FACT Ltd, Cochin V. ACIT, Aluva

CO 12/COCH/2009

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6403 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 6 month(s) 6 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 26-09-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2001-2002
• Appeal Filed On: 20-03-2009
• Court: TRIBUNAL
• Keywords: Depreciation
• Section: 145; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND SANJAY AROR A, AM I.T.A NO. 53 /COCH/2009 & C.O. NO.12/COCH/2009 (BY THE ASSESSEE) ASSESSMENT YEAR: 2001-02 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, ALUVA RANGE, ALUVA. VS. THE FACT LTD., UDYOGMANDAL, ALUVA. [PAN:AAACT 6204C] (REVENUE-APPELLANT) (ASSESSEE-R ESPONDENT) REVENUE BY SHRI S.R.SENAPATI, SR.DR ASSESSEE BY SHRI GOPI K., CA-AR DATE OF HEARING 15/09/2011 DATE OF PRONOUNCEMENT 26/09/2011 O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE REVENUE AND CROSS OBJECTI ON BY THE ASSESSEE, ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME-TAX( APPEALS)-II, KOCHI (CIT(A) FOR SHORT) DATED 28.11.2008, AND THE ASSESSMENT YEAR UN DER REFERENCE IS 2001-02. 2. THE ASSESSEES CROSS OBJECTION (C.O.) CHALLENGES THE LEGAL VALIDITY OF THE IMPUGNED ASSESSMENT, WHICH STANDS FRAMED U/S. 143(3 ) R.W.S. 147 OF THE INCOME-TAX ACT, 1961 ('THE ACT' HEREINAFTER). THE SAME WAS THEREFOR E TAKEN UP FOR HEARING FIRST. HOWEVER, AFTER INITIALLY SEEKING TO MAKE OUT A CASE, THE LD. AR CONCEDED TO NO PREJUDICE HAVING BEEN CAUSED TO THE ASSESSEE ON IT BEING NOT FURNISH ED THE COPY OF THE REASONS RECORDED BY THE ASSESSING OFFICER (AO) U/S. 148 OF THE ACT, WIT H IT HAVING IN FACT REPRESENTED ITS CASE ON MERITS BEFORE THE AUTHORITIES BELOW, I.E., QUA THE SAID REASONS, SECURING A VERDICT I.T.A. NO.53 /COCH/2009 & C.O. NO. 12/COCH/2009 (ASSTT. YEAR: 2001-02) 2 THEREON FROM THEM AND, RATHER, HAVING NOT RAISED AN Y SPECIFIC GROUND IN THIS RESPECT BEFORE THE FIRST APPELLATE AUTHORITY. HE, ACCORDING LY, CONVEYED THE NON-PRESSING OF THE CROSS OBJECTION BY THE ASSESSEE, MAKING AN ENDORSEM ENT IN FORM 36A TO THAT EFFECT. 3. COMING TO THE REVENUES APPEAL, THE SAME RAISED TWO ISSUES, ALBEIT INTER-RELATED, WHICH WE SHALL TAKE UP IN SERIATIM. THE BRIEF FACTS IN RELATION TO THE FIRST ISSUE, RAISED VIDE GROUND NO. 2, IS THAT THE ASSESSEE, A PUBLIC SECTOR COMPANY UNDER THE COMPANIES ACT, 1956, ENGAGED IN THE MANUFACTURE OF FERTILIZERS, WA S UP TO THE IMMEDIATELY PRECEDING YEAR, I.E., RELEVANT TO A.Y. 2000-01, TREATING THE INVENTORY OF MACHINERY STORES AND SPARES BEING MAINTAINED BY IT AS A CURRENT ASSET, THOUGH C HARGING A PROVISION FOR OBSOLESCENCE, STORAGE LOSS, ETC. IN ITS ACCOUNTS IN THEIR RESPECT , AND WHICH STOOD REVIEWED ANNUALLY. HOWEVER, FROM THE CURRENT YEAR ONWARDS, IT CHANGED ITS ACCOUNTING POLICY IN THE MATTER WITH A VIEW TO CONFORM TO THE ACCOUNTING STANDARDS AS-2 AND AS-10 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), AND THE SUBSEQUENT CLARIFICATION/S IN THE MATTER THERE-FROM. THE STORES AND SPARES WERE S EGREGATED INTO TWO COMPONENTS, I.E., THAT IN RESPECT OF FIXED ASSETS, AND WHOSE USE, THE REFORE, WAS IRREGULAR, AND THOSE WHICH WERE REQUIRED FOR THE NORMAL MANUFACTURING OPERATIO NS. WHILE THE LATTER CATEGORY CONTINUED TO BE INVENTORIZED AND ACCOUNTED FOR AS P REVIOUSLY, THE FORMER CATEGORY WAS CONSIDERED AS A PART OF THE BLOCK OF FIXED ASSETS, I.E., THE MACHINERY TO WHICH THE STORES AND SPARES RELATED, AND ACCORDINGLY CAPITALIZED AS A PART OF THE FIXED ASSETS, CHARGING DEPRECIATION THEREON IN ACCOUNTS, AS WELL AS CLAIMI NG IT UNDER THE PROVISIONS OF THE ACT. THE ENTIRE PROVISION (FOR OBSOLESCENCE), AS OUTSTAN DING IN BOOKS, I.E., ` 463.53 LAKHS, WAS, ACCORDINGLY, WITHDRAWN AND CREDITED TO THE PROFIT A ND LOSS (P&L) ACCOUNT. THE AO, HOWEVER, DID NOT FIND THE SAME AS ACCEPTABLE. AS PE R THE ACCOUNTING STANDARD ISSUED BY THE CBDT, A CHANGE IN THE ACCOUNTING POLICY COULD B E ADOPTED ONLY WHERE REQUIRED BY THE STATUTE OR IF IT WAS CONSIDERED THAT THE CHANGE WOULD RESULT IN A MORE APPROPRIATE PREPARATION OR PRESENTATION OF THE FINANCIAL STATEM ENTS BY THE ASSESSEE (ITEM NO. 9 OF AS- II). HE, ACCORDINGLY, DISALLOWED THE DEPRECIATION CLAIMED ON THE STORES & SPARES CAPITALISED (AT ` 5922.65 LAKHS), I.E., AT ` 1480.66 LAKHS, PLACING RELIANCE ON THE DECISION IN THE CASE OF CIT VS. ANDHRA PRABHA LTD ., 231 ITR 81 (MAD.). I.T.A. NO.53 /COCH/2009 & C.O. NO. 12/COCH/2009 (ASSTT. YEAR: 2001-02) 3 4. THE SECOND DISALLOWANCE, AGITATED PER GROUND NO. 3, IS IN RESPECT OF PROVISION FOR OBSOLESCENCE. THE ASSESSEE CLAIMED PER ITS NOTE NO. 17 TO THE NOTES TO THE FINAL ACCOUNTS, WHEREBY THE SAID CHANGE IN THE ACCOUNTING POLICY STOOD EXPLAINED, OF HAVING WITHDRAWN THE ENTIRE PROVISION OUTSTANDING IN BOOKS . THE P&L ACCOUNT, HOWEVER, BORE A CREDIT OF ` 399.76 LAKHS ONLY, AS AGAINST THE PROVISION OF ` 463.53 LAKHS ADMITTEDLY OUTSTANDING IN BOOKS. THE DIFFERENCE OF ` 63.77 LAKHS WAS, THEREFORE, ADDED AS INCOME. 5. IN APPEAL, THE LD. CIT(A) ALLOWED THE ASSESSEE C LAIM, BEING CONSISTENT WITH AS-2 AND AS-10 OF ICAI. FURTHER, THE DECISIONS IN THE CASE OF CIT VS. SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATION LTD., 292 ITR 362 (MAD.); CIT VS. VAYTHIRI PLANTATIONS LTD., 128 ITR 675 (KER.); AND CIT V. PEPSU ROAD TRANSPORT CORPORATION , 253 ITR 303 (P&H) SUPPORTED THE CLAIM FOR DEPRECIATION ON SPARE PARTS , ON THE PREMISE THAT WHERE KEPT AS STANDBY TO MEET AN EMERGENT SITUATION, THE SAME COU LD ONLY BE CONSIDERED AS HAVING BEEN USED FOR THE PURPOSE OF THE BUSINESS. HE, ACCORDING LY, DELETED THE DISALLOWANCE OF THE ASSESSEES CLAIM FOR DEPRECIATION OF ` 1480.66 LAKHS. IN RESPECT OF THE DIFFERENCE IN THE AMOUNT OF PROVISION WITHDRAWN, IT WAS FOUND BY HIM, WITH REFERENCE TO A RECONCILIATION, THAT THERE WAS ACTUALLY NO DIFFERENCE, AND THE APPA RENT DIFFERENCE WAS ONLY ON ACCOUNT OF THE PROVISION WHICH STOOD CONTINUED TO BE CHARGED A ND MAINTAINED, I.E., IN RESPECT OF CONSUMABLE STORES AND SPARES. ACCORDINGLY, THE SAME WAS DELETED. AGGRIEVED, THE REVENUE IS IN APPEAL. 6. BEFORE US, LIKE CONTENTIONS STOOD RAISED BY EITH ER SIDE. THE LD. DR PLACING RELIANCE ON THE DECISION IN THE CASE OF ANDHRA PRABHA LTD. (SUPRA), WOULD SUBMIT THAT THERE IS NO CASE FOR A CHANGE IN THE ACCOUNTING POL ICY, I.E., PER AS-II BY THE CBDT. FURTHER, THE LD. CIT(A) HAD ACCEPTED THE RECONCILIA TION STATEMENT IN RESPECT OF THE PROVISION FOR OBSOLESCENCE, WITHOUT CONFRONTING THE SAME TO THE ASSESSING AUTHORITY AND NOTING HIS OBJECTIONS THERE-TO, IF ANY. THE LD. AR , ON THE OTHER HAND, WOULD SUBMIT THAT BOTH THE CONDITIONS OF ITEM NO. 9 OF AS-II BY THE C BDT STAND COMPLIED WITH. THE ACCOUNTING STANDARDS ISSUED BY ICAI ARE MANDATORY F OR THE ASSESSEE, A GOVERNMENT I.T.A. NO.53 /COCH/2009 & C.O. NO. 12/COCH/2009 (ASSTT. YEAR: 2001-02) 4 COMPANY, IN TERMS OF S. 211 (3C) OF THE COMPANIES A CT, 1956. FURTHER, THE PREMISE OF THE SAID STANDARDS IS THAT WHERE STORES AND SPARES QUA THE FIXED ASSETS EMPLOYED ARE MAINTAINED TO MEET ANY EMERGENT SITUATION, THE SAME CANNOT BE EXPECTED TO BE PRODUCTIVE BEYOND THE USEFUL LIFE OF THE RELEVANT FIXED ASSETS . AS SUCH, THE SAME OUGHT TO BE CONSIDERED AS A PART OF THE BLOCK OF FIXED ASSETS A ND CAPITALIZED, AND PROVISION FOR DEPRECIATION THEREON CHARGED IN THE ACCOUNTS TO COR RESPOND WITH THE BALANCE USEFUL LIFE OF THE RELEVANT FIXED ASSETS. THE REQUIREMENT OF ITEM NO. 9 (OF AS-II), I.E., FOR A MORE APPROPRIATE PREPARATION AND/OR PRESENTATION OF THE FINANCIAL STATEMENTS, THUS, STANDS ALSO INDEPENDENTLY MET. WITH REGARD TO THE APPARENT DIFF ERENCE IN THE PROVISION ACCOUNT, THE RECONCILIATION FURNISHED IS ONLY A COPY OF THE RELE VANT PROVISION ACCOUNT, FORMING PART OF THE AUDITED ACCOUNTS OF THE ASSESSEE. THE AO HAD N OT TAKEN PAINS TO EITHER LOOK INTO THE MATTER OR SEEK CLARIFICATION THEREON FROM THE ASSES SEE. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 7.1 THE PRINCIPLES UNDERLYING A CHANGE IN THE AC COUNTING POLICY OR ACCOUNTING METHOD ARE WELL LAID OUT PER A SERIES OF DECISIONS, INCLUD ING THAT IN THE CASE OF CIT VS. ANDHRA PRABHA LTD . (SUPRA) BEING RELIED UPON BY THE REVENUE. IN FACT , AS-II (BY CBDT) ISSUED U/S. 145 OF THE ACT, ITSELF CLARIFIES THAT THE SAME COULD BE EFFECTED WHERE WARRANTED BY STATUTORY CONSIDERATIONS OR RESULTS IN A MORE APPRO PRIATE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS. THE LD. AR HAS EXPLAINED THE PREMISE OF AS-2 AND AS-10 BY ICAI. IF THE SAID STORES AND SPARES ARE NOT CAPITALISED B UT ONLY HELD IN STOCK, THE SAME WOULD HAVE TO BE WRITTEN OFF IN THE ACCOUNTS AT THE END O F THE USEFUL LIFE OF THE CORRESPONDING FIXED ASSETS, CAUSING DISTORTION IN THE OPERATING R ESULTS FOR THE RELEVANT YEAR. PROVISION FOR DEPRECIATION IN ACCOUNTS ONLY PROVIDES FOR A CONSIS TENT AND SYSTEMATIC PROVISION TOWARD DIMINUTION IN THEIR VALUE ON ACCOUNT OF VARIOUS REA SONS, INCLUDING OBSOLESCENCE, USEFUL LIFE, ETC. THE REVENUE HAS NOT BEEN ABLE TO STATE A S TO HOW THE SAID CRITERION STIPULATED BY ITEM NO. 9 OF AS-II STANDS NOT MET. EVEN OTHERWISE, THE SAID ACCOUNTING STANDARDS ISSUED BY ICAI ARE MANDATORY IN TERMS OF S. 211 OF THE COMPANIES ACT; THE ASSESSEE BEING A COMPANY GOVERNED BY THE COMPANIES ACT. THE CHANGE IN THE ACCOUNTING POLICY IS BONA FIDE AND, THUS, PERMISSIBLE IN TERMS OF THE LAW IN THE MATTER. THE CHARGE FOR I.T.A. NO.53 /COCH/2009 & C.O. NO. 12/COCH/2009 (ASSTT. YEAR: 2001-02) 5 DEPRECIATION ON THE STORES AND SPARES CAPITALIZED, BOTH IN BOOKS WHICH IS AS PER THE DEPRECIATION NORMS PROVIDED BY THE COMPANIES ACT, A S WELL AS UNDER THE ACT, I.E., IN THE COMPUTATION OF TOTAL INCOME ASSESSABLE THERE-UNDER, IS INCIDENTAL AND ALLOWABLE, AS HELD BY A SERIES OF DECISIONS AS RELIED UPON BY THE LD. CIT(A) (REFER PARA 5 OF THIS ORDER ). 7.2 WITH REGARD TO THE ISSUE OF THE DIFFERENCE IN T HE AMOUNT OF PROVISION WITHDRAWN, CLEARLY THE AO HAS NOT VERIFIED THE FACTS; THE RECO NCILIATION STATEMENT AS APPEARING AT PG. 7 OF THE IMPUGNED ORDER BEING ONLY A COPY OF THE RE LEVANT PROVISION ACCOUNT. THERE IS NO CHANGE IN THE ACCOUNTING POLICY WITH REGARD TO ONE CATEGORY OF THE STORES AND SPARES, SO THAT THE IMPUGNED `DIFFERENCE REPRESENTS THE ACCUM ULATED PROVISION FOR OBSOLESCENCE IN RESPECT THEREOF. THE REVENUES CASE IS WHOLLY WITHO UT MERIT. WE DECIDE ACCORDINGLY. 8. IN THE RESULT, BOTH THE REVENUES APPEAL AND THE ASSESSEES C.O. ARE DISMISSED. SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 26TH SEPTEMBER, 2011 GJ COPY TO: 1. M/S. THE FACT LTD., UDYOGMANDAL, ALUVA. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1, ALUVA RANGE, ALUVA. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KOC HI 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .