Rs. 6,16,55,838/- by disallowing depreciation on closing stock holding that the depreciation on the closing stock is not eligible deduction. Before the ld. CIT(A), the assessee given the breakup of depreciation on various inventory, demo-vehicles, accessories and consumable Auto Parts in the following manner:
Sr. Description Cost NRV Cost/NRV No. whichever is lower A. Inventories/demo- vehicles Sub-total 1,20,75,65,762 1,15,19,43,005 1,15,19,43,005 B. Accessories, Consumables and 5 M/s. Concorde Motors (India) Ltd. parts Sub-total 12,27,19,312 11,66,86,232 11,6,86,232 C. Service Wip-TML Sub-total 1,33,46,22,303 1,27,29,66,467 1,27,29,66,467
On the basis of aforesaid tabulation, the assessee explained that there is a difference of Rs. 6,16,55,838/- reported in the cost price and NRV.
The ld. CIT(A) accepted the contention of assessee holding that the assessee has not claimed the depreciation as conceived by Assessing Officer. It is a classification of closing stock both the at the cost as well as NRV as per assessee’s cost price or market price, whichever is lower which is correctly made by assessee. The ld. CIT(A) also concluded that the Assessing Officer not appreciated the fact that it is not at all debited in the Profit & Loss A/c and addition made is not justifiable and deleted the addition.
The Hon’ble Supreme Court in United Commercial Bank (supra) held that it is an established rule of commercial practice in accountancy that closing stock can be valued at cost or market price, whichever is lower.
It was held that under the Income Tax Act, the taxable is real income accrued or arisen income. On the basis of method accountancy regularly implied by the assessee, the real income is pointed out in the Income-tax return which cannot be ignored by holding that in a balance-sheet which is required to be statutorily maintained in a particular form, market value of the share and securities is not mentioned in brackets. For the purpose of Income Tax, whichever method is adopted by assessee is a 6 M/s. Concorde Motors (India) Ltd. true picture of the profit and gains, i.e. to say, real income is to be disclosed. For determining the real income, the entries in the balance- sheet required to be maintained in the statutory form, may not be decisive or conclusive. In such case, it is not open to Assessing Officer as well as to the assessee to point out the true and proper income while submitting return. It was further held that for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower, a method of accounting adopted by tax payer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or valuation.
The Hon’ble Delhi High Court in CIT vs. Hughes Communication India Ltd. (supra) held that the diminution of closing stock on account of impairment and effect is allowable, if the same method of valuation consistently followed.
Further, the Hon’ble Delhi High Court in CIT vs. Indian Sugar & Gen.
Industry Export Import (supra) while considering the question of law whether the finding of Income-Tax Appellate Tribunal was right in accepting the NRV as declared by respondent/assessee and was right in not adopting the cost price for computation of closing stock held that the assessee could have adopted the NRV method for valuation of closing stock and whether it is mandatory to value the cost on cost basis, it was 7 M/s. Concorde Motors (India) Ltd. held that Hon’ble Apex Court in various decisions and observation that closing stock can be valued on cost price or market price, if the market price is less than the cost. However, the said principle does not apply, if the market value of the closing stock is more than the cost, as profit cannot be brought to tax on notional basis.
The Hon’ble Bombay High Court in Alfa Laval (India) Ltd. (supra) also held that when assessee is valued the closing stock on obsolete items at 10% of the cost. Auditor’s report justifying the valuation. The items were in fact sold in the subsequent year at a price less than 10% of the cost. It could not be said that valuation of obsolete item made by assessee was not proper.
In view of the aforesaid discussion, we affirm the order of ld. CIT(A).
The ld. DR of the revenue was not able to differentiate the ratio of decision of Hon’ble Bombay High Court in Alfa Laval (India) Ltd. (supra). Hence, Ground No. 1 & 2 is dismissed.
Ground No.3 relates to making adjustment on addition of Rs. 6,16,55,838/- in book profit under section 115JB. The ld. DR for the revenue supported the order of Assessing Officer.
On the other hand, the ld. AR of the assessee submits that the ld. CIT(A) deleted the addition under section 115JB, in case the action of the ld CIT(A) is affirmed, the adjudication of this ground of appeal
would become academic.
8. M/s. Concorde Motors (India) Ltd.
We have considered the submission of both the parties. We find that we have affirmed the finding of ld. CIT(A) in deleting the addition of Rs. 6,16,55,838/-. Therefore, the addition which was consequential to the addition of subject matter of Ground No.1. Therefore, this ground of appeal is also dismissed.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 01/10/2019.