DIT, New Delhi V. M/s Becton Dickinson India (P) Ltd., New Delhi

ITA 2530/DEL/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 6764 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-11-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 26-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHOK PANDEY
• Assessee Lawyers: PA WAN KUMAR ADITYA GUPTA; NIDHI JAIN
• Keywords: Difference of opinion; Change of opinion
• Section: 143(3); 115JB; 147; 148; 37

Judgement Text

ITA NO.904/DEL/10 & OTHERS 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO.904/DEL/2010 ASSTT. YEAR: 2001-02 DY.COMMISSIONER OF INCOME TAX, VS BECTON DICK INSON INDIA (P) LTD. CENTRAL CIRCLE 2(1), NEW DELHI. COR PORATE FINANCE, 6 TH FLOOR, SIGNATURE TOWER-B, SOUTH CITY, GURGAON. (PAN NO. AAACB2656A) C.O. NO.124/DEL/2010 (IN ITA NO.904/DEL/2010) ASSTT. YEAR: 2001-02 BECTON DICKINSON INDIA (P) LTD., VS DCIT, CC 2( 1), NEW DELHI. GURGAON. ITA NO. 884/DEL/2010 ASSTT.YEAR: 2002-03 DCIT, CC 2(1), NEW DELHI. VS BECTON DICKINSON INDIA(P) LTD., 202-204, TOLSTOY HOUSE, NEW DELHI. C.O. NO.122/DEL/2010 (IN ITA NO. 884/DEL/2010) ASSTT.YEAR: 2002-03 BECTON DICKINSON INDIA(P) LTD., VS DCIT , CC 2(1), NEW DELHI. 202-204, TOLSTOY HOUSE, NEW DELHI. ITA NO.904/DEL/10 & OTHERS 2 ITA NO. 885/DEL/2010 ASSTT.YEAR: 2004-05 DCIT, CC 2(1), NEW DELHI. VS BECTON DICKINSON INDIA(P) LTD. NEW DELHI. C.O.NO.123/DEL/2010 (IN ITA NO. 885/DEL/2010) ASSTT.YEAR: 2004-05 BECTON DICKINSON INDIA(P) LTD. VS DCIT, CC 2(1), NEW DELHI NEW DELHI. ITA NO. 2530/DEL/2010 ASSTT. YEAR: 2005-06 DCIT, CC 2(1), NEW DELHI VS BECTON DIC KINSON INDIA(P) LTD. NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ASHOK PANDEY, CIT DR RESPONDENT BY: SHRI PA WAN KUMAR, ADITYA GUPTA & MS NIDHI JAIN O R D E R PER G.E. VEERABHADRAPPA, V.P. THESE FOUR APPEALS BY THE DEPARTMENT ARE FILED AGA INST THE RESPECTIVE ORDERS OF THE CIT(A) FOR AYS 2001-02, 2002-03, 2004 -05 AND 2005-06 AND THE ASSESSEES CROSS OBJECTIONS ARE FOR AYS 2001-02 , 2002-03, 2004-05. ALL THESE APPEALS WHICH INVOLVE COMMON DISPUTE WERE CON SOLIDATED AND HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS ORDER. ITA NO.904/DEL/10 & OTHERS 3 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURE AND TRADING OF MEDICAL CONSUMABLES AND DIAGNOSTIC EQUIPMENT FOR US E BY HEALTH CARE PROFESSIONAL, MEDICAL RESEARCH INSTITUTIONS AND GEN ERAL PUBLIC. THE ASSESSEE WAS INCORPORATED IN JANUARY 1996 UNDER THE COMPANIE S ACT 1956 AND FROM THE AY 1996-97 IT IS IN THE SAME BUSINESS AND FIRST TIME FOR THE AY 2001-02 THE AO WENT THROUGH THE PROFIT AND LOSS ACCOUNT AND FOUND THAT THE ASSESSEE HAS DEBITED A SUM OF RS.2,74,22,000 AS PROVISION F OR SLOW MOVING FINISHED GOODS TO THE PROFIT AND LOSS ACCOUNT AND ADMITTED THAT THESE WERE ONLY PROVISIONS AND ARE NOT ACTUAL EXPENSES. THE AO MAD E AN ADDITION BY REOPENING THE COMPLETED ASSESSMENT U/S 143(3) BY IS SUANCE OF NOTICE U/S 148 OF THE ACT. THE ASSESSEE EXPLAINED THAT AS IN THE EARLIER YEARS, HE HAS FOLLOWED A CONSISTENT METHOD OF FINDING OUT THE INV ENTORY UNDER WHICH ANY INVENTORY ITEM WHICH IS NOT MOVING/NOT SOLD IN MARK ET FOR CERTAIN TIME (SAY MORE THAN 12 MONTHS) IS CONSIDERED AS SLOW MOVING I NVENTORY AND PROVISION WAS CREATED FOR THE SAME. THE ASSESSEE EXPLAINED T HAT IT IS DEALING WITH SOPHISTICATED MEDICAL CONSUMABLES WHICH ARE USED BY THE LARGE PUBLIC AND IF AN INVENTORY IS NOT MOVING FOR SUFFICIENTLY LONG PE RIOD, IT IS CONSIDERED TO BE NON-PRODUCTIVE OR NON-USEABLE. SUCH IDENTIFICATION IS DONE THROUGH SAP, COMPUTER PROGRAM IMPLEMENTED BY THE ASSESSEE. EACH AND EVERY ITEM OF SUCH SLOW MOVING FINISHED GOODS LYING AT THE EACH Y EAR END IS IDENTIFIED AND ITA NO.904/DEL/10 & OTHERS 4 SUCH INFORMATION IS FURNISHED IN THE PAPER BOOK ON RECORD. MANAGEMENT ESTIMATES NET REALIZABLE VALUE OF SUCH SLOW MOVING INVENTORY ON THE BASIS OF USABILITY/SALEABILITY OF SUCH GOODS. BY CREATION OF PROVISION OF SLOW MOVING FINISHED GOODS, CARRYING VALUE OF SUCH INVENTORY HA S BEEN REDUCED TO NET REALIZABLE VALUE. THE ASSESSEE STATED THAT THERE IS A FOOL PROOF METHOD OF IDENTIFYING MANUFACTURED PRODUCTS WHICH ARE SLOW MO VING OR NON- PRODUCTIVE AND THE ASSESSEE HAS DISCLOSED ALL THESE DETAILS IN THE PUBLISHED ACCOUNT AND HAS ALSO FILED THE DETAILS OF SUCH SLOW MOVING ITEMS OF STOCK AS ON 31.3.2001 IN PAGES 25 TO 29. SIMILAR DETAILS AR E ALSO FILED FOR OTHER YEARS. RELYING UPON THESE PAPERS, IT WAS SUBMITTED THAT TH E ASSESSEES METHOD OF ACCOUNTING BE ACCEPTED. THESE SUBMISSIONS WERE NOT ACCEPTED BY THE AO AND WERE ACCEPTED BY THE CIT(A) AND THE REVENUE IS AGGRIEVED. IN AY 2002-03 ALSO, THE CIT(A) PASSED A SIMILAR ORDER AND THE DEPARTMENT HAS ACCEPTED THAT PART OF THE ORDER AND HAS ONLY DISPUT ED THE FINDINGS OF THE CIT(A) WITH REGARD TO THE PROCEEDINGS U/S 147 OF TH E I.T.ACT. LD. DR VEHEMENTLY SUPPORTED THE FINDINGS OF THE AO. ACCOR DING TO HIM, THERE IS NO BASIS FOR MAKING THESE PROVISIONS AND THE PROVISION S ARE ONLY BASED ON CERTAIN ARBITRARY ASSESSMENTS MADE BY THE ASSESSEE AND THEY ARE UNASCERTAINED PROVISIONS AND ARE CONTINGENT IN NATU RE AND THEREFORE SHOULD NOT BE ALLOWED, IN COMPUTATION OF INCOME FOR THE AS SESSMENT. ITA NO.904/DEL/10 & OTHERS 5 3. THE ASSESSEES COUNSEL, ON THE OTHER HAND, STRON GLY JUSTIFIED THE FINDINGS OF THE CIT(A). ACCORDING TO HIM, THE ASSE SSEE HAS PROPERLY IDENTIFIED THE SLOW AND OBSOLETE STOCKS. HAVING RE GARD TO THE ASSESSEES DELICATE NATURE OF BUSINESS, WHICH IS INVOLVING WIT H HUMAN LIFE AND IS SUBJECT TO SO MANY DISCIPLINES AND CONTROLS BY THE GOVERNME NT AUTHORITIES. ASSESSEE HAS CHOSEN TO FOLLOW THIS METHOD OF ACCOUNTING FOR INVENTORIES HELD BY IT. 4. THE LD. COUNSEL FOR THE ASSESSEE ALSO PLEADED TH E METHOD OF ACCOUNTING WHICH REMAINED CONSISTENT RIGHT FROM THE START OF ITS BUSINESS I.E. FROM AY 1996-97 AND THE DEPARTMENT IS NOT JUSTIFIED IN REJECTING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN THIS REGA RD FROM THESE ASSESSMENT YEARS BY TAKING A DIFFERENT STAND. LD. COUNSEL ALS O PLEADED IN THE AY 2002- 03 THAT THE COMMISSIONER HAS GIVEN RELIEF WHICH THE DEPARTMENT ITSELF HAS ACCEPTED AND HAS NOT COME UP IN APPEAL BEFORE THE T RIBUNAL MEANING THEREBY THAT THE ORDER OF THE CIT(A) DESERVES TO BE ACCEPTE D FOR OTHER YEARS AS WELL. 5. WE HAVE GONE THROUGH THE RECORDS INCLUDING THE D ETAILS OF SLOW MOVING STOCK AS ON 31.3.2001 AND SIMILAR STOCKS IN THE OTHER YEARS AND DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING THE METHOD OF ACCOUNTING OVE R A PERIOD OF TIME. THE ASSESSEE IS IN THE BUSINESS OF PHARMACEUTICAL PRODU CTS WHERE STRICT SUPERVISION OF THE QUALITY HAS TO BE ENSURED AND TH ESE PRODUCTS ARE MOSTLY ITA NO.904/DEL/10 & OTHERS 6 SURGICAL NEEDLES AND MEDICAL CONSUMABLE AND IF SUCH FAST MOVING ITEMS ARE NOT SOLD FOR A CONSIDERABLY LENGTHY PERIOD. IT CAN BE SAFELY SAID THAT THEY HAVE LOST THEIR CONSUMABLE ACCEPTABILITY OVER A PER IOD OF TIME, MAY BE DUE TO ADVENT OF NEW PRODUCTS. AFTER ALL, AS LONG AS THE ASSESSEE ACTED IN A BONA FIDE MANNER AND HAS APPRECIATED THE BUSINESS REALIT IES IN WHICH HE IS PLACED, THE SAME SHOULD BE ACCEPTED. THE ASSESSEE HAS A FO OLPROOF METHOD OF IDENTIFICATION OF SLOW MOVING OR DEAD STOCK AND HAS PUT THE REALIZABLE VALUE FOR THE PURPOSE OF VALUING THE SAME. IN FACT, THE PRINCIPLE OF VALUATION IS THE COST OR THE MARKET VALUE WHICHEVER IS LOWER. THE M ARKET VALUE HERE MEANS THE VALUE THAT IS ACCEPTABLE IN THE MARKET. IF AN I TEM HAS BECOME OBSOLETE OR SLOW MOVING IT NATURALLY HAS A LOWER MARKET VALUE W HICH THE ASSESSEE HAS RECOGNIZED. THE ASSESSEE HAS PROPERLY IDENTIFIED S UCH STOCK AND HAS ALSO FOLLOWED IN ACCORDANCE WITH COMMERCIALLY ACCEPTED A CCOUNTING PRINCIPLES OF VALUATION. IN OUR VIEW, THE CIT(A) WAS CORRECT IN LAW AND ON FACTS TO HAVE DELETED THE ADDITION MADE BY THE AO WHICH WAS BASED NOT TAKING INTO CONSIDERATION THE HARD REALITIES OF ASSESSEES BUSI NESS. THE ADDITION IN OUR VIEW, IS PROPERLY DELETED AND WE DECLINE TO INTERFE RE. 6. THE ASSESSEE IN THE CROSS OBJECTION FOR AY 2001- 02 DISPUTES THE PROCEEDINGS TAKEN U/S 147 FOR THIS YEAR ALTHOUGH TH E ASSESSMENT HAS BEEN COMPLETED U/S 143(3). THE AO WHO FIRST PROCESSED T HE RETURN HAS RAISED ITA NO.904/DEL/10 & OTHERS 7 QUERIES AND THE ASSESSEE HAS ANSWERED THE SAME BY F URNISHING NECESSARY DETAILS WHICH HAS FOUND FAVOUR OF ACCEPTANCE BY HIM AND SUBSEQUENTLY HE HAS REAPPRAISED THE WHOLE THING AND HAS TAKEN THE P ROCEEDINGS U/S 147 BY A MERE CHANGE OF OPINION. THE CIT(A) IN THE AY 2002- 03 ACCEPTED THE ASSESSEES CONTENTION IN THIS REGARD AND THE REVENU E IS AGGRIEVED. IN THE LIGHT OF PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS KELVINATOR OF INDIA 320 ITR 561(SC), WE ACCE PT THE ASSESSEES CONTENTION IN THIS REGARD THAT THE PROCEEDINGS TAKE N BY THE AO BY INVOKING SECTION 147 FOR THESE TWO YEARS ARE MERELY BASED UP ON CHANGE OF OPINION AND NOT BASED UPON ANY REASONS WHICH LED HIM TO BEL IEVE THAT THE INCOME HAS ESCAPED ASSESSMENT. THE HONBLE SUPREME COURT OF I NDIA HAS RIGHTLY POINTED OUT THE CONCEPT OF CHANGE OF OPINION AS INB UILT TEST TO CHECK ABUSE OF POWER BY THE AO. THE REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. IN OUR VIEW, SUCH A LIVE LINK IS ABSEN T FOR THESE YEARS AS THE AO WAS PROVIDED WITH ALL THE DETAILS WHICH ARE NECESSA RY TO DECIDE THE ISSUE AND THE AO ACCEPTED THE ASSESSEES CONTENTION AT THE FI RST INSTANCE AND THERE ARE NO TANGIBLE REASONS OR MATERIAL WHICH CAME SUBSEQUE NT TO THE FRAMING OF THE ASSESSMENT U/S 143(3) OF THE ACT WHICH SUPPLIES HIM THE NECESSARY REASONS TO BELIEVE THAT CERTAIN INCOMES HAVE ESCAPED ASSESS MENT. WE THEREFORE AGREE WITH THE ASSESSEE THAT THE PROCEEDINGS U/S 14 7 ARE BASED ON MERE ITA NO.904/DEL/10 & OTHERS 8 CHANGE OF OPINION AND DO NOT STAND TO THE TEST AS L AID DOWN BY THE HONBLE SUPREME COURT IN KELVINATOR OF INDIA (CITED SUPRA). ACCORDINGLY, CO FOR AY 2001-02 BE TREATED AS ALLOWED AND APPEAL FOR AY 2002-03 BY THE DEPARTMENT SHOULD BE TREATED AS DISMISSED. 7. IN THE CROSS OBJECTION FOR AY 2004-05, GROUNDS N O.2 AND 3 WERE NOT PRESSED AT THE TIME OF HEARING. AS REGARDS GROUND NO.1, THE SAME RELATES TO ADDITION IN RESPECT OF PROVISION FOR WARRANTY SERVI CES WHICH ACCORDING TO THE AO ARE ONLY CONTINGENT LIABILITIES AND THEREFORE NO T ALLOWABLE U/S 37 OF THE ACT AND WHILE CALCULATING THE BOOK PROFITS UNDER TH E MINIMUM ALTERNATE TAX PROVISION (MAT), THE SAME REQUIRES TO BE ADDED. TH E CIT(A) WAS OF THE VIEW THAT THE ADDITION MADE BY THE AO IS JUSTIFIED IN THE LIGHT OF CLAUSE (I) IN EXPLANATION TO SECTION 115JB OF THE I.T.ACT. 8. WE HAVE HEARD BOTH SIDES AND GONE THROUGH THE RE CORD AND THE RELEVANT PROVISIONS OF EXPLANATION (1) TO SECTION 1 15JB(2) WHICH IS RELIED UPON IN SUPPORT OF THE ADDITION TO THE BOOK PROFIT RATES AS UNDER:- EXPLANATION (1) FOR THE PURPOSES OF THIS SECTION , BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARE D UNDER SUB-SECTION (2), AS INCREASED BY. . (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIA BILITIES; OR ITA NO.904/DEL/10 & OTHERS 9 (I) THE AMOUNT OR AMOUNTS SET ASIDE AS PROVISIO N FOR DIMINUTION IN THE VALUE OF ANY ASSET. 9. THE ASSESSEE IN THIS CASE AS IS CLEAR FROM THE I MPUGNED ORDERS HAS MADE THE PROVISION @ 4% OF THE SALE VALUE, AS THE P ROVISION FOR LIABILITIES IN RESPECT OF AFTER SALES WARRANTY OFFERED TO THE CUST OMERS. THE ASSESSEE HAS ALSO SUPPLIED DETAILED WORKING OF THE WARRANTY PROV ISIONS MADE. THE WARRANTY PROVISION WAS CREATED IN THE YEAR OF SALE WHICH ACCORDING TO THE ASSESSEE IS CLEARLY BASED ON SOME SCIENTIFIC AND RE ASONABLE BASIS AND NOW WE WILL EXAMINE WHETHER THE SAME CAN BE DISALLOWED AS AN AMOUNT OR AMOUNT SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF AN ASSET WHICH CAN ALONE BE THE SUBJECT MATTER OF INCREASE TO THE BOOK PROFI T IN TERMS OF CLAUSE (I) OF THE AFORESAID EXPLANATION (1). IN OUR OPINION, TH E PROVISION MADE FOR WARRANTY CLAIMS IN RESPECT OF SALES WHICH ARE AFFEC TED AND CANNOT BE TREATED AS A PROVISION FOR DIMINUTION IN THE VALUE OF ASSET . EVEN IN TERMS OF CLAUSE (C) OF THE AFORESAID EXPLANATION (1) WHICH WE HAVE EXTRACTED ABOVE, IT CANNOT BE SAID THAT THE AMOUNT OR PROVISIONS FOR MEETING L IABILITIES OTHER THAN ASCERTAINED LIABILITIES, THE HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA P. LTD. VS CIT 314 ITR 62 WAS CONCERNED WITH AN IDE NTICAL ISSUE WHEREIN IDENTICAL PROVISIONS FOR WARRANTY WERE MADE. THE A PEX COURT AFTER ELABORATELY DEALING WITH THE ISSUE HAS HELD THAT TH E ASSESSEE WAS ENTITLED TO ITA NO.904/DEL/10 & OTHERS 10 DEDUCTION FOR PROVISION OF WARRANTY CLAIMS. IN THE CASE BEFORE US WHAT THE AO IS TRYING IS TO MAKE AN ADDITION TO THE BOOK PRO FIT U/S 115JB OF THE ACT. IN OUR VIEW, THE PLAIN READING OF THE PROVISIONS OF CLAUSE (C) OR (I) OF EXPLANATION (1) OF SUB-SECTION (2) OF SECTION 115(J ) DOES NOT JUSTIFY THE ACTION OF THE DEPARTMENT. 10. IN THE RESULT, THE DEPARTMENTAL APPEALS ARE DIS MISSED AND THE ASSESSEES CROSS OBJECTION FOR AY 2002-03 IS DISMIS SED AND CO FOR AY 2001-02 IS TO BE TREATED AS ALLOWED. CROSS OBJECTI ON FOR AY 2004-05 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.11.2010. SD/- SD/- ( A.D. JAIN ) ( G.E. VEERABHADRAPPA ) JUDICIAL MEMBER VICE PRESIDENT DT. 12TH NOVEMBER 2010 GS COPY FORWARDED TO:- 1. DCIT, CC 2(1), NEW DELHI. 2. BECTON DICKINSON INDIA (P) LTD., GURGAON. 3. CIT(A) 4. CIT 5. DR BY ORDER DY.REGISTRAR