MEGA FINE PHARMA P.LTD,MUMBAI vs. ACIT 4(2), MUMBAI

We heard the parties and perused the record. The assessee is engaged in the business of manufacture and sale of bulk drugs and chemicals. The first issue relates to addition made to the value of closing stock. Before the Assessing Officer the assessee furnished details of valuation of finished stock, which was valued at lower of cost of market value. For the purpose of arriving at the cost of finished goods, the assessee has taken into account cost of raw material, cost of conversion and direct overheads. The Assessing Officer

Main contention of learned AR is that the Assessing Officer has erred in law in adopting the average value from the figures available in Profit and Loss account in order to arrive at the value of finished goods, when there are different types of finished goods, i.e., the assessee is manufacturing various types of finished goods ranging from ` 1000/- to ` 15000/-. He submitted that the assessee has been scientifically valuing the finished goods and the same system is followed over the past several years. He further submitted that the assessee has also furnished a certificate obtained from chartered engineer to prove that the stock has been valued in scientific manner. He further submitted that the Assessing Officer did not find fault with the methodology adopted by the assessee for valuing closing stock. Hence, the Assessing Officer was not justified in disturbing the method adopted by the assessee. He further submitted that the Ld CIT(A) confirmed the addition without giving any reason.

On the contrary, learned Departmental Representative strongly supported the order passed by the learned CIT(A).

Having heard the rival contentions, we are of the view that there is merit in the contention of learned AR. From the orders passed by the tax authorities, we noticed that the Assessing Officer has not found fault with the method followed by the assessee for valuing finished goods. Secondly, the assessee has been following the same method of valuation for the past seven years and hence, under the principles of consistency, the Assessing Officer should not have disturbed the same without finding fault with the said methodology. We

Next issue relates to the disallowance of expenses incurred towards patent application. The assessee had incurred a sum of ` 4,24,100/- towards application for obtaining patent. The Assessing Officer treated the same as an intangible asset and accordingly disallowed the above said expenditure and allowed depreciation of 25% thereon. The learned CIT(A) also confirmed the same.

Learned AR submitted that the assessee has not obtained any patent during this year so as to get qualified to be called as an intangible asset. The assessee has incurred this expenditure for processing the application for patent rights, the outcome of which is uncertain. He submitted that the assessee did not receive any patent right during this year. Accordingly, he submitted that the impugned expenditure should be allowed as revenue expenditure.

On the contrary, learned Departmental Representative placed reliance on the order passed by the learned CIT(A).

We have heard the rival contentions on this issue. The assessee has incurred the impugned expenditure for the purpose of applying patent and during the year under consideration the assessee did not receive any patent rights and hence it cannot be said that the assessee has acquired any intangible asset. In the absence of patent rights, question of allowing depreciation on non-existing asset does not arise. Accordingly, we are of the view that the expenditure incurred by the assessee on processing of application cannot be treated as intangible asset. Accordingly, we set aside the 4 M/s. Mega Fine Pharma Pvt. Ltd.

In the result, appeal filed by the assessee is allowed. Order has been pronounced in the Court on 6.6.2017.