DCIT, NEW DELHI vs. M/S NATIONAL FERTILIZERS LTD.,, NEW DELHI

Date of hearing: 30.05.2016 Date of Pronouncement: 31.05.2016 ORDER PER BENCH: These are cross appeals arising out of the separate orders passed by Ld. CIT(A) XVI, New Delhi each dated 25.03.2013 for the Assessment Year 2006-07 to 2009-10. A. We first take up the appeals filed by the Revenue: 2. Assessment Year 2006-07:

2 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013

The grounds of appeal raised by the Revenue for the year under consideration are as under: “1. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the demurrage & wharfage expenses as penalty.

2. Whether on the facts & in the circumstances 0 e case, the Ld. CIT(A) has erred in law in not appreciating the provision laid down in explanation to section 37(1) wherein it has been said any amount paid for the purpose which is an offense or which is prohibited by law shall not be allowed as expenditure.

3. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the Railway act has defined the demurrage and wharfage as the charge levied, charge means the blame or accusation hence penalty.”

2.1 At the outset, Ld. A.R. submitted that the above grounds No.1, 2 & 3 are against the deletion of addition amounting to Rs.1,39,30,000/- on account of demurrage and wharfage charges. He submitted that the assessee had debited Rs.1,39,30,000/- as demurrage and wharfage charges in the P & L account, as it was paid to the Indian Railways towards delay in loading/unloading operation at the units beyond time frame fixed by Indian Railways. The Assessing Officer was of the view that the amount paid as demurrage and wharfage to Indian Railways is in the matter of fine or penalty and hence disallowed the expenditure.

3 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 2.2 Ld. CIT(A) dealt with this issue at para 11 page 37 of his order wherein, he held the payment are not in the nature of penalty or fine for violation of any statute. 2.3 Ld. A.R. submitted that this issue is covered by the order dated 20.05.2015of this Tribunal in assessee’s own case for Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013. The Tribunal for Assessment Year 2009- 10, has relied upon the decision of Hon'ble Jurisdictional High Court as well as the decision of Coordinate Bench of this Tribunal in Mahlaxmi Sugar Mills Co. Ltd. Vs CIT (1986) 157 ITR 683 (Del.) and Imcola (Exports) Ltd., in I.T.A.No.974/Mum/2009 respectively. The relevant findings are given in para 7 page 4 of the said order and read as under: “7. Ground no.2 is against the deletion of addition of Rs.2,36,00,000/- being demurrage & wharfage charges. These charges are paid to the railways towards delay in loading and unloading operations beyond the time frame fixed by the Indian railways. The AO was of the view that the amount paid as demurrage and wharfage to the railways is a fine or penalty and hence disallowed the expenditure. The Ld. CIT(A) has dealt with the issue at page 44 para 5. The payment in question is not the penalty or fine for violation of any statute. It is compensatory in nature. The issue stands covered by the following decisions. i. Nanhoomal Jyoti Prasad vs. CIT (1980) 123 ITR 269 (All) ii. Mahalaxmi Sugar Mill Co. Ltd. vs. CIT (1986) 157 ITR 683 (Del.) iii. Imcola (Exports) Ltd. ITA 974/Mum/2009.

4 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013

Respectfully following the same we uphold the finding of the First Appellate Authority and dismiss this ground of Revenue.”

2.4 Respectfully following the same, we uphold the findings of first appellate authority and dismiss these grounds in Revenue’s appeal for the Assessment Year 2006-07. Appeal filed by the Revenue for the Assessment Year 2006-07 stands dismissed. Assessment Year 2007-08: 3. The grounds of appeal raised by the Revenue for the year under consideration are as under: “1. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that Section 145 of the IT Act, permits use of one type of accounting system in a particular year and mixed accounting system is not at all allowed.

2. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the fact that as per the provision of Section 145 of the IT Act, which is mandatory for every assessee.

3. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in low by ignoring the fact that by allowing the contention of the assessee, the assessee will be allowed to follow the hybrid system of accounting which is against the code of IT Act.

4. Whether on the facts & in the circumstances of the case, the Ld. ClT(A) has erred in law by deleting the additions mode by the AO on account of accrued interest of Rs. 6.48 crores and Rs.266.14 crores on protective basis by ignoring the finding of Hon'ble High Court in the assessee's case for A Y 2004-05, wherein court has held that "the addition, if any con only be made in the year when the award become the 5 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 rule of court, which on the plain facts of the case took place of the previous year corresponding to A Y 2007- 08.

5. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that mere improbability of recovery, does not mean that no real income has accrued to the assessee .

6. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the demurrage & wharfage expenses as penalty.

7. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the provision laid down in explanation to section 37(1) wherein it has been said any amount paid for the purpose which is an offense or which is prohibited by low shall not be allowed as expenditure.

8. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the Railway Act has defined the demurrage and wharfage as the charge levied, charge means the blame or accusation hence penalty.

9. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in low by directing the AO to verify the facts again and re-examine the case of the assessee alter giving opportunity of being heard to the assessee, though the AO had duly fallowed the said procedure at the time of the assessment proceedings.

10. Whether an the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the assessee has not filed any new / additional documents which needs to re-examined.”

3.1 At the outset, Ld. A.R. submitted that grounds No. 1 to 5 are covered by the order of this Tribunal in assessee’s own case for the Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013 vide order dated 20.05.2015. This issue

6 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 has been discussed at page 2 para 3 of the assessment order. Assessee had made advance of Rs.130.69 crores to M/s. Karsan in the year 1995-96 against the import of Urea, , the price of which were not received, the ;supplies of which were not received and subsequently, the contract was terminated. Accordingly, the assessee initiated arbitration proceedings before the International Court of Arbitration (ICA) against non performance of the contract by the supplier. The arbitration award was delivered on 03.12.1998 in favour of the assessee for US$40.69 million along with simple interest @ 5% p.a. on the principal amount of US$37.62 million w.e.f. 14.11.1995 till the date of payment. 3.2 The ICA award was challenged by M/s. Karsan in District Court at Amsterdam in 1999 and before Dutch Court of Appeal thereafter. Dutch Court of Appeal vide its judgment dated 14.12.2006 rejected the appeal of M/s. Karsan. The A.O. in the assessment order made addition of Rs. 1 16.80 crore for A.Y. 2004-05, on account of interest accrued for the period from 14/11/95 to 31/03/2004 which has been deleted by the Hon'ble ITAT vide order dated 20.05.2015. The order of the ITA T for A. Y. 2004-05 was not accepted by the Department and appeal before the Hon'ble Delhi High Court has been filed. Since, interest has accrued to the assessee in the subsequent period up to A Y 2007-08 for the period from 14/11/95 to 31/03/2007 amounting to Rs.

7 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 266,14,09,000/- in view of the arbitration award decided in favour of the assessee, addition of Rs. 266.14 crore was made to the declared income of the assessee on protective basis by Ld. A.O. The Ld. AO made an addition of Rs. 6,48,18,5501- as accrued interest for the relevant previous year. The Ld. AO held that the assessee was pursuing the recovery of the amount, therefore, as per mercantile system of accounting the income should have first been declared and thereafter, as and when the assessee feels that the amount is irrecoverable the same can be written off in the books of accounts but the assessee neither has shown the interest receivable as income, nor written it off in the books of account. Being aggrieved, the assessee carried the matter to the Ld. CIT(A). 3.3 Ld. CIT(A) held that the Assessing Officer was not justified in making the addition of notional interest on the basis of directions and findings made at para 4.2 to 4.4 of his order. Now, the Department is in appeal. 3.4 Ld. A.R. submitted that Hon'ble Jurisdictional High Court has affirmed the order of the Tribunal for Assessment Year 2004-05 in I.T.A.No. 541/2012 vide order dated 24.09.2012 and has held as follows: “The Tribunal endorsed the finding of the CIT(A). It relied upon its decision for AY 2004-05, as is apparent from its discussion in para 9. The Tribunal's finding would show that it had also relied upon the decision of the Supreme Court in Fuerst Day Lawson Ltd. Vs. Jindal Exports Ltd. (AIR 2001 SC 2293). This 8 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013

Court. also noticed that having regard to the terms of the repeated Arbitration Act, 1940, an award could not be enforceable. The same was the case with the foreign award, the Court had to first adjudicate as to the enforceability. In these circumstances, the assessee's right to interest was a mere claim, till the date of the judgement of the Court dt. 4th Dec, 2006. In other words, the right to interest crystallized after the judgement of the Court. Till then, it was inchoate. For this reason, the Tribunal's finding cannot be faulted with. No substantial question of law arises. The appeal is therefore dismissed.”

3.5 On the contrary, Ld. D.R. submitted that the Assessing Officer in his order at page 2 para 3 has observed as under: “Counter claims: M/s. Karsan had filed their counter claims during the ICC arbitration amountin9. to US$ 33.63 million and GBP 73609.20 (INR 14661.68 Lakhs) as on 31.03.07), which were rejected by ICC. The party challenged the award in district Court at Amsterdam during March 1999 which was rejected vide their judgement dated 12.12.2001. The party filed an appeal against the judgement of District Court before the Dutch High Court, Amsterdam, which has been rejected vide its judgement dated 22.01.2004. However, M/s Karsan during Oct, 2004 has filed fresh litigations before Dutch Court of Appeal for annulment of the said ICC award dt. 3.12.1998 and Dutch Court of Appeal vide its judgement dt. 14.12- 2006 has rejected the appeal of M/s. Karsan and no fresh litigations against the Company in respect of counter claims of M/s. Karsan are known to the company.” 3.6 Ld. D.R. submitted that as the arbitration order has attained finality and the assessee has been granted

9 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 notional interest @ 5% p.a. from 14.11.1995 till the date of payment justifying the addition made by the Assessing Officer. He submitted that Dutch Court had dismissed the appeal filed by M/s. Karsan against the arbitration award and no fresh litigation has been filed challenging the said arbitration award. He supported the addition made by the Assessing Officer on account of accrued interest for the relevant previous year. 3.7 We have perused the relevant orders referred by the parties before us as well as the submissions made by them. There is no dispute that the ICA has awarded interest to the assessee @ 5% p.a. on the advance made to M/s. Karsan. It is also not disputed that the assessee could not make recovery against the advance (principal amount) of Rs.130.69 crores, an amount of Rs.1.05 crores only could be recovered leaving balance advance of Rs.129.64 crors which could not be recovered till date. The notional interest awarded by the International Court of Arbitration, which has now attained finality is a hypothetical income which cannot be subjected to tax. Merely because the said amount has been awarded by way of an order, does not mean that the assessee has received such income. The assessee followed mercantile system of accounting where there cannot be a situation of hypothetical income being taxed. In the entirety of the circumstances of the case before us, though the notional interest in the books of account noted as outstanding

10 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 dues and based on the advance paid to the supplier, during the relevant time, there was no prospect of realization of the notional interest worked out by the Assessing Officer when principal amount itself was difficult to be recovered. 3.8 An income to be taxed, has to be real income and not a notional income and concept of accrual of income can be applied only to the real income as laid down in the judgement passed by the Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd. Vs CIT (1997) 225 ITR 746. The Hon'ble Supreme Court held as under: “The question whether there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity which were added by the Income- tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee- company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal.”

11 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 3.9 In the aforesaid judgment Hon'ble Supreme Court has emphasized that though the income tax enactment takes into account two points at a time as, such taxable liability is direct i.e. accrual or receipt of income, nevertheless the substance of matter is ‘income’, and if income does not result, there cannot be tax. It has been recorded by the Ld. CIT(A) that in the process of enforcement of award passed by ICA against the identified asset held in the name of M/s. Karsan, the execution of such award are pending at Turkey, Bahrain, Monaco, Hyderabad (India) & New Delhi (India). Various interim attachments, civil attachments orders etc. have been obtained in respect of some of the assets held in the name of M/s. Karsan. 3.10 From the above, it is clear that the assessee has not yet been able to recover even the principal amount advanced to M/s. Karsan and it is not possible to consider the notional interest on the advance as income in the hands of the assessee, which is not received yet. Accordingly, we dismiss these grounds of revenue’s appeal. 3.11 Grounds No.6-8 of the revenue’s appeal are in respect of demurrage and wharfage charges paid to Indian Railways. Respectfully following the decision of this Tribunal in assessee’s own case for Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013, dated 20.05.2015 (supra), we dismiss these grounds of Revenue’s appeal.

12 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 3.12 Grounds No.9 & 10 are general in nature and hence we are not inclined to adjudicate the same. 3.13 In the result, appeal filed by the Revenue for the Assessment Year 2007-08 stands dismissed. 4. Assessment Year 2008-09: The grounds of appeal raised by the Revenue for the year under consideration are as under:

1. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that Section 145 of the IT Act, permits use of one type of accounting system in a particular year and mixed accounting system is not at all allowed.

2. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the fact that as per the provision of Section 145 of the IT Act.

3. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in low by ignoring the fact that by allowing the contention of the assessee, the assessee will be allowed to follow the hybrid system of accounting which is against the code of IT Act .

4. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by deleting the additions made by the AO on account of accrued interest of Rs. 6.48 crores by ignoring the finding of Hon'ble High Court in the assessee's case for AY 2004-05, wherein court has held that "the addition, if any can only be made in the year when the award become the rule of court, which on the plain facts of the case took place of the previous year corresponding to A Y 2007-08. 5. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring

13 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 the provisions of See 43B where in the leave encashment which is post retirement benefit, has been allowed on ascertained amount.

6. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the demurrage & wharfage expenses as penalty.

7. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the provision laid down in explanation to section 37(1) wherein it has been said any amount paid for the purpose which is an offense or which is prohibited by law shall not be allowed as expenditure.

8. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the Railway Act has defined the demurrage and wharfage as the charge levied, charge means the blame or accusation hence penalty.

9. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by directing the AO to verify the facts again and re-examine the case of the assessee after giving opportunity of being heard to the assessee, though the AO had duly followed the said procedure at the time of the assessment proceedings.

10. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the assessee has not filed any new / additional documents which need to re-examined.”

4.1 Grounds no.1-4 deal with the accrual of interest on advance given to M/s. Kasan. As we have dealt with this issue in detail in Assessment Year 2007-08 above, to void

14 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 repetition, following the same discussion, we dismiss these grounds of appeal raised by the Revenue. 4.2 Ground No.5: Ld. A.R. submitted that this issue is covered by assessee’s own case for Assessment Year 2009- 10 in dated 20.05.2015. The Assessing Officer had made addition of Rs.194.46 lacs in respect of the provisions made by the assessee for post retirement medical benefits as per AS-15. The assessee had debited an amount of Rs.371.79 lacs on account of provision towards long service awards, post retirement medical benefits, TA on retirement and social security benefits which are as under: S.N. Nature of provision Debited to P & Actual L account (Rs.) payment (Rs.) A Long service award 30.94 lacs 15.50 lacs B Post retirement medical 155.12 lacs 38.16 lacss benefit C TA on retirement 10.09 lacs 1.04 lacs D Social security benefits 175.64 lacs 122.63 lacs Total 371.79 lacs 177.33 lacs 4.2.1 The Assessing Officer held the liability as not ascertained, and disallowed the provisions to the extent of Rs.194.46 lacs. 4.2.2 Ld. CIT(A) has dealt with the issue at page 52, para 7.4 of his order. Ld. CIT(A) relied upon the decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd. Vs CIT

37. ITR 01, Metal Block Co. of India Ltd. Vs their workmen reported in 73. ITR 53 and Bharat Earthmovers Ltd. Vs CIT 245 ITR 428, wherein it has been held that the 15 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 liability being determined one, though to be discharged in future, did not make it a contingent liability and is allowable. He further noted that the principle enunciated by Hon'ble Supreme Court in the above decision, has been followed by Hon'ble Jurisdictional High Court in the case of CIT Vs Insilco Lt. 179 Taxman 55, wherein it has been held that the liabilities provided for long service award payable in future, are allowable liabilities. Now the department is in appeal. 4.2.3 On the contrary, Ld. D.R. relied upon the order passed by Ld. Assessing Officer. 4.2.4 We have perused the orders passed by the authorities below and the submissions advanced by both the parties. It is observed that Coordinate Bench of this Tribunal has decided the issue in favour of the assessee and against the Department in assessee’s own case for Assessment Year 2009-10, in I.T.A.No. 4076/Del/2013 vide order dated 20.05.2015 at page No.4 in para 8, as under:

“8. Ground no.3 is against deletion of disallowance made by the AO of Rs.7,79,00,000 being provision for post retirement benefits. 8.1. The First Appellate Authority at page 49 para 7.1 to 7.6 has dealt with this issue. The Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT (SC) 245 ITR 428 has held that liability being a determined one, though to be discharged in future, did not make it a contingent liability and it is an allowable liability. The First Appellate Authority in this case has followed the 16 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 judgement of Hon’ble Supreme Court. Thus we find no reason to interfere with the same. Ground no.3 is dismissed.”

4.2.5 Respectfully following the same, we dismiss this ground of appeal raised by the Revenue. 4.3 Grounds No.6-8 of the revenue’s appeal are in respect of demurrage and wharfage charges paid to Indian Railways. Respectfully following the decision of this Tribunal in assessee’s own case for Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013, dated 20.05.2015, we dismiss these grounds of Revenue’s appeal. 4.4 Grounds No.9-10 are general in nature and hence we are not inclined to adjudicate the same. 4.4.1 In the result, appeal filed by the Revenue for the Assessment Year 2007-08 stands dismissed. B. Assessee’s appeals:

5. Ld. A.R. submitted that the only issue raised by the assessee for the Assessment Year 2006-07 to 2009-10 relate to the disallowance on account of valuation of slow moving, non moving and obsolete stores. Ld. A.O. during the assessment proceedings observed that the assessee has reduced the profits due to valuation of slow moving, non moving and obsolete stores and spares. Assessing Officer observed that there was due modification in accounting policy. He thus disallowed the valuation arrived at by the assessee for all the Assessment Years under consideration.

17 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 5.1 Aggrieved by the order of the Ld. A.O., the assessee preferred appeal before ld. CIT(A) whoconfirmed the addition made by the Assessing Officer. 5.2 Before us, Ld. A.R. submitted that the assessee is a public sector undertaking engaged in the business of manufacturing of fertilizers and other related products. He submitted that the assessee has been following accounting standard notified by Institute of Chartered Accountants of India (ICAI) in accordance with the provisions of Section 211(3A) of the Company’s Act consistently. Ld. A.R. submitted that till the current year, the assessee had adopted AS-2, the same was yet to be fully implemented, in so far as valuation of non moving/ slow moving / obsolete stores and spare parts were concerned. Ld. A.R. submitted that the account of assessee was audited by the statutory auditors as well as Controller and Auditor General (CAG). He submitted that during the year 2004-05, auditors had made the following observations in the audit report for non following of Accounting Standard-2 (AS-2) in respect of stores and spare parts inventory which is as under: “2(a) Further to our comments in the Annexure referred to in paragraph 1 above, we report that: provisions for diminution in value of obsolete/surplus/non moving items of stores and spares have been am de based on Management assessment. Pending final detailed analysis of these stocks, consequential impart thereof, if any, on the accounts remains unascertained”.

18 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 5.3 Ld. A.R. submitted that to have an authentic opinion regarding fair valuation of inventory, the assessee approached various valuation officers / independent engineer valuers, for studying the nature of plant and machinery and associated non moving stocks / stores and spare parts held in inventory, to assess and determine the value of inventory as per the requirement of AS-2 in respect of the plants situated at Nangal, Bhatinda, Panipat and Vijaypur plants 1 & 2. Ld. A.R. submitted that the valuer /independent engineer valuers submitted their reports, which have been placed in the Paper Book at pages 99-128 for all the Assessment Years under consideration. 5.4 Ld. A.R. submitted that if a particular item of stores / spare part is not found to be useful for several years (in the present case of assessee, for over 5 years considering the technical aspect of plant and machinery) or items specifically determined surplus/ obsolete such stores / spare parts cannot be carried for consumption in lieu of non usability of the company and carrying higher value of such inventory, become an unnecessary burden. He further submitted that the valuation thus confined for determination of realizable value of such stores / spare parts, which have not moved for more than 5 years, were identified as surplus / obsolete. 5.5 Ld. A.R. submitted that these reports were filed before the Ld. A.O. as well as Ld. CIT(A). He relied upon

19 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 the decision of Hon'ble Supreme Court in the case of Chainroop Sampatram Vs CIT (1953) 24 ITR 481 (S.C.) and Hon'ble Bombay High Court in the case of CIT Vs Indian Rare Earths Ltd. (2015) 375 ITR 276, CIT Vs Corporation Bank Ltd. (1988) 174 ITR 616 (Kar.), Bharat Heavy Electricals Ltd. Vs DCIT (2005) (7) TMI-299-ITAT- Del.

8. Ld. A.R. submitted that the change in the valuation was needed as per the direction of CAG which is supported by the individual reports placed in the Paper Books for relevant Assessment Years. This change was bona-fide, and it was followed consistently in the succeeding years.

21 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 which was based on the valuation report submitted by M/s. K. D. Kohli Associate, New Delhi, an independent Engineering Valuer, engaged by the company to carry out the valuation of inventory of stores and spares in the background of AS-2 related to valuation of ‘inventory’, which has been issued by ICAI, New Delhi. 9.2. In the present case, the assessee had to adhere to AS-2 due to the remarks by CAG in the annual report for immediate previous year i.e. F.Y. 2004-05. This change was done on the basis of the remarks by Auditors which was supported by opinion of highly reputed engineer valuer, after proper on the spot study of nature of plant & machinery and associated non moving stocks of stores and spares held in inventory. Thus, there was no mala fide in valuing the slow moving/surplus/obsolete Stores and Spare parts as per the valuation report received from engineering valuer. 9.3. In the instant case, the valuation of slow-moving/ surplus / obsolete stores, spares was made on the basis of the report of the approved valuer, and it can be said that the amount written off was not an arbitrary one and claim of loss on this account was actual. Assessee has followed this policy consistently in subsequent years. It is an established principle in context of section 145, that 'Regular’ does not mean ‘Permanent’ for system of accounting. The statute stipulates that the income shall be computed on the system of accounting 'regularly'

22 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 followed by the assessee. However, the provision u/s.145 cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. It has not been pointed out with reference to any provision that a change is impermissible or barred even when it is warranted by an existing situation.

23 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 out. It was in such a scenario that a decision was taken to investigate the entire matter by appointing a committee of experts on whose recommendations, based on proper study of market condition, the assessee company reduced the value of stocks and this value has been carried forward to the next year and assessed as such. Hon'ble Bombay High Court in the case of CIT VSs M/s. India Rare Earths Ltd(supra), in para 7-9 has held as under: “7. We have heard learned counsel for the parties who have taken us through the orders of the Assessing Officer, the Commissioner and the Tribunal. Mr. Suresh Kumar, learned counsel for the Revenue, relied upon the Judgment in the case of Heredilla Chemicals, which is already differentiated on facts. Having considered the facts and the questions proposed as substantial questions of law, we find that Section 145A of the Income Tax Act, 1961 reads as under: "145A. Notwithstanding anything to the contrary contained in section 145,- (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be- (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.- For the purposes of this section*, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all

24 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 such payment notwithstanding any right arising as a consequence to such payment;

(b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received."

9. Accordingly, we are of the view that the Judgment of this Court in the case of Heredilla Chemicals will not affect the write off by the assessee in the present case being distinguishable on facts. It is not merely on the basis of obsolescence of any particular equipment that the assessee has claimed write off of the slow/non-moving items. The write off claimed is essentially on the basis of deterioration of various materials, including raw-materials and in particular slow moving items of machinery. In the circumstances, we are of the view, that no substantial question of law

25 I.T.A.Nos.3947,3048,3949/Del/2013 I.T.A.Nos.3517-3520/Del/2013 arises in these Appeals and the same are accordingly dismissed. There will be no order as to costs.”

10.2 Respectfully following the same, we are of the considered opinion that assessee’s claim requires to be accepted. 10.3 Accordingly, the grounds raised by the assessee in respect of valuation of spares/ non moving / slow moving / obsolete parts / spares, stand allowed in respect of all the Assessment Years. Hence, appeals filed by the assessee for all the Assessment Years are allowed.

11. In the result, appeals filed by the Revenue are dismissed and the appeals filed by the assessee are allowed for all the Assessment Years. Order pronounced in the open court on 31st May, 2016.