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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A.MOHAN ALANKAMONY
आदेश / O R D E R
Per A. Mohan Alankamony, AM:-
These appeals by the assessee are directed against the common order passed by the learned Commissioner of Income Tax (Appeals)-3, Chennai dated 30.12.2016 in 15/CIT(A)-3 & 72/2015-16/CIT(A)-3 for the assessment years 2010-11 & 2011-12 passed U/s.250(6) r.w.s. 143(3) of the Act.
The assessee has raised several identical grounds in both of its appeals however the cruxes of the issues are that:-
(i) The Ld.CIT(A) has erred in upholding the order of the Ld.AO who had disallowed stock written off under the head indirect expenses in the P & L account for Rs.86,69,344/- in the assessment year 2010-11 and Rs.7,71,937/- in the assessment year 2011-12 as allowable deduction. (ii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO with respect to charging of interest U/s.234B & 234C of the Act.
The brief facts of the case are that the assessee is a private limited company engaged in manufacturing of professional electronic components & cable assembly filed its return of income for the assessment year 2010-11 & 2011-12 on 12.10.2010 & 28.09.2011 admitting total income of Rs.4,26,74,410/- & Rs.2,49,02,549/- respectively. The case was selected for scrutiny and finally assessment orders for the assessment years 2010-11 & 2011-12 were passed U/s.143(3) of the Act on 26.03.2014 & 26.03.2015 wherein the Ld.AO disallowed Rs.86,69,344/- & Rs.7,71,937/- towards stock written off U/s.37 of the Act and also levied penalty U/s.234B & 234C of the Act for the relevant assessment years.
Ground No. 2(i) : Stock written off:- During the course of scrutiny assessment proceedings it was observed by the Ld.AO that the assessee had claimed Rs.86,69,344/- and Rs.7,71,937/- for the assessment year 2010- 11 & 2011-12 respectively as deduction under the head stock written off which was disclosed in schedule K – indirect expenses forming part of P& L account. On query it was explained that consolidated value of inventory was taken into P&L account on account of constraints in the ERP being used by the assessee company. However the Ld.AO disallowed the claim of the assessee as allowable deduction because of the following reasons:-
1) The raw materials dealt by the assessee Company had higher scrap value which the assessee had not taken into consideration.
2) The only basis for writing off stock was that, it was not moving for the past three years.
3) The scrap value of the stock was ignored and the assessee
Company had merely debited its P&L account without reducing the value of the closing stock.
4) The decisions relied by the assessee was not applicable in the case of the assessee Company.
4.1 On appeal the Ld.CIT(A) upheld the order of the Ld.AO.
While doing so, he made the following observations:- i. The assessee had not adduced any policy in support of valuation of closing stock pertaining to obsolete items of inventory. ii. The assessee had not filed any evidence such as proof of age of an item considered for valuation. iii. The assessee has not filed any evidence with respect to change in technology which has resulted in rendering of stock as obsolete. iv. The assessee had not filed any evidence for the stock being damaged. v. The assessee had not established as to how the net realizable value of its stock has depleted. vi. The assessee has not complied with the Accounting Standards 2. vii. The assessee has not reduced the value of the stock written off from its closing stock and opening stock for the subsequent year.
4.2 Before us the Ld.AR made the following submissions:-
(i) The appellant company had maintained regular books of accounts under the Companies Act, 1956 which was duly audited. (ii) Only the non-moving and obsolete stock held for a period of more than three years were written off. (iii) The company has an ERP procedure in line with their manufacturing activity which identifies obsolete stock.
(iv) Such obsolete stocks are physically verified, valued and thereafter written off in the books of accounts. (v) The value of the obsolete stock is not duplicated by further reduction in closing stock.
With the above submission the Ld.AR pleaded that the disallowance made by the Ld. Revenue Authorities with respect to writing off of obsolete stock may be deleted. The Ld.DR on the other hand relied on the orders of the Ld. Revenue Authorities.
4.3 We have heard the rival submissions and perused the materials on record carefully. From the facts of the case, it is apparent that the assessee has simply debited in its P&L account under the head ‘indirect expenses’ with respect to stock written off for both the assessment years and the corresponding credit is given effect to provision account. This procedure adopted by the assessee is neither in accordance with the Companies Act, 1956 nor with the Accounting Standards / Financial Accounting. If the value of the stock has depleted the same has to be reduced from the value of the closing stock which will conversely reduce the profit of the assessee. Further the value of closing stock forms part of balance sheet item thereby disclosing the true state of affairs of the company with respect to the value of closing stock.
Moreover the closing stock is adopted as the opening stock of the subsequent year and carried forward in the P&L account. If the depleted value of opening stock is sold at a higher price in the subsequent year or verse versa, to that extent the profit will increase or decrease for that year. Thus the profit or loss arising due to change in value of the stock will be inherently absorbed in the P&L account when such method is followed and the correct value of stock will be disclosed in the Balance Sheet. Schedule VI part I, part II and part III to Companies Act also mandates such method of accounting. However in the case of the assessee, it has simply written off a specified amount as expenditure under the head ‘indirect expenses’ and correspondingly provision is created.
The value of the stock does not reflect the depletion of the value of the stock. Thus the true and fair value of the stock is not disclosed in the balance sheet explicitly. Moreover there will be no control in computing the correct profit / loss in the P&L account. Therefore the method adopted by the assessee by writing off the value of the stock is erroneous and cannot be allowed as deduction. Moreover even if the assessee has followed the correct method by writing off the value of the stock in the books of accounts as explained herein above, as pointed out by the Ld.AO and the Ld.CIT(A) the assessee has to come out with some tangible materials to establish that the value of the stock has actually depleted and that is lacking in the case of the assessee. Therefore we do not find it necessary to interfere with the order of the Ld. Revenue Authorities on this issue.
Ground No. 2(ii) : Levy of Interest U/s.234B & 234C of the Act:- It is pertinent to mention that levy of interest U/s.234D & 244A of the Act is consequential in nature and accordingly this ground raised by the assessee is devoid of merits.
In the result both the appeals of the assessee are dismissed.
Order pronounced on the 12th December, 2017 at Chennai.