Molex Mafatlal Micron Ltd, Gandhinagar V. The Income tax Officer,GNR Ward-3, Gandhinagar

ITA 1083/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0181 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 26-07-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 13-03-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Keywords: Capital expenditure
• Section: 37(1); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM) ITA NO.1083/AHD/2007 A. Y.: 2003-04 MOLEX MAFATLAL MICRON LTD., C-788, GIDC, SECTOR -25, GANDHINAGAR VS THE INCOME TAX OFFICER, GANDHINAGAR WARD -3, GANDHINAGAR PA NO. AABCM 3173G (APPELLANT) (RESPONDENT) APPELLANT BY SHRI SANJAY R. SHAH, AR RESPONDENT BY SHRI K. M. MAHESH, DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A), GANDHINAGAR DATED 07-12-2006 FOR ASSESSMENT YEAR 2003-04, CHALLENGING THE ORDER OF T HE LEARNED CIT(A) IN CONFIRMING DISALLOWANCE OF RS.88,87,494/- BEING PRO VISION MADE FOR OBSOLESCENCE OF INVENTORY. 2. WE HAVE HEARD LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL ON RECORD POINTED OUT BY THE PARTIES. 3. BRIEFLY, THE FACTS OF THE CASE ON THE ABOVE GROU ND ARE THAT THE ASSESSEE HAD CLAIMED DEDUCTION FOR OBSOLESCENCE OF INVENTORY AND THE AO HAD OBSERVED THAT IN THE PROFIT & LOSS ACCOUNT, TH E PROVISION FOR THE SAME FOR RS.88,87,494/- WAS DEBITED. THE ASSESSEE C LARIFIED THAT THE ABOVE PROVISION WAS MADE AS PER THE COMPANYS POLIC Y. IT HAD EXPORTED CERTAIN GOODS WHICH WERE REJECTED AND RETURNED. THU S, THESE GOODS HAD ONLY NEGLIGIBLE VALUE AND ACCORDINGLY OBSOLESCENCE OF INVENTORY WAS CLAIMED AS DEDUCTION. FURTHER, IT WAS STATED THAT T HE PROVISION WAS MADE IN ACCORDANCE WITH SECTION 227 (4A) OF THE COMPANIE S ACT ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 2 (MANUFACTURING AND OTHER COMPANIES AUDITOR REPORT) ORDER 1974. SINCE THE PROVISION WAS STATUTORILY REQUIRED, THE SAME WA S WRITTEN OFF IN THE PROFIT & LOSS ACCOUNT AND CLAIMED DEDUCTION U/S 37 (1) OF THE IT ACT. THE AO EXAMINED THE CONTENTION OF THE ASSESSEE AND POIN TED OUT THAT THE CLAIM WAS MADE ON MERE PROVISION WITHOUT INCURRING ACTUAL EXPENSES. THOUGH THE ASSESSEE WAS REQUIRED TO MAKE PROVISION AS PER COMPANIES ACT, DEDUCTION IN COMPUTING INCOME SHOULD HAVE BEEN DECIDED AS PER PROVISIONS OF THE IT ACT. THE AO NOTED THAT IN THE PRESENT CASE, PROVISION WAS MADE ON ESTIMATE; THEREFORE, HE REJECTED THE CL AIM OF THE ASSESSEE. 4. THE ADDITION WAS CHALLENGED BEFORE THE LEARNED C IT(A) AND THE SAME SUBMISSIONS WERE REITERATED. IT WAS SUBMITTED THAT THE ASSESSEE WAS MANUFACTURING CONNECTORS IN MORE THAN 30 COUNTR IES. THE DYNAMIC NATURE OF THE INDUSTRY, PRODUCT MANUFACTURED, THE G LOBAL RESEARCH AND DEVELOPMENT IN ELECTRONIC INDUSTRY MAKES IT PRUNE T O TECHNOLOGY OF OBSOLESCENCE. THEREFORE, IT WAS PRUDENT TO PROVIDE THIS KIND OF EXIGENCIES IN FINANCIAL STATEMENTS. RECOGNIZING THE ABOVE NEED AND ALSO BASED ON PAST EXPERIENCE, THE MOLEX GROUP (THE ASSESSEE IS P ART OF THE GROUP) MADE SPECIFIC POLICIES FOR INVENTORY ALLOWANCE (PRO VISION) AND SLOW AND EXCESS INVENTORY. ACCORDINGLY, PROVISIONS WERE MADE REGULARLY ON SCIENTIFIC BASIS, DATA ANALYSIS AND ON PHYSICAL ASS ESSMENT OF THE INVENTORY. THE CONNECTORS MANUFACTURED BY THE ASSES SEE ARE MAINLY USED IN TELECOMMUNICATION INDUSTRY WHICH IS UNDERGOING F AST CHANGES IN TECHNOLOGY. PROVISION IN THE PRESENT YEAR WAS MADE IN ACCORDANCE WITH THE GROUP POLICY FOR PROVISIONS FOR OBSOLESCENCE OF INVENTORY AND PROVISIONS FOR SLOW AND EXCESS INVENTORY. COPY OF T HE GROUP POLICY WAS PRODUCED FOR CONSIDERATION. SO FAR AS PROVISION CRE ATED DURING THE YEAR IN RESPECT OF REJECTED MATERIAL OF RS.58,95,288/-, IT WAS POINTED OUT THAT THE ASSESSEE HAD RECEIVED ORDERS OF THE ABOVE AMOUNT FR OM MOLEX, HONG KONG. THESE PRODUCTS WERE MANUFACTURED FOR THE SPEC IFIC REQUIREMENT AND COULD NOT BE USED BY OTHER CLIENTS. AS PER THE REPORT FROM QUALITY ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 3 ASSURANCE DEPARTMENT OF THE ASSESSEE COMPANY, IT WA S NOT POSSIBLE TO RECTIFY THE DEFECTS IN THE GOODS AND ACCORDINGLY PR OVISION WAS MADE. FURTHER, PROVISION FOR SLOW AND EXCESS INVENTORY AM OUNTING TO RS.29,92,275/- WAS MADE IN ACCORDANCE WITH GROUP PO LICY. SUCH PROVISION WAS MADE IN ACCORDANCE WITH SCIENTIFIC ME THOD. THE ASSESSEE REFERRED TO ACCOUNTING STANDARD 2 ISSUED BY INSTITU TE OF CHARTERED ACCOUNTANTS OF INDIA ON VALUATION OF INVENTORIES WH ICH READS AS UNDER: NET REALISABLE VALUE 20. THE COST OF INVENTORIES MAY NOT BE RECOVERABLE IF THOSE INVENTORIES ARE DAMAGED, IF THEY HAVE BECOME WHOLLY OR PARTIALLY OBSOLETE, OR IF THEIR SELLING PRICES HAVE DECLINED. THE COST OF INVENTORIES MAY ALSO NOT BE RECOVERABLE IF THE ESTIMATED COSTS OF COMPLETION OR THE ESTIMATED COST S NECESSARY TO MAKE THE SALE HAVE INCREASED. THE PRAC TICE OF WRITING DOWN INVENTORIES BELOW COST SO NET REALIZAB LE VALUE IS CONSISTENT WITH THE VIEW THAT ASSETS SHOULD NOT BE CARRIED IN EXCESS OF AMOUNTS EXPECTED TO BE REALIZED FROM THEI R SALE OR USE. IT WAS SUBMITTED THAT PROVISION WAS MADE BY THE ASS ESSEE COMPANY AS PER THE ABOVE ACCOUNTING STANDARD. IT WAS FURTHER S UBMITTED THAT AS PER SECTION 227 (4A) OF THE COMPANIES ACT, (MANUFACTURI NG AND OTHER COMPANIES AUDITORS REPORT) ORDER 1974, A MANUFACTUR ING COMPANY IS REQUIRED TO STATE AS TO WHETHER ADEQUATE PROVISION IN RESPECT OF UN- SERVICEABLE OR DAMAGED STOCK ARE DETERMINED AND WHE THER PROVISION FOR LOSS IF ANY, HAVE BEEN MADE IN THE ACCOUNTS, IF NOT , AUDITORS ARE REQUIRED TO QUALIFY SUCH DEFICIENCY IN ITS REPORT. THE AO H AS MADE THE ADDITION MAINLY ON THE GROUND THAT PROVISION WAS ESTIMATED F IGURE. HOWEVER, THIS PROVISION WAS MADE AT 1.5% OF INVENTORY VALUE AS PE R THE VALUATION POLICY OF THE COMPANY. THE ASSESSEE RELIED UPON THE ORDER OF THE ITAT AHMEDABAD BENCH DATED 04-05-2000 IN THE CASE OF GUJARAT STATE FERTILIZER CORPORATION LTD. ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 4 5. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE AND THE MATERIAL AVAILABLE ON RECORD CONFIRMED THE ORDER OF THE AO BY UPHOLDING THE ADDITION. HOWEVER, WITH REGARD TO ACT UAL WRITING OFF/WRITTEN BACK OBSOLESCENCE OF SOCK, THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE IS FREE TO MAKE CLAIM BEFORE THE AO FO R PROPER RELIEF. THE FINDINGS OF THE LEARNED CIT(A) IN PARA 2.3, 3 AND 3 .1 ARE REPRODUCED AS UNDER: 2.3 THE FACTS OF THE CASE AND THE SUBMISSIONS HAV E BEEN CONSIDERED. THE APPELLANT HAD CLAIMED DEDUCTIO N IN RESPECT OF PROVISION FOR OBSOLESCENCE OF INVENTORY AT RS.88,87,494/-. THE CLAIM WAS MADE AS PER COMPANYS POLICY FOR MAKING PROVISION FOR OBSOLESCENCE IN INVENTORY OF FINISHED GOODS. IT WAS ARGUED THAT THE CLAIM WAS CORRECT IN VIEW OF THE EXPLANATION TO THE PROVISIONS OF SECTION 227(4A) OF THE COMPANIES ACT (MANUFACTURING AND OTHER COMPANIES AU DITORS REPORT) ORDER 1974. IT WAS ALSO ARGUED THAT THE CLA IM WAS MADE IN ACCORDANCE WITH ACCOUNTING STANDARD 2 ISSUE D BY THE INSTITUTED OF CHARTERED ACCOUNTANTS OF INDIA ON VALUATION OF INVENTORIES. SO FAR AS THE CLAIM IS CONSIDERED, NO DEDUCTION WAS ALLOWABLE U/S. 37(1) OF THE I.T. ACT AS THE CLA IM DID NOT CONSTITUTE AN EXPENDITURE. THE SECOND ISSUE TO BE C ONSIDERED IS WHETHER THE CLAIM IS ALLOWABLE AS BUSINESS LOSS AS PER SECTION 28 OF THE I.T. ACT. IN THIS CONTEXT, IT IS NOTICED THAT NO BUSINESS LOSS HAD ACTUALLY OCCURRED IN RESPECT OF R EVALUATION OF INVENTORY OF STOCK. THE CLAIM OF DEDUCTION IS TO BE ALLOWED WITH REFERENCE TO THE PROVISIONS OF INCOME-TAX ACT AND THE ACCOUNTING POLICY FOLLOWED SHOULD NOT BE A DECIDING FACTOR IN ALLOWING SUCH A CLAIM. THE APPELLANT ALSO RELIED ON THE DECISION OF THE AHMEDABAD ITAT IN THE CASE OF GUJAR AT STATE FERTILIZERS CO. LTD. ON GOING THROUGH THE DECISION OF THE HONBLE ITAT, IT IS NOTICED THAT THAT THE CLAIM IN THE ABOVE CASE WAS IN RESPECT OF SPARE PARTS, STORES ETC., WHICH H AD BEEN USED IN THE BUSINESS PROCESS AND THE OBSOLESCENCE C LAIMED WAS MAINLY WITH REFERENCE TO LOSS ON ACCOUNT OF WEA R AND TEAR AND ACTUAL USER IN THE BUSINESS PROCESS. NO DE PRECIATION OR DEDUCTION WAS CLAIMED IN RESPECT OF THE ABOVE IT EMS. HOWEVER, IN THE PRESENT CASE, THE CLAIM WAS MADE IN RESPECT OF FINISHED GOODS WHICH HAVE ALREADY BEEN VALUED AS PER THE RELEVANT METHOD OF VALUING CLOSING STOCK. THE STOCK IS NORMALLY VALUED AS PER COST OR NET REALIZABLE VALUE, WHICHEV ER IS LESS. IN THE PRESENT CASE, THE APPELLANT DID NOT SHOW THA T THERE WAS NEED FOR REVALUATION OF CLOSING STOCK. INSTEAD IT H AD CLAIMED ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 5 PROVISION FOR OBSOLESCENCE AS DEDUCTION IN COMPUTIN G INCOME. SO FAR AS DEDUCTION OF LOSS, IT IS TO BE HELD THAT THE APPELLANT DID NOT ESTABLISH THAT A LOSS HAD ACTUALLY OCCURRED IN RESPECT OF THE INVENTORY OF SOCK. AS SUCH, THE CLAIM IS FOU ND TO BE NOT CORRECT. THE ADDITION MADE IN THIS REGARD IS UPHELD . 3. THE SECOND ISSUE IN THIS APPEAL IS AGAINST THE ACTION OF THE ASSESSING OFFICER IN NOT GIVING DIREC TION TO REDUCE THE INCOME IN THE YEAR IN WHICH PROVISION IS WRITTE N OFF/WRITTEN BACK. IT WAS POINTED OUT THAT SO FAR AS THE PROVISI ON MADE FOR OBSOLESCENCE OF SOCK, THE APPELLANT HAD WRITTEN BAC K SUCH PROVISIONS IN SUBSEQUENT YEARS. WHILE DISALLOWING T HE CLAIM OF OBSOLESCENCE OF SOCK, THE ASSESSING OFFICER SHOULD HAVE DIRECTED THAT THE PROVISION BACK AS INCOME SHOULD H AVE BEEN EXECUTED FROM THE TOTAL INCOME OFFERED BY THE APPEL LANT. 3.1 THE ISSUE HAS BEEN CONSIDERED. THE CLAIM REGARDING PROVISION WRITTEN BACK IN SUBSEQUENT YEAR S IS LIABLE TO BE ALLOWED ONCE THE ADDITION IS UPHELD IN THE PR ESENT YEAR. APPELLANT IS FREE TO MAKE THE CLAIM BEFORE THE ASSE SSING OFFICER FOR APPROPRIATE RELIEF. THE GROUND RAISED I S TREATED AS ALLOWED. 6. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THA T SAME SYSTEM OF ACCOUNTING WAS FOLLOWED IN THE OTHER YEARS IN WHICH NO ADDITION HAS BEEN MADE BY THE AO AND REFERRED TO THE DETAILS OF PROVI SION MADE FOR OBSOLESCENCE OF INVENTORY FILED AT PAGE 12 OF THE P APER BOOK WITH REGARD TO POLICY OF MOLEX GROUP TO MAKE PROVISION. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254 IN WHICH IT WAS HELD THAT THE EXPRESSION ANY EXPENDITURE HAS BEEN USED IN SECTI ON 37 OF THE INCOME-TAX ACT, 1961, TO COVER BOTH EXPENSES INCUR RED AS WELL AS AN AMOUNT WHICH IS REALLY A LOSS EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. HE HAS REFERRED TO PAGE 10 OF THE ABOVE JUDGMENT IN WHICH IT WAS OBSER VED THAT THE WORD EXPENDITURE IS, THEREFORE, REQUIRED TO BE UNDERST OOD IN THE ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 6 CONTEXT IN WHICH IT IS USED. HE HAS SUBMITTED THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE PROFIT & LOSS ACCOUNT, THE VALUE OF THE STOCK IN TRADE AT THE BEG INNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRI CE WHICHEVER IS LOWER. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED UP ON THE ORDER OF ITAT, MUMBAI BENCH IN THE CASE OF AVAYA GLOBAL CONNECT LT D. VS ACIT 26 SOT 397 (COPY FILED). THE LEARNED DR ON THE OTHER HAND, RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT NO EVIDENCE WAS FILED BEFORE THE AUTHORITIES BELOW TO JUSTIFY THE CLAIM I N RESPECT OF OBSOLESCENCE OF INVENTORY. THE LEARNED DR SUBMITTED THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER I S LOWER AND RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF SANJEEV WOOLEN MILLS VS CIT 279 ITR 434. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL AVAILABLE ON RECORD. SECTION 37 OF THE IT ACT READS AS UNDER: 37. (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASS ESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN C OMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND G AINS OF BUSINESS OR PROFESSION. [ EXPLANATION .FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESS EE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBI TED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR T HE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDIT URE.] (2) (2B) NOTWITHSTANDING ANYTHING CONTAINED IN SUB- SECTION (1), NO ALLOWANCE SHALL BE MADE IN RESPECT OF EXPEN DITURE INCURRED BY AN ASSESSEE ON ADVERTISEMENT IN ANY SOU VENIR, BROCHURE, TRACT, PAMPHLET OR THE LIKE PUBLISHED BY A POLITICAL PARTY.] ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 7 7.1 HONBLE SUPREME COURT IN THE CASE OF INDIAN MOL ASSES CO. (P) LTD. VS CIT 37 ITR 66 HELD AS UNDER: SPENDING IN THE SENSE OF PAYING OUT OR AWAY OF MONEY IS THE PRIMARY MEANING OF EXPENDITURE. EXPENDITURE IS WHAT IS PAID OUT OR AWAY AND IS SOMETHING WHICH IS GONE IRRETRIEVABLY. EXPENDITURE, WHICH IS DEDUCTIBLE FOR INCOME-TAX PURPOSES, IS ONE WHICH IS TOWARDS A LIABILITY ACTUALLY EXISTING AT T HE TIME, BUT THE PUTTING ASIDE OF MONEY WHICH MAY BECO ME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. THE INCOME-TAX LAW MAKES A DISTINCTION BETWEEN AN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH FOR THE TIME BEING, IS ONLY CONTINGENT. THE F ORMER IS DEDUCTIBLE BUT NOT THE LATTER. IT WAS FURTHER HELD IN THAT CASE AS UNDER: HELD, THAT AS UNTIL SEPTEMBER 20, 1955, THE ASSESSEE COMPANY HAD DOMINION THROUGH THE TRUSTEES OVER THE SUMS PAID AT LEAST IN TWO CIRCUMSTANCES, V IZ. UNDER THE SPECIAL PROVISION AND CLAUSE III OF THE S ECOND SCHEDULE TO THE POLICY, AND THERE WAS A POSSIBILITY OF THERE BEING A RESULTING TRUST IN FAVOUR OF THE COMP ANY, THE SUMS PAID SHOULD BE TREATED AS SET APART TO MEE T A CONTINGENCY, THE PAYMENT OF THOSE SUMS WAS NOT A PAYING OUT OR AWAY OF THOSE SUMS IRRETRIEVABLY AND DID NOT AMOUNT TO EXPENDITURE, AND A DEDUCTION COULD NOT BE MADE IN RESPECT THEREOF UNDER SECTION 10(2) (XV) . 7.2 THE HONBLE SUPREME COURT IN THE CASE OF SANJE EV WOOLEN MILLS VS CIT 279 ITR 434 HELD AS UMDER: HELD, AFFIRMING THE DECISION OF THE HIGH COURT, THAT THE RECOGNIZED AND SETTLED PRACTICE OF ACCOUNT ING IN RELATION TO CLOSING STOCK WAS TO VALUE IT ON THE COST BASIS OR AT THE MARKET VALUE BASIS IF THE MARKET VA LUE OF THE STOCK WAS LESS THAN THE COST. THE ASSESSEE H AD NOT ADOPTED THE ESTABLISHED AND SETTLED PRACTICE. T HE MARKET VALUE OF THE STOCK HAD BEEN TAKEN INTO CONSIDERATION WHILE ARRIVING AT THE CHARGEABLE INCO ME ALTHOUGH THE MARKET VALUE OF THE STOCK WAS MORE THA N ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 8 THE COST VALUE. THE PROFIT EARNED WAS ONLY NOTIONAL . THERE WAS NO TRANSFER OF GOODS AND THE CLOSING STOC K REMAINED THE OPENING STOCK OF THE NEXT ACCOUNTING YEAR. INCOME WHICH WAS NOT DERIVED BY THE ASSESSEE COULD NOT BE SAID TO BE INCOME CHARGEABLE, AND, THEREFORE, REJECTION OF THE ACCOUNTS MAINTAINED BY THE ASSESSEE FOR VALUATION OF CLOSING SOCK BY THE ASSES SING OFFICER AND CONFIRMED BY THE HIGH COURT WAS IN ACCORDANCE WITH LAW. 7.3 THE AO NOTED THAT THE SUBMISSIONS OF THE ASSESS EE IN THE ASSESSMENT ORDER IN WHICH THE ASSESSEE HAS REFERRED TO PROVISIONS OF SECTION 227 (4A) OF THE COMPANIES ACT (MANUFACTURIN G AND OTHER COMPANIES AUDITORS REPORT) ORDER 1974 IN WHICH IT H AS BEEN MENTIONED THAT A MANUFACTURING COMPANY IS REQUIRED TO STATE A S TO WHETHER ADEQUATE PROVISION IN RESPECT OF UNSERVICEABLE OR D AMAGED STOCK ARE DETERMINED AND WHETHER PROVISIONS FOR LOSS, IF ANY HAVE BEEN MADE IN THE ACCOUNTS, IF NOT, AUDITORS ARE REQUIRED TO QUALIFY SUCH DEFICIENCY IN ITS REPORT. IN THE ABOVE ORDER, IT IS CLEAR THAT THE CO MPANY HAS TO STATE WHETHER ADEQUATE PROVISIONS FOR UNSERVICEABLE OR DA MAGED STOCK ARE DETERMINED AND IF NOT THE AUDITORS SHALL QUALIFY SU CH DEFICIENCY. IT IS ALSO PROVIDED THAT DISCREPANCY NOTICED BY MANAGEMENT ON PHYSICAL VERIFICATION IN RESPECT OF FINISHED GOODS AS COMPAR ED TO BOOKS BE MENTIONED. HOWEVER, THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE BEFORE THE AUTHORITIES BELOW IF SUCH DETERMINATION WAS MAD E BY THE ASSESSEE WHICH IS SUPPORTED BY ANY COGENT OR RELEVANT EVIDEN CE ON RECORD. THE AO, THEREFORE, RIGHTLY NOTED THAT EXPENSES ON ACCOUNT O F OBSOLESCENCE OF INVENTORY WERE ONLY A PROVISION AND NOT ACTUALLY EX PENSES INCURRED BY THE ASSESSEE. THE AO WAS ALSO, THEREFORE, JUSTIFIED IN NOTING THAT THE ALLOWABILITY OF THE EXPENDITURE SHALL HAVE TO BE JU DGED IN THE LIGHT OF THE RELEVANT PROVISIONS UNDER THE IT ACT. THE AO ALSO N OTED THAT OUT OF THE PROVISIONS OF OBSOLESCENCE IN THIS YEAR, MAJOR PORT ION IS CREDITED AND SHOWN AS INCOME IN THE NEXT ASSESSMENT YEAR 2004-05 . THE AO, THEREFORE, NOTED THAT THE ASSESSEE HAS REDUCED THE INCOME ELIGIBLE TO TAX ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 9 IN THE YEAR UNDER CONSIDERATION. THE AO ALSO NOTED THAT THE ASSESSEE HAS PROVIDED 1.5% FOR REDUCTION IN THE OBSOLESCENCE OF INVENTORY. THEREFORE, IT DID NOT REPRESENT THE ACTUAL VALUE OF THE STOCK. THE AO, THEREFORE, RIGHTLY NOTED THAT THERE CANNOT BE ANY POSSIBLE REA SON FOR REDUCING THE VALUE OF ITEMS BY 1.5% EVEN IF SUCH ITEMS WERE PURC HASED ON THE LAST DAY OF THE FINANCIAL YEAR. THE ABOVE FACTS, THEREFORE, WOULD SHOW THAT THE ASSESSEE COMPANY VALUED THE CLOSING STOCK AT 1.5% B ELOW THE COST VIZ- A- VIZ UNABLE TO ESTABLISH THAT THE VALUE WAS 1.5% BEL OW. IN THE ABSENCE OF ANY EVIDENCE ON RECORD REGARDING ACTUAL REDUCTION I N THE VALUE OF INVENTORY, PROVISIONS WOULD NOT JUSTIFY THE ACTION OF THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT PAGE 1 8 OF THE PAPER BOOK WITH REGARD TO POLICY OF ALLOWANCE FOR SLOW MOVING AND EXCESS INVENTORY WHICH IS REPRODUCED AS UNDER: PURPOSE: TO ESTABLISH THE ALLOWANCE FOR SLOW MOVING AND EXC ESS INVENTORY POLICY: EACH ENTITY WILL PROVIDE AN INVENTORY ALLOWANCE EQ UAL TO: A) 100% OF ALL MATERIAL WHICH IS SUSPECTED OF BEING DE FECTIVE OR OBSOLETE. ALL MATERIAL WHICH IS KNOWN TO BE DEFECTI VE OR OBSOLETE SHOULD BE WRITTEN OFF AND SCRAPPED IMMEDIA TELY UPON RECOGNITION OF THE FACT. B) 100% OF THE EXCESS VALUE OF SLOW/EXCESS ITEMS AS DE FINED IN 400.40.0003. C) 3% OF THE REMAINING BALANCE OF THE INVENTORY, INCLU DING THE TRANSIT INVENTORY. THE ABOVE POLICY OF THE GROUP WOULD SHOW THAT THE P ROVISIONS COULD BE MADE FOR INVENTORY WHEN ALL MATERIAL IS KNOWN TO BE DEFECTIVE OR OBSOLETE AND HAS BEEN WRITTEN OFF AND SCRAPPED IMMEDIATELY U PON RECOGNITION OF THE FACT. IT WOULD, THEREFORE, SHOW THAT ON VERIFIC ATION OF THE DEFECTS OR OBSOLESCENCE, THE SAME SHOULD BE WRITTEN OFF OR SCR APPED UPON ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 10 RECOGNITION OF THE FACT. THEREFORE, EVEN THE POLICY OF THE GROUP WOULD NOT JUSTIFY THE CLAIM OF DEDUCTION ON ACCOUNT OF MERE P ROVISION AS AGAINST ACTUAL WRITING OFF. THE ASSESSEE MADE ALTERNATE CLA IM BEFORE THE LEARNED CIT(A) READING ACTUAL WRITING OFF IN THE ACCOUNTS A ND FOR DIRECTION TO THE AO WHICH HAS BEEN CONSIDERED FAVOURABLY BY THE LEAR NED CIT(A) IN THE IMPUGNED ORDER. THE CRUX OF THE MATTER WOULD BE THA T THE ASSESSEE DID NOT PRODUCE ANY RELIABLE OR COGENT EVIDENCE ON RECO RD TO SHOW THAT IT WAS ACTUALLY LIABILITY OF THE ASSESSEE FOR WHICH PROVIS ION WAS MADE OR THAT IT WAS A QUANTIFIED LIABILITY. NO RELEVANT STATUTORY P ROVISION IS REFERRED TO SHOW THAT IT WAS A LEGAL LIABILITY OF THE ASSESSEE TO MAKE PROVISION FOR OBSOLESCENCE IN THE INVENTORY. THE LEARNED CIT(A), THEREFORE, RIGHTLY NOTED THAT IN THE PRESENT CASE CLAIM WAS MADE IN RESPECT OF FINISHED GOODS WHICH HAVE ALREADY BEEN VALUED AS PER RELEVANT METH OD OF VALUATION OF CLOSING STOCK. THE ASSESSEE DID NOT SHOW IF THERE W AS ANY NEED FOR RE- VALUATION OF THE CLOSING STOCK. THE ASSESSEE VALUED THE CLOSING STOCK AT 1.5% BELOW THE COST AND CHARGED THE SAME TO PROFIT & LOSS ACCOUNT AS PER REPLY (PB-10) WITHOUT ANY BASIS; THEREFORE, ASSESSE E HAD NOT ADOPTED THE ESTABLISHED AND SETTLED PRACTICE OF VALUING CLOSING STOCK. NO EVIDENCE WAS FILED TO ESTABLISH THAT LOSS HAD ACTUALLY OCCURRED TO THE ASSESSEE IN RESPECT OF INVENTORY OF THE STOCK. THE LEARNED COUN SEL FOR THE ASSESSEE REFERRED TO PARA 13 IN THE JUDGMENT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) IN WHICH THE DECISION IN THE CASE OF INDIAN MOLASSES CO. (P) LTD. (SUPRA) HAS BEEN REFERRED TO. THEREFOR E, IT WOULD NOT SUPPORT THE CONTENTION OF THE ASSESSEE. MOREOVER, IN THIS C ASE THE ISSUE BEFORE THE HONBLE SUPREME COURT WAS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, ADDITIONAL LIABILITY ARISING O N ACCOUNT OF FLUCTUATION IN RATE OF EXCHANGE IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSE COULD BE ALLOWED AS DEDUCTION U/S 37(1) IN THE YEAR OF TH E FLUCTUATION IN THE RATE OF EXCHANGE OR WHETHER THE SAME COULD BE ALLOW ED IN THE YEAR OF REPAYMENT OF SUCH LOANS. THE ISSUE IN THE PRESENT A PPEAL IS, THEREFORE, CLEARLY DISTINGUISHABLE. THE LEARNED COUNSEL FOR TH E ASSESSEE ALSO RELIED ITA NO.1083/AHD/2007 MOLEX MAFATLAL MICRON LTD. VS ITO, GANDHINAGAR W-3 11 UPON THE ORDER OF ITAT MUMBAI BENCH IN THE CASE OF AVAYA GLOBAL CONNECT LTD. (SUPRA) IN WHICH THE ISSUE WAS WITH RE GARDING TO DISALLOWANCE IN RESPECT OF OBSOLETE STOCK WRITTEN O FF BY THE ASSESSEE. HOWEVER, IN THE PRESENT APPEAL, IT WAS NO ACTUALLY WRITTEN OFF OF THE OBSOLETE STOCK BUT A MERE PROVISION. THEREFORE, THI S ORDER IS ALSO DISTINGUISHABLE ON FACTS. 8. IN VIEW OF THE ABOVE FACTS, THE CONDITIONS OF SE CTION 37 OF THE IT ACT ARE NOT SATISFIED IN THE PRESENT CASE. THEREFORE, N O DEDUCTION COULD BE ALLOWED ON PROVISION FOR OBSOLESCENCE OF INVENTORY BECAUSE NO LIABILITY ACTUALLY EXISTING AT THE TIME OF MAKING THE PROVISI ON. 9. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE C ASE IN THE LIGHT OF THE ABOVE DISCUSSION, WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE. WE ACCORDINGLY, CONFIRM THE FINDINGS OF THE AUTHORI TIES BELOW AND DISMISS THE APPEAL OF THE ASSESSEE. 10. AS A RESULT, THE APPEAL OF THE ASSESSEE IS DISM ISSED. ORDER PRONOUNCED ON 06-08-2010. SD/- SD/- (A. N. PAHUJA) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 06-08-2010 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD