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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: Shri JOGINDER SINGH, & Shri G. MANJUNATHA
आदेश / O R D E R
Per Joginder Singh (Judicial Member) The assessee as well as the Revenue are in appeal for assessment year 2008-09 whereas the assessee has preferred Cross-Objection for assessment year 2008-09 (arising out of ITA No.3680/M/2016).
First we shall take up appeal of the assessee (ITA No.3680/M/2016). The first ground raised by the 3 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 Revenue pertains to deleting the disallowance of Rs.310.49 lakhs in respect of provisions made for slow and non-moving stock without appreciating the facts that notwithstanding the method of accounting of valuation of stock, unascertainable expenditure is not allowable under the provisions of section 28 to 44 of the Income Tax Act, 1961 (hereinafter the Act). The ld. counsel for the assessee Shri Jitendra Jain along with Shri H. Jam Shetji claimed that the issue under consideration is covered by the decision of the Tribunal for assessment year 2010-11.
This factual matrix was not controverted by Dr. L. Ramji Rao, Ld. CIT(DR).
2.1 We have considered the rival submissions and perused the material available on record. In view of the above we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 08.11.2017 for ready reference and analysis:
“15. The issue raised in the grounds of appeal no.3 is against the deletion of disallowance of Rs.59,97,000/- in respect of provision for slow and non moving stock by the ld. CIT(A) without appreciating the fact that notwithstanding the method of accounting or valuation of stock, the unascertainable expenditure is not allowed under the provisions of sections 28-44 of the IT Act.
4 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 16. The facts in brief are that the AO noticed upon perusal of the balance sheet that the closing balance in the provisions for slow and non –moving stock as on 31.3.2010 was Rs.340.92 lakhs, whereas the opening stock was Rs.280.95 lakhs and thus the provision of Rs.59,97,000/- was charged to the profit and loss account during the year. Accordingly, the AO issued show cause notice which was replied by the assessee submitting that the assessee is a manufacturer of critical chemicals, powders and pesticides, which are highly toxic having limited life and during the year 650 items of stock were slow-moving ,obsolete or damaged. The assessee submitted that the stocks are in the form of powder, liquid and is prone to easily evaporated or susceptible to damage. Besides, the ld. AR submitted that the assessee has been following the accounting method consistently and full and adequate disclosure have also been made by the assessee as per Schedule20- Notes to the Accounts. The inventory are valued on lower of the cost and net realizable value whichever is less. The ld. Counsel of the assessee also referred to accounting standard –II issued by Institute of Chartered Accountants of India which is mandatory. The contentions and submissions of the assessee did not find favor with assessing officer and ultimately he rejected the same resulting into addition of Rs.59,97,000/- to the total income of the assessee by observing as under:
“6.2 The contention of the assessee is examined and is not acceptable for the simple reason that the assessee himself states that there are 650 items of stock which are slow moving, obsolete or damages. The contention of the assessee that these are wastages in stock due to evaporation and reduced efficacy is mere general statement backed up by no evidence whatsoever. In fact all evaporation and wastage losses during the manufacturing process would ipso facto be accounted for the consumption of raw-material in the manufacturing process. This submission of the assessee goes against the very grain of creating provision for slow and non-moving stock.”
In the appellate proceedings, the ld.CIT(A) deleted the addition after taking into consideration the various contentions and submissions of the assessee by observing and holding as under :
“11. GROUND NOS. 6 to 8 - DISALLOWANCE ON ACCOUNT OF PROVISION FOR SLOW AND NON-MOVING STOCK:
The appellant during the year under consideration has made provision for slow, non-moving and damaged stocks of Rs.59,97,000/-. It was stated that the appellant follows AS-2 whereby stores/inventories are valued at cost or market value whichever is lower. This principle has also been upheld by the Hon'ble Supreme Court on numerous occasions, one of them being its judgment in the case of CIT vs. Hindustan Zinc. Ltd (2007) (291 ITR 391). He also referred to section 5 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 145A and stated that as per the principle of stock valuation upheld by the apex court, the method of valuation regularly adopted by the appellant is a recognized method and therefore, the same cannot be rejected. The items written down to the net realizable value are items of raw materials and stores. In paragraph 6.3 the Assessing Officer has wrongly presumed that these are finished goods. The Assessing Officer is in error when he says that the appellant has not been able to demonstrate that the stock is obsolete or slow-moving. The appellant has drawn attention to several items of stock which have not moved for several years and it is only for that reason that the appellant has considered that the stock is slow-moving. The Assessing officer also failed to consider that the provision made for writing down the stock is Rs.59.97 lakhs, as compared to the total stock of the appellant of Rs.148.24 crores, which is a paltry 0.4% to the total stock. He relied on the decision in the case of CIT v. Hughes Communication India Ltd. (Del) (ITA 383 and 385 of 2012); CIT v. Hotline Teletube & Components Ltd. (Del) (ITA 694/2008); CIT v. Wolkem India Ltd. (315 ITR 211 (Raj); IAC v. Consolidated Pneumatic Tool Co. India Ltd. (15 ITD 564) (Born); A.L.A. Firm v. CIT (189 ITR 285) (SC); Alfa Laval India Ltd. v. DCIT (266 ITR 418) (Born); DCIT v. Indroyal Fumiture Co. P. Ltd. (2 ITR (Trib) 628) (Cochin). It was stated that first two judgments specifically deal with the issue of provision for diminution in the value of stock. It was thus stated that the disallowance be deleted.”
The ld. DR vehemently submitted before us that the order of ld. CIT(A) was against the provisions of the Act and against the facts on records and also order was passed in a cryptic manner. The ld. DR submitted by referring to the provisions made for non movable and damaged items of stock material and packing material filed at placed at pages 45 to 83 of the assessee‟s paper book to point out that three items viz clause 11 of schedule 20 at pages 61 of the annual report, consumption of raw materials, packing materials and stores and spare parts included provision of Rs.340.92 lakhs. The ld. DR also submitted that it is not clear from the facts whether the assessee claimed the said loss after evaluating the same by Technical Committee or done in summary manner. Finally, the ld.DR prayed that such depreciation are not admissible under the Act and therefore should not be allowed. The ld. DR relied on the decision of the Hon‟ble Delhi High Court in the case of CIT V/s Hughes communication India Ltd reported in (2013) 215 Taxman 0136 beside relying on the following case laws:
a) CIT v. Hotline Teletube & Components Ltd. -175 Taxman 286 (Del. HC) b) CIT v. Hughes Communication India Ltd.- 33 taxmann.com 95 (Del HC) c) CIT v. IBM India Ltd. - 55 taxmann.com 515 (Kar.) d) CIT v. Indian Rare Earths Ltd. - 375 ITR 276 jBom.) e) Alfa Laval India Ltd. v. DCIT - 2661TR 418 {80m.) f) IAC v. Consolidated Pneumatic Tool Co. (ind). Ltd.-15 ITD 564 Mum
6 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016
Finally, the ld. DR prayed before us that by following the ratio laid down in the aforementioned decisions, the order of the ld.CIT(A) be set aside and that of AO be upheld.
The ld.AR relied heavily on the order of ld.CIT(A) by submitting that the assessee is a manufacturer of critical chemicals, powders and pesticides which are highly toxic and the raw materials used are in the form of liquids and powders of various which are highly vaporable and susceptible to damage and are not fit to be used in the manufacturing of the chemicals . The ld. AR took us through pages 198 to 199 of the paper book referring the Insecticides Rules, 1971(GSR 1650, Dt.9.10.1971. Para 10A of the said Rules provides that after expiry of stock the same shall be marked as not for sale, not for use or not for manufacturing, and shall be kept by the licensee in a separate place specifically demarcated for the purposes with a declaration “ date expired insecticide” to be exhibited on the conspicuous part of the place. All such stocks then shall be disposed of in an environment friendly manner as may be specified from time to time by the by the Central Government in consultation with the Central Insecticides Board and shall not be used for manufacturing. The ld. AR also took us through the SC-7 and SC-13 of 62, Annual Report 2009-10 and submitted that these were actually stocks written off due to damage and expiry and not the provisions as alleged and observed by the AO. The ld. AR also took us through schedule-18 of the Annual Report under the head “Operative Expenses” wherein stores and Spares Consumed were shown at Rs. 402.80 lacs.
We have heard the rival submissions and perused the material placed before us. We find that during the year the assessee has written off stock of slow moving and expired items which are not fit for consumption in the manufacturing processes. The assessee itself has duly disclosed all the facts qua stock written off during the year in its audited accounts. Moreover, the stock register was prepared and maintained as per the Accounting Standard followed by the assessee regularly which also duly disclosed all stock in the accounts. Since the assessee is engaged in the manufacturing of chemical ,pesticides and powder which are easily evaporable or are susceptible to damage and cannot be used in the finished goods. Besides, the ld. AR submitted that the assessee has been following the accounting method regularly which is also duly disclosed in the audited financial statements. Since, the assessee is engaged in the manufacturing of chemicals and pesticides using inputs in the form of chemical powder and liquid which are evaporative and damageable. After considering the submissions of the rival parties and considering the facts of case, we do not find any infirmity in the order of ld. CIT(A). The case laws relied by the revenue have been examined and found to be not applicable to the present facts. Accordingly, we affirm his order and reject the ground taken by the Revenue.”
7 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 2.2 If the aforesaid order of the Tribunal is analyzed, we find that in the case of assessee for assessment year 2010-11, on identical facts/issue, there is a finding by the Tribunal that the assessee written off stock of slow moving and expired items which were not fit for consumption in the manufacturing process. These facts were duly disclosed by the assessee and mentioned in the audited accounts. In the absence of any contrary facts, we have no option but to follow the order of the Tribunal, thus, we find no infirmity in the order of the Ld. Commissioner of Income Tax (Appeal), which is upheld, resulting into dismissal of the ground raised by the Revenue.
The next ground raised pertains to deleting the disallowance of Rs.1,86,22,782/- expended on DISHA Project, being capital in nature, without appreciating the fact that implementation of the said project has enduring benefit to the assessee and deserves to be treated as capital expenditure.
8 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 3.1 We have considered the rival submissions and perused the material available on record. In view of the above we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 08.11.2017 for ready reference and analysis:
“21. Facts in brief are that the assessee incurred an expenditure of Rs.1,06,52,800/- on account of legal and professional fee incurred for increasing the business operation efficiency and the same were shown under the head “Project Disha” (Driving Innovative Solution for Hyper Achievements). This project was carried out with the help of an external consultant Ernst and Young to whom this amount was paid. The said project was undertaken to bring in several improvements in the operations of business which were divided into three phases: Phase I: Improving area of manufacturing and procurement; Phase II:-Improving areas of Sales and Marketing and; Phase III: Optimizing the fixed costs and operating expenses. The said project was like remodeling or revamping the whole business of the assessee thereby effecting the improvement and optimizing the areas of manufacturing sales and marketing and thus the expenditure so incurred was towards the improving the business of the assessee. Accordingly, the AO brushed aside the contention of the assessee that the expenses were incurred for assessee business improvement and to increase efficacy and has long term and enduring benefit to the entire business of the assessee over the future years. The AO treated the entire expenditure as capital in nature and allowed 25% thereof resulting into disallowance of Rs.79,89,600/-. In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee after considering the various contentions and submissions as made during the appellate proceedings by observing and holding as under:
“5.4 Ground No.9 to 10: The above grounds are taken together as they address a common issue I find that the appellant during the year under consideration has incurred expenditure amounting to Rs.1,06,52,800/ - on account of legal; and professional fees for increasing the efficiency of business operations. The same was under a project titled "Project DISHA" (Driving Innovation Solution for Hyper Achievements). In Alembic Chemical Works Vs.CIT 177 ITR 377 (SC), Hon'ble Supreme Court held:
9 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 "The improvisation in the process and technology in some 'areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessee's established business not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from area of the day-to-day business of the assessee's established enterprise." In view of the above decision and the ratio laid down in the case of Indo Rama Synthetics India Ltd, V/s CIT (333 ITR 18) (Delhi); CIT v. Praga Tool Ltd (157 ITR 282) (AP); CIT vs. Crompton Engineering Co. Ltd. (242 ITR 317) (Mad)‟ CIT V/s JCT Electronics Ltd (P&H) (ITA 676 of 2009); CIT V/s Abbott Laboratories (I) P Ltd (202 ITR 819) Bom; EL Forge Ltd V.s DCIT (2013) 216 Taxman 114 (Mad); CIT V/s Carborandum Universal Ltd (2008) 219 CTR 202 (Mad), the AO is directed to treat the expenditure on account of legal and professional fees amounting to Rs.1,06,52,800/-”
The ld. DR vehemently submitted before us that the order of ld. CIT(A) is apparently wrong in deleting the addition of expenses of capital nature incurred on the project to increase efficiency of business operations which was of a long term nature resulting into benefits of enduring nature and the benefit were going to last over longer period of time than one year. Thus, the expenditure incurred by the assessee was of capital nature and the AO has rightly disallowed 75% by allowing 25% of the said expenditure to be written off in the current year and proposing to allow it in the next three years the remaining amount. The ld. DR relied on the decision of AO and stated that the ld.CIT(A) has wrongly followed the decision of the Hon'ble Supreme Court rendered in the case of In Alembic Chemical Works Vs.CIT 177 ITR 377 (SC) without any discussion. The ld. DR finally prayed that the order of the AO be restored and that of ld. CIT(A) be set aside.
On the other hand, the ld.AR submitted that the expenditure incurred by the assessee by way of payment on account of professional and legal fees in connection with a project purported to be undertaken for increasing the efficiency of business operation in the existing business of the assessee under the title „DISHA” which stood for (Driving Innovative Solution for Hyper Achievements). The ld.AR for the assessee submitted that this major innovative drive undertaken in the year 2007-08. The said project was carried out with the help of outside agencies in three phases i.e. Phase I:Improving area of manufacturing and procurement; Phase II:-Improving areas of Sales and Marketing and ; Phase III: Optimizing the fixed costs and operating expenses. The ld. Counsel submitted that the expenditure incurred on the said project was purely of revenue in nature as it has not resulted into any benefit of enduring nature or resulted in the creation any new assets and thus the assessee has rightly claimed the expenditure as 10 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 revenue. The assessee relied upon the series of decisions in defense of his arguments: a) CIT v. Crompton Engineering Co. Ltd. - 242 ITR 317.(Mad.)- b) CIT v. M/s. JCT Electronics Ltd. - 188 Taxman 191 (P&H) – c) Indo Rama Synthetics India Ltd. v. CIT - 333 ITR 18 (Del HC) d) CIT v Abbott Laboratories (I) Pvt. Ltd. - 202 ITR 818.(80m.) e) CIT v. Praga Tools Ltd. - 1571TR 282 (AP) f) CIT v, Carborandum Universal Ltd. - 177 Taxman 347 (Mad.) Finally, the ld.AR prayed before us that considering the ratio laid down in the various decisions, the appeal of the revenue should be dismissed on this ground by confirming the order of the ld.CIT(A).
We have carefully considered the rival submissions and perused the material placed before us including the impugned order and case laws cited by the parties. We find that the assessee has incurred an expenditure of Rs.1,06,52,800/- on project “DISHA” which was undertaken to bring about overall efficiency and improvement in the business of the assessee and the project was carried out with the help of outside agency. After considering the submissions of both the parties and on perusal of the facts on records and the decisions as relied upon by the parties, we are of the considered view that the expenditure incurred by the assessee to an external consultant Ernst and Young as legal and professional charges for “DISHA” cannot be treated as capital expenditure as the same was incurred to bring overall efficiency and improvement in the existing business of the assessee by undertaking special campaign in the phased manner during the year. In our opinion, the expenditure incurred by the assessee is of purely revenue in nature and cannot be treated as capital nature as has been done by the AO. We, therefore, are in agreement with the findings of the ld.CIT(A) and inclined to uphold the same and the order of ld.CIT(A) does not suffer from any infirmity.”
3.2 We find that the Tribunal also considered the expenditure on account of legal and professional fee incurred for increasing the business operation efficiency which were shown under the head “project DISHA”
(Driving Innovation Solution for Hyper Achievements).
Being on identical facts, following the aforesaid decision of 11 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 the Tribunal, we find no merit in the contention of the Revenue, therefore, we affirm the stand of the Ld. Commissioner of Income Tax (Appeal). Resultantly, the impugned ground is also dismissed.
Finally, the appeal of the Revenue is dismissed.
Now, we shall take up appeal of the assessee (ITA No.3465/M/2013), with respect to invocation of revisional jurisdiction u/s 263 of the Act by the ld. Commissioner. The contention of the ld. counsel for the assessee is that if the order of the Tribunal is followed and the order of the Ld. Commissioner of Income Tax (Appeal) is upheld in then the present appeal will become infractuous. This contention of the assessee was not controverted by the ld. DR. 4.1 We have considered the rival submissions and perused the material available on record. We find that the Ld. Commissioner of Income Tax (Appeal) invoked revisional jurisdiction with respect allowability of deduction on account of slow, non-moving and damaged stock on the ground that the ld. Assessing Officer did not 12 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 make proper verification and likewise, expenses of Rs.1,86,22,782/- on account of increasing business operation efficiency carried out under the project “DISHA”.
On both these issues, by following the earlier order of the Tribunal, we have dismissed the appeal of the Revenue, therefore, this appeal of the assessee has become infractuous, consequently, the appeal of the assessee is dismissed as infractuous.
5. Now, we shall take up the Cross-objection 185/M/2016(arising out of wherein the ground/CO raised with respect to provision made for slow, non-moving stock and if any, cannot exceed Rs.40.96 lakhs. The ld. counsel invited our attention to the delay of 50 days in filing the appeal before this Tribunal. The ld. counsel invited our attention to the application for condonation of delay and contents of the affidavit. The ld. DR contended that the assessee was expected to explain the delay of each day.
We have considered the rival submissions and perused the material available on record. In view of the 13 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 assertions made by the ld. respective counsel, so far as, condonation of delay is concerned, no doubt filing of an appeal is a right granted under the statute to the assessee and is not an automatic privilege, therefore, the assessee is expected to be vigilant in adhering to the manner and mode in which the appeal is to be filed in terms of the relevant provisions of the Act. Nevertheless, a liberal approach has to be adopted by the appellate authorities, where delay has occurred for bona fide reasons on the part of the assessee or the Revenue in filing the appeal. In matters concerning the filing of appeal, in exercise of the statutory right, a refusal to condone the delay can result in a meritorious matter being thrown out at the threshold, which may lead to miscarriage of justice. The judiciary is respected not on account of its power to legalize in justice on technical grounds but because it is capable of removing injustice and is expected to do so.
5.1 The Hon’ble Apex Court in a celebrated decision in Collector, Land Acquisition vs Mst. Katiji & Ors. 167
14 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 ITR 471 opined that when technical consideration and substantial justice are pitted against each other, the courts are expected to further the cause of substantial justice. This is for the reason that an opposing party, in a dispute, cannot have a vested right in injustice being done because of a non- deliberate delay. Therefore, it follows that while considering matters relating to the condonation of delay, judicious and liberal approach is to be adopted.
If sufficient cause is found to exist, which is bona-fide one, and not due to negligence of the assessee, the delay needs to condoned in such cases. The expression ‘sufficient cause’ is adequately elastic to enable the courts to apply law in a meaningful manner, which sub-serves the end of justice- that being the life purpose of the existence of the institution of the courts. When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserves to be preferred. The Hon’ble Apex Court in Vedabhai vs Santaram 253 ITR 798(SC) observed that inordinate delay calls of cautious approach. This means that there should be no mala-fide or dilatory tactics. Sufficient cause should receive liberal
15 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 construction to advance substantial justice. The Hon’ble Apex Court in 167 ITR 471 observed as under:-
“3. The legislature has conferred the power to condone delay by enacting section 51 of the Limitation Act of 1963 in order to enable the courts to do substantial justice to parties by disposing of matters on de merits. The expression “sufficient cause” employed by the legislature is adequately elastic to enable the courts to apply the law in a meaningful manner which subserves the ends of justice that being the life- purpose of the existence of the institution of courts. It is common knowledge that this court has been making a justifiably liberal approach in matters instituted in this court. But the message does not appear to have percolated down to all the others courts in the hierarchy.”
5.2 Furthermore, the Hon'ble Supreme Court in the case of Vedabai Alia Vaijayanatabai Baburao Patil vs. Shantaram Baburao Patil 253 ITR 798 (SC) held that the court has to exercise the discretion on the facts of each case keeping in mind that in construing the expression ‘sufficient cause’, the principle of advancing substantial justice is of prime importance. The court held that the expression “sufficient cause” should receive liberal construction.
16 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 5.3 The decision of the Tribunal in People Infocom Private Ltd. v/s CIT (ITA No.210/Mum/2013) order dated 19/05/2016, M/s Neutron Services Centre Pvt. Ltd vs ITO (ITA No.1180/Mum/2012) order dated 18/02/2016, Shri Saidatta Coop-. Credit Society Ltd. v/s ITO (ITA No.2379/Mum/2015) order dated 15/01/2016 and Mr. Nikunj Barot (Prop. Enigma) vs ITO (ITA No.4887/Mum/2015) order dated 06/01/2016, wherein, substantial delay was condoned, supports the case of the present assessee. Having made the aforesaid observation and various decisions discussed hereinabove, including from Hon’ble Apex Court, the circumstances narrated by the assessee, wherein, he has stated the reasons which caused the delay, therefore, we are satisfied with the explanation of the assessee and condone the delay. Since, we have already dismissed the appeal of the Revenue, this CO is also consequential in nature.
Finally,
(1) the appeal of the Revenue is dismissed, (2) the appeal of the assessee is dismissed as infractuous whereas
17 M/s Rallis India Ltd. ITA NO.3680/Mumbai/2016 CO NO.185/Mumbai/2016 (3) the Cross-objection of the assessee is consequential in nature and become infractuous.
This Order was pronounced in the open court in the presence of learned representatives from both sides at the conclusion of the hearing on 1st March, 2018.