M/s. Matheson Bosanquet Enterprises Ltd., Bangalore V. ACIT, Ooty

ITA 1274/CHNY/2009

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1189 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-08-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P B SEKHARAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Earning of tax free income; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH B BEFORE DR.O.K.NARAYANAN, VICE PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER I.T.A. NO.1274/MDS/2009 ASSESSMENT YEAR : 2006-07 M/S MATHESON BOSANQUET ENTERPRISES LTD. NO. 26/1, SUA HOUSE KASTURBA CROSS ROAD BANGALORE 560 001. VS. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE I(1), OOTY. PAN AABCM 9747 J (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI P.B. SEKHARAN ASSESSEE BY : SHRI R. VIJAYARAGHAVAN O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEV ANT ASSESSMENT YEAR IS 2006-07. THIS APPEAL IS DIRECT ED AGAINST THE ITA NO. 1274/MDS/2009 :- 2 -: ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) A T COIMBATORE DATED 02.06.2009 AND ARISES OUT OF THE ASSESSMENT C OMPLETED UNDER SEC.143(3) READ WITH SEC.147 OF THE I.T. ACT, 1961. 2. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THIS APPE AL IS THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF ` 8,69,786/- MADE BY THE ASSESSING OFFICER AGAINST THE VALUATION OF CLOSING STOCK. IT IS THE CASE OF THE ASSESSEE THAT THE LEA RNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS CONFIRMED THE ADOPTION OF PURCHASE RATE FOR THE MONTH OF MARCH 20 06 ALONGWITH AN ADDITION OF ` 2/- PER KG AS INCIDENTAL EXPENSES. ASSESSEE ARGUES THAT THE AVERAGE PRICING METHOD ADOPTED BY T HE ASSESSEE IS A VALUATION METHOD FOLLOWED BY THE ASSESSEE IN A CONSISTENT MANNER FOR ALL THE ASSESSMENT YEARS IN THE PAST WHE REIN THE ASSESSEE IS ADOPTING THE AVERAGE PURCHASE PRICE, AS DETAILED CATEGORY-WISE. THERE IS NO NEED TO UNDO THIS CON SISTENT METHOD WITHOUT POINTING OUT ANY SERIOUS FLAW IN THE VALUAT ION METHOD FOLLOWED BY THE ASSESSEE. THEREFORE, IT IS THE CAS E OF THE ASSESSEE THAT THE ALLEGATION OF UNDERVALUATION OF C LOSING STOCK IS WITHOUT ANY BASIS. ITA NO. 1274/MDS/2009 :- 3 -: 3. WE CONSIDERED THIS ISSUE IN DETAIL. ASSESSEE IS A DEALER IN TEA. HE IS DEALING IN DIFFERENT GRADES. DIFFERENT GRADES OF TEA ARE PURCHASED AND SOLD FOR DIFFERENTIAL PRICES, DEPENDI NG UPON THE QUALITY AND MARKET STAND. ASSESSEE HAS DISCLOSED A CLOSING STOCK OF ` 87,69,822/- FOR THE ASSESSMENT YEAR UNDER APPEAL. ASSESSEE HAS WORKED OUT THE AVERAGE VALUE OF THE ST OCK OF TEA AT ` 48/- PER KG WHEREAS THE ASSESSING OFFICER FOUND TH AT THE AVERAGE COST OF PURCHASE PRICE WORKED OUT TO ` 50.07 PER KG. THE ASSESSING OFFICER ALSO FOUND THAT THE ASSESSEE HAD PURCHASED TEA IN THE MONTH OF FEBRUARY AND MARCH AT AN AVERAG E COST OF ` 51.22 PER KG AND ` 50.76 PER KG RESPECTIVELY AND ASSESSEE HAD INCURRED ` 2/- PER KG TOWARDS INCIDENTAL EXPENSES WHICH SHOUL D BE INCLUDED IN THE COST PRICE OF THE TEA. BY EXAMININ G THE DETAILS OF PURCHASE PRICE OF VARIOUS GRADES OF TEA, THE ASSESS ING OFFICER ARRIVED AT AN AVERAGE PRICE OF ` 52.76 PER KG AND WORKED OUT THE CLOSING STOCK WHICH RESULTED INTO AN ADDITION OF ` 8,69,786/-. THE ASSESSING OFFICER HAS ALSO DISALLOWED A REVALUATION LOSS OF ` 2,17,503/- REFLECTED IN THE STOCK VALUATION. THIS POSITION IS CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS). ITA NO. 1274/MDS/2009 :- 4 -: 4. WE CONSIDERED THE ISSUE IN DETAIL. THERE IS NO DIS PUTE ON THE FACT THAT THE ASSESSEE HAS BEEN VALUING THE CLO SING STOCK OF TEA ON THE BASIS OF DIFFERENT GRADES AND AVERAGE PU RCHASE COST ATTRIBUTABLE TO THOSE DIFFERENT GRADES. THIS IS ON E OF THE ACCEPTED METHODS OF STOCK VALUATION. AN YEARLY AVERAGING OF THE PURCHASE PRICE IS ONE OF THE COMMON METHODS OF STOCK VALUATI ON IN THE TRADE OF CONSUMER ITEMS LIKE TEA, UNLIKE TO THE TRA DING IN HIGH WORTH INDIVIDUAL ITEMS. EXCEPT FOR CERTAIN COST VA RIATIONS OBSERVED IN RESPECT OF LAST TWO MONTHS OF THE PREVIOUS YEAR, NAMELY FEBRUARY AND MARCH, ASSESSING OFFICER HAS NOT POINT ED OUT ANY FUNDAMENTAL FLAW IN THE CONSISTENT METHOD OF VALUAT ION ADOPTED BY THE ASSESSEE. THE INCOME-TAX LAW HAS ALWAYS ACC EPTED THE PROPOSITION THAT A CONSISTENT METHOD OF STOCK VALUA TION ADOPTED BY THE ASSESSEE HAS TO BE USUALLY ACCEPTED UNLESS R EVENUE HAS POINTED OUT ANY SERIOUS FLAW IN THE CORRECTNESS OF THE METHOD EMPLOYED BY THE ASSESSEE. THIS IS MAINLY BECAUSE O F THE COMPENSATORY NATURE OF STOCK VALUE AS CLOSING STOCK OF ONE PREVIOUS YEAR AND AS THE OPENING STOCK OF SUCCEEDIN G YEAR. 5. AS FAR AS THE PRESENT CASE IS CONCERNED, THE ASSESS ING OFFICER HAS NOT MADE OUT ANY SUCH CASE. ARGUMENT O F THE ITA NO. 1274/MDS/2009 :- 5 -: REVENUE IS ALSO NOT ACCEPTABLE IN CASE OF TREATMENT OF REVALUATION LOSS OF ` 2,17,503/- RECORDED BY THE ASSESSEE IN ITS COMPUTA TION STATEMENT OF STOCK VALUATION. TEA, AS A COMMODITY, TRADED BY THE ASSESSEE IS FAST DEGRADABLE, RESULTING IN DETERIORA TION IN QUALITY OF DIFFERENT GRADES IN WHICH CIRCUMSTANCES IT WOULD BE NECESSARY FOR THE ASSESSEE TO PROVIDE FOR VALUATION LOSS. THE MO ST IMPORTANT ASPECT TO BE BORNE IN MIND IN THIS EXERCISE IS THAT THERE IS NO DISCREPANCY IN THE QUANTITIES OF DIFFERENT GRADES O F TEA FOR VALUATION. 6. THE OVER-EMPHASIS GIVEN BY THE LOWER AUTHORITIES ON THE PURCHASE OF TEA IN THE MONTH OF FEBRUARY AND MARCH IS NOT SO RELEVANT BECAUSE THE LOWER AUTHORITIES HAVE NOT CON SIDERED THE GENERATION OF PROFITS ON THE BASIS OF THE SALES MAD E IN THE EARLIER MONTHS. WHEN THE ASSESSEE IS TREATING THE PREVIOUS YEAR AS AN INDIVISIBLE SINGLE UNIT, IT IS ALWAYS NOT ADVISABLE TO TAKE OUT ONE OR TWO MONTHS FOR DETERMINING THE CLOSING STOCK VALUE WITHOUT STATING WHETHER THE PHYSICAL CLOSING STOCK INCLUDED MAINLY THE LATEST PURCHASES OR NOT. ITA NO. 1274/MDS/2009 :- 6 -: 7. THEREFORE, ON FACTS AND IN LAW, WE FIND THAT THERE IS NO JUSTIFICATION TO MAKE AN ADDITION OF ` 8,69,786/- TOWARDS VALUATION OF CLOSING STOCK. THIS ADDITION IS ACCORDINGLY DEL ETED. 8. NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE LEAR NED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN C ONFIRMING THE DISALLOWANCE OF BAD DEBTS CLAIMED AT ` 19,26,263/- THAT HAS ARISEN FROM THE TRAVEL AGENCY BUSINESS. 9. EVEN THOUGH THE ASSESSEE HAS DETERMINED THE DEBTS A S BAD, IN THE EVE OF TRANSFERRING THE TRAVEL AGENCY B USINESS TO ANOTHER COMPANY, THE DEBTS WERE REMAINING IN THE BO OKS OF THE ASSESSEE FOR A PERIOD OF 3 TO 5 YEARS. THEREFORE, IT IS TO BE SEEN THAT DE HORS THE SALE OF TRAVEL AGENCY BUSINESS, TH OSE DEBTS HAVE BECOME DOUBTFUL BY VIRTUE OF THE LONG PERIOD FOR WH ICH THE DEBTS WERE OUTSTANDING. THEREFORE, THE WRITE OFF OF BAD DEBTS NEED NOT BE READ ALONG WITH THE TRANSFER OF TRAVEL AGENCY BU SINESS TO ANOTHER COMPANY. IN THE CIRCUMSTANCES, WE FIND THA T THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SOUTHERN TECHNOLOGY LIMITED VS. JCIT 320 ITR 577 [SC] AND IN THE CASE O F TRF LIMITED VS. COMMISSIONER OF INCOME-TAX 323 ITR 397 SUPPORT THE CASE OF THE ASSESSEE THAT ONCE THE DEBTS ARE WRITTEN OFF AS BAD, IT HAS TO ITA NO. 1274/MDS/2009 :- 7 -: BE ALLOWED AS A DEDUCTION U/S 36(1)(VII) OF THE I.T . ACT, 1961. ACCORDINGLY, THE ADDITION OF ` 19,26,263/- IS DELETED. 10. THIRD GROUND RAISED BY THE ASSESSEE IS THAT THE LEA RNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN D ISALLOWING NOTIONAL EXPENSES U/S 14A OF THE I.T. ACT, 1961 BY APPLYING RULE 8D OF THE INCOME TAX RULES, 1962 WHICH WAS NOT AVAI LABLE TO THE ASSESSEE AT THE TIME OF FILING OF THE RETURN. 11. ON DISCUSSING THE MATTER IN THE OPEN COURT AT THE T IME OF HEARING, WE FIND THAT THE QUANTUM OF DISALLOWANCE C ONFIRMED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) AF TER MODIFICATION IS VERY REASONABLE. THEREFORE, WITHOU T DISCUSSING ANY MATTER OF LAW U/S 14A OF THE ACT, WE FIND THAT THE DISALLOWANCE CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IS VERY REASONABLE WHEN COMPARED TO THE QUANTUM OF EXEMPT INCOME RETURNED BY THE ASSESSEE. THEREFORE, THIS G ROUND RAISED BY THE ASSESSEE IS REJECTED. ITA NO. 1274/MDS/2009 :- 8 -: 12. IN THE RESULT, THIS APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON WEDNESDAY, TH E 12 TH OF JANUARY, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) JUDICIAL MEMBER ( DR.O.K.NARAYANAN) VICE-PRESIDENT CHENNAI : 12 TH JANUARY, 2011 VL. COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR