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Income Tax Appellate Tribunal, KOLKATA BENCH (A
Before: Shri P.M. Jagtap, AM & Shri S.S. Viswanethra Ravi, JM]
order
: September 28, 2018 ORDER
Per P.M. Jagtap, AM
This appeal is preferred by the revenue against the order of Ld. CIT(A) – 4, Kolkata dated 17.07.2015.
The issue involved in Ground No. 1 relates to the deletion by the Ld. CIT(A) of the addition of Rs. 27.18 crores made by the AO on account of disallowance of assessee’s claim for depletion of closing stock.
The assessee in the present case is a company which is mainly engaged in the business of trading and manufacturing of silk fabrics. The return of income for the year under consideration was filed by it on 30.09.2011 declaring a loss. In the audit report filed along with the said return, a comment was made by the auditors on the valuation of 2 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. closing stock. As per the said comment, the valuation of closing stock was done by the assessee company at current realisable value in the market based on management perception resulting in depletion of stock value of Rs. 27.18 crores. In this regard, the assessee company was called upon by the AO to offer its explanation during the course of assessment proceedings. It was explained on behalf of the assessee company that there was no change in the method of valuation of closing stock and the valuation of stock was made by applying either the cost or the net realizable value whichever is lower. It was pointed out that a decision was taken by the Govt. of India in the budget of 2011-12 placed in the Parliament on 28.02.2011 to reduce the basic custom duty on raw silk from 30% to 5% and keeping in view this drastic reduction, the net realisable value of the products held by the company in stock as on 31st March, 2011 was worked out. It was submitted that a scientific approach was adopted while determining the net realisable value of the closing stock by categorising the stock into moving, non-moving, slow-moving and rejected items. Some sample copies of invoices raised by the assessee company in the subsequent year were also produced to show that the actual price realised for the attempts in closing stock was actually lower than the prices adopted by the assessee company for valuation of closing stock. The Assessing Officer did not find merit in this explanation offered on behalf of the assessee company. According to him, the budget presented by the Govt. of India in the Parliament on 28.02.2011 was for the F.Y. 2011-12 and the same, therefore, was not applicable for the F.Y. 2010-11 relevant to A.Y. 2011-12 under consideration. As regards the invoices of the subsequent year produced by the assessee company to justify the depletion of closing
3 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. stock, the Assessing Officer agreed that the same were sufficient to establish that the net realisable value of certain items during the period 20.05.2011 to 31.12.2011 was even less than the value taken as on 31.03.2011. He however held that the assessee company had failed to substantiate the genuineness of net realisable value from its own books of account which lead to the assessee to deplete closing stock by Rs. 27.18 crores in respect of yarn fabrics etc. He also found contradiction in the stand taken by the assessee in citing the budget speech to explain depletion of closing stock due to reduction of import duty on one hand and categorising the stock into four segments such as moving, slow moving, non moving and rejected for the purpose of valuation. He also found that the invoices produced by the assessee to justify the net realisable value of the closing stock were mainly in respect of sale made to the related parties. He, therefore, held that the valuation of closing stock ascertained by the assessee was improper and not in accordance to the principle of method of accounting. Accordingly, the loss created notionally by the assessee in the name of depletion in value of closing stock by Rs. 27.18 crores was disallowed by the AO and the said amount was added back by him to the total income of the assessee in the assessment completed u/s 143(3) vide an order dated 15.02.2014.
The addition of Rs. 27.18 crores made by the AO by rejecting its claim for depletion of closing stock was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as material available on record, the Ld. CIT(A) deleted the same for the following reasons given in paragraph no. 4.2 of his impugned order:
4 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. 4.2. I have carefully considered the submission of the AR of the appellant, both oral as well as written, in the backdrop of the assessment order as well as the materials on record along with the judicial decisions as cited by the AR. After due examination of the issue at hand in this regard, my findings and decision are as follows: i) The comments of the Auditor as appearing at Point No. 2(f) of Audit Report dated 24.08.2011 as reproduced by AO at Page 2 of assessment order are examined. I am unable to concur with the AO that comments of the auditor are against the appellant. The auditor thought it proper to refer this point as technical in nature and refrained from making comments so far as adequacy of the valuation made for diminution in value of inventories. The auditor therefore left the matter to be decided by appropriate authority and as per legal position on this issue. In my opinion such comment of the auditor cannot be construed as an adverse one particularly when there is no adverse finding regarding purchase, sale, opening stock etc. Consequently, similar comments of the auditor appearing at Point 2(g) and Point 3 cannot have any adverse impact as far as assessment is concerned. ii) As regards valuation of depletion of closing stock of Rs. 27,18,66,432/- and allowability of such claim, the AR has drawn my attention to guidelines issued by ICAI through Accounting Standard 2 which authorises valuation of inventories at lower of cost or net realizable value (NRV). NRV as defined means the estimated selling price in the ordinary course of business. It is also stated that the practice of inventorisation below cost to NRV is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale. AS-2 formulated by ICAI also speaks for valuation of inventories on NRV when inventories are either damaged or wholly or partially obsolete or their selling prices have declined. As regards manner of valuing inventories on NRV, it speaks of item to item basis or similar group or related items etc. so far as basis on reliable evidences available at the time of estimate regarding the expected amount of realisation. It is made abundantly clear that such materials must take into consideration the fluctuation of prices or cost directly relating to events occurring after the balance sheet date. In the light of accounting standard (AS-2), the AR has explained the quantity wise stock of Raw Materials and Finished Goods as well as value thereof on NRV as on 31.03.2011 at Rs. 60,87,42,877/- as against aggregate cost price of Rs. 88,06,09,308/- and thereby claiming depletion of stock by Rs. 27,18,66,432/- as per details which form part of assessment order as well as Paper Book, Page No.13. iii) I am unable to concur with the AO's view contained at para 2.4 of the order concerning the correctness and genuineness of detailed working of depletion of raw material and finished goods. The contention that sample bills furnished in support of depletion statement related to the period 20.05.2011 to 31 .12.2011 does not suggest any wrong premise. I have already stated that according to the guidelines of AS-2, NRV should be based on estimated price or cost occurring after the Balance Sheet date. In this respect, I have examined the contention of the AR as follows: ‘We have followed the same method since years and also in the financial year 2010-11 relevant for assessment year 2011-12 and the same method have been followed in subsequent years also. To substantiate our point of view, we have, in the subsequent years sold the same material at an average cost of Rs. 264 whereas the valuation as on 31.03.2011, which you will observe is much higher than what we could realize.’ In view of the totality of facts in the matter, I am of the considered opinion that the statement showing depleted value of raw materials & finished goods which forms part of assessment order is treated as not tenable on the ground of misconception or confusion. iv) The contention of the appellant that the company had been valuing its inventories since its inception at cost price or net realizable value whichever is lower and the same had been accepted by the tax authorities since the past so many years u/s 143(3) is examined. The principle of res judicata is not applicable in Income Tax proceedings but the principle of 'Consistency' has to be maintained when there is no material change in the facts of the matter. Hence, I agree with the view of the AR that there should not be any departure from such practice in the present year particularly when no defect has been pointed out in the books of accounts of the appellant. v) The AR has contested the AO's view that the Budget Speech dated 28.02.2011 proposing reduction of import duty from 30% to 5% has no relevance in the present assessment year. In this context, the AR has argued as follows: ‘Since the price of raw material was to come down heavily due to budget proposal the stock that the company had in hand would not fetch the same price at which they were purchased. The reduction in the value of the products was so substantial that there was major glut in the market look a long time to recover from the stock.’
6 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. The above contention is examined with reference to unaudited subsequent period and I find that silk industry is passing through in domestic market and international market. Moreover, the issue under consideration is the estimation of net realizable value at a future date consequent upon budget speech dated 28.02.2011. Therefore the view that such Budget Speech does not relate to present assessment year is not tenable. vi) In view of the foregoing, I do not find any logistics In the action of the AO in the quantitative statement of raw materials and finished products of the appellant in claiming depletion in value of Rs. 27,18,66,432/- merely on the ground that assessee company and associated companies of the group are having office at the same place and hence manipulation of realizable value cannot be ruled out. The factual matrix shows that parties from whom purchases are made and to whom sales are made are regular parties since several years back. The names of such companies or parties are duly disclosed in audited accounts as per Company Law Board's directions as per schedule 14. The audit report does not indicate any adverse comment regarding purchases at higher rate or sale at a lower price for transactions with such associated concerns. Moreover, the company maintains stock book, purchase register, sales records, and production records apart from cash book, ledger, journal etc which are duly examined by the auditor as well as by the AO. No defect in opening stock, purchases, sales, production record and closing stock appears to have been detected in course of assessment. Therefore the rejection of the claim is held to be on suspicion & surmises and not valid in the eye of law. The disallowance of the claim for depletion of closing stock has no ultimate revenue effect since the addition in the present year will mean reduction of identical amount in the following year as addition to declared value of opening stock in assessment year 2012-13. This fact is also admitted by AO while making assessment year for 20l2-13 as per notes appearing at the end of order u/s 143(3) dated 26 03.2015 vide paper book page 14 to 20. vii) The AR draws my attention to the judgement of the Hon'ble ITAT, Mumbai Bench dated 05.11.2012 in the case of Deptt. vs. Yash Safely Products (India) Ltd. and has furnished a copy thereof at page 21 to 25 of the paper book. I have gone through the said judgement which supports valuation of stock on net realizable value as a reasonable basis. The relevant finding reads as follows: ‘In our view, the value of stock on cost price or net realizable value is an accepted method and therefore CIT (A) has rightly rejected the viii) I also find the relevancy of the judgement of Madras High Court in the case of India Motor Parts & Accessories Pvt. Ltd. reported at 60 ITR 5310, wherein, it was held that the method of valuing slow moving and obsolete stock at a price below cost price is a recognized method in other countries. The same method should be logistically applicable in the appellant's case as well. ix) Considering the entire gamut of the issue as well as the legal position in this regard as discussed supra, I have no hesitation in holding that the disallowance of the claim in respect of depletion of stock based on net realizable value is not sustainable on merits in the absence of any cogent and tenable premise presented by the AO. In view of this, the addition made on this count by the AO is directed to be deleted amounting to Rs. 27,18,66,432/-. In view of this, Ground Nos. 1 & 2 are allowed.
The learned DR invited our attention to the reasons given by the AO in the assessment order for rejecting the claim of the assessee for depletion of closing stock and strongly relied on the same in support of the revenue’s case on this issue. He contended that there was nothing brought on record by the assessee to show as to how the net realizable value resulting in depletion of closing stock by 27.18 crores was determined. He contended that the classification of closing stock into moving, non moving, slow moving and rejected items was not relevant for the net realizable value claimed to be determined by the assessee as on 31.03.2011 on the basis of reduction of custom duty by the Govt. of India on raw silk from 30% to 5%. He contended that the said reduction in the custom duty of raw silk no doubt was having a direct bearing on the net realizable value of the items lying in the closing stock of the assessee but the depletion of closing stock should have been to that extent only and the classification of closing
The learned counsel for the assessee, on the other hand, submitted that the net realizable value of the items lying in the closing stock was determined by the assessee company after taking into consideration the reduction of import duty on raw silk from 30% to 5% as announced in the budget speech delivered by the Hon’ble Finance Minister on 28.02.2011. He contended that there was no change in the method of valuation of closing stock by the assessee company and the closing stock was being valued at cost or net realizable value whichever is lower in accordance with the Accounting Standard II which was mandatorily to be followed. He submitted that the net realizable value of closing stock determined by the assessee company was duly supported by the sample sale bills related to the period 20.05.2011 to 31.12.2011 raised in the subsequent year which clearly established that the actual sale value realized of the concerned items was even less than the valuation adopted by the assessee as on 31.03.2011. He contended that even if the said sample bills were raised by the assessee company on the related parties, the sale of the concerned attempts was regularly made by the assessee company to the same related parties and the same was accepted by the AO even in the A.Y. 2012-13. He contended that the depletion of closing stock in any case was revenue neutral in as much as any higher realisation on actual sale in subsequent year would have suffered tax in that year.
9 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd.
We have considered the rival submissions on this issue and also perused the relevant material available on record. It observed that its closing stock as on 31.03.2011 was valued by the assessee company by following the method of cost or net realizable value whichever is lower and this valuation made by the assessee company had resulted in depletion of closing stock to the extent of Rs. 27.18 crores. The said method adopted by the assessee company for valuation of closing stock was consistently being followed by it and there is no dispute about the same. The dispute raised by the AO was in respect of net realizable value of closing stock as determined by the assessee company. As claimed on behalf of the assessee company before the authorities below as well as before us, the net realizable value of the items such as yarn and fabrics was determined by taking into consideration the change in the government policy whereby import duty on raw silk was reduced from 30% to 5%. The announcement of the said reduction in import duty was made by the Hon’ble Finance Minister during his budget speech on 28.02.2011 in the Parliament and this basis adopted by the assessee for reducing the net realizable value of closing stock consisting of yarn and fabrics was not accepted by the AO on the ground that the budget presented in the Parliament on 28.02.2011 was relevant for the F.Y. 2011-12 i.e. A.Y. 2012-13 and not for the assessment year under consideration i.e. A.Y. 2011-12. We are unable to agree with this view taken by the Assessing Officer. As rightly held by the Ld. CIT(A), the reduction in import duty on raw silk as announced by the Hon’ble Finance Minister in the budget speech as on 28.02.2011 had direct and immediate effect on the prices of yarn and fabrics and the same, therefore, was a material and relevant consideration having direct impact on the net realizable
At the time of hearing before us, the learned DR has not disputed the factual position that the reduction in the import duty on raw silk from 30% to 5% as announced in the budget speech on 28.02.2011 had a direct bearing on the net realizable value of the yarn and fabrics lying in the closing stock of the assessee company as on 31st March, 2011. He however has contended that the method finally followed by the assessee company for determining the net realizable value of its closing stock by classifying the same into moving, slow moving, non moving and rejected items was in-consistent with its claim of determining the net realizable value of the items lying in closing stock by taking into consideration the reduction in import duty. No doubt there is some merit in this contention of the learned DR. However, the fact that remains to be seen is that there was a flat reduction of about 30% in the net realizable value of the main items lying in the closing stock viz. yarn and fabrics and notwithstanding the classification of closing stock as made by the assessee company into different categories, the same was fair and reasonable keeping in view the reduction in import duty by 25% and the other consequential aspects having a cascading effect on the net realizable value of yarn and fabrics in the market. Moreover, the sample invoice copies issued by the assessee company during the subsequent year clearly established that the actual sale price realised by the assessee company of the said products was even lower than the net realizable value adopted by the assessee for the purpose of valuation of closing stock and the same produced by the assessee before the AO were 11 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. sufficient to support and substantiate the net realizable value of the items lying in closing stock as determined by the assessee company as on 31st March, 2011. It is observed that the AO however did not accept the said evidence as reliable on the ground that the sample invoice copies produced by the assessee were mainly raised on the related parties. As submitted on behalf of the assessee company before the authorities below as well as before us, the sale of these products was mainly made by the assessee company always to the related parties and therefore, there was no justifiable reason for the AO to reject the said evidence and as unreliable merely on the ground that the invoices were raised by the assessee company on the related parties. It is pertinent to note here that the said invoices raised by the assessee mainly on the related parties in the subsequent year were accepted by the AO himself and it therefore, constituted the relevant and reliable evidence to support and substantiate the net realizable value of closing stock as determined by the assessee company as on 31st March, 2011. Keeping in view all these relevant facts of the case, we are of the view that the addition made by the AO by rejecting the claim of the assessee for depletion of closing stock was not sustainable and the Ld. CIT(A) was fully justified in deleting the same. We accordingly uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 1 of the revenue’s appeal.
The issue involved in ground no 2 of the revenue’s appeal relates to the deletion by the Ld. CIT(A) of the disallowance of Rs. 8,96,169/- made by the AO u/s 40(a)(ia) as well as section 37 of the Act to the extent of Rs. 6,85,754/-.
During the course of assessment proceedings, it was noticed by the AO that the assessee has failed to deduct tax at source u/s 194C from the payment made towards flat maintenance of Rs. 8,06,169/- and service charges for computer maintenance of Rs. 90,000/- . He, therefore, invoked the provision of section 40(a)(ia) and made a disallowance of Rs. 8,96,169/-. He also held that the said expenses even otherwise were liable to be disallowed u/s 37 of the Act as the assessee company failed to establish the business expediency of incurring the same. On appeal, the Ld. CIT(A) sustained the disallowance of Rs. 8,96,169/- made by the AO on this issue to the extent of Rs. 6,85,754/- for the following reasons given in paragraph no 5.2 of his impugned order: “5.2. I have considered the submission of the AR of the appellant vis a vis the material facts of the issue at hand. After due consideration of the findings of the AO and the written submissions of the appellant. I hold that out of total disallowance of Rs. 8,06,169/-, provision of section 40(a)(ia) is applicable only on Rs. 2,10,415/-. The remaining expenses of Rs. 5,95,754/- i.e. (8,06,169/- - 2,10,415/-) is outside the purview of section 40(a)(ia). Hence, the disallowance u/s 40(a)(ia) is restricted to Rs. 2,10,415/- only. So far as service charges of Rs. 90,000/-, TDS @ 10% was deducted and paid in time, hence, the disallowance of Rs. 90,000/- is also deleted. The factual position does not also suggest any disallowance u/s 37 of the Act. Hence, the appellant gets relief of Rs. 5,95,754/- & Rs. 90,000/-. These grounds of appeal are partly allowed.”
11. We have considered the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the expenditure of Rs. 90,000/- was incurred by the assessee on service charges for computer installed in its Kolkata office and since the payment of the said expenditure was made by the assessee company after deducting tax at source @ 10%, the same was 13 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. not liable to the disallowed either u/s 37 or u/s 40(a)(ia) as rightly held by the Ld. CIT(A). As regards the expenditure of Rs. 8,06,169/- incurred by the assessee company for the maintenance of flats at Kolkata, Bangalore and Rashi, it is observed that the said flats were used by the assessee company for storing/display of goods for sale or for stay of its employees. The said expenditure thus was incurred by the assessee company wholly and exclusively for the purpose of its business and the same was not liable to be disallowed u/s 37 as rightly held by the Ld. CIT(A). As regards the disallowance of the said expenditure u/s 40(a)(ia), it is observed that the expenditure on account of maintenance of flats to the extent of Rs. 5,95,754/- was made by the assessee company on account of payment to Co- operative Housing Society for regular maintenance and for purchase of certain attempts and since no tax at source was deductable from the said payments, the same were outside the purview of section 40(a)(ia) as rightly held by the Ld. CIT(a) while restricting the disallowance of Rs. 8,96,169/- made by the AO to the extent of Rs. 2,10,415/- thereby allowing the relief of Rs. 6,85,754/-. We therefore, uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 2 of the revenue’s appeal.
12. The issue raised in ground no 3 relates to the deletion by the Ld. CIT(A) of disallowance of Rs. 4,05,783/- made by the AO on account of irrecoverable advances written off.
13. The claim of the assessee company for deduction on account of irrecoverable advances written off amounting to Rs. 4,05,783/- was disallowed by the AO on the ground that the said advances did not 14 Assessment Year: 2011-12 M/s. Lucky Goldstar Co. Ltd. form part of the assessee’s income either for the year under consideration or for the earlier years. On appeal, the Ld. CIT(A) deleted the said disallowance made by the AO after having found that the said advances to the extent of Rs. 1,44,553/- represented advances given by the assessee company to its employees who had left the company without information and the balance amount of Rs. 2,61,230/- represented VAT receivable on account of input which was held to be not admissible by the concerned authority.
We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that both the amounts of Rs. 1,44,553/- and Rs. 2,61,230/- represented the advances given by the assessee company to its employees and the VAT receivable on input respectively and since the said amounts were pertaining to the ordinary course of the assessee’s business, the loss suffered due to non-recovery of the same was the business loss, which in our opinion, was liable to be allowed as deduction as rightly held by the Ld. CIT(A). We, therefore, uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 3 of revenue’s appeal.