Racold Thermo Private Limited (Formerly known as Racold Thermo Limited), Pune V. Income tax Officer,

ITA 2921/PUN/2016

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1689 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 21-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: THIS CONSOLIDATED
• Assessee Lawyers: RELATE TO ASSESSMENT YEARS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NOS.2919 & 2921/PUN/2016 / ASSESSMENT YEARS : 2007-08 & 2010-11 RACOLD THERMO PRIVATE LIMITED (FORMERLY KNOWN AS RACOLD THERMO LIMITED), GAT NO.265/374-376, KHARABWADI, CHAKAN-TALEGAON ROAD, TAL. KHED, CHAKAN, PUNE 410 501 PAN : AAECM0766G VS. ITO (JUDICIAL) (HQ), PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THESE TWO APPEALS BY THE ASSESSEE RELATE TO THE ASSESSMENT YEARS 2007-08 & 2010-11. SINCE SOME COMMON ISSUES ARE RAISED IN THESE APPEALS, WE ARE, THEREFORE, PROCEEDING TO DISPOSE TH EM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. A.Y. 2007-08 : 2. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE CONFIRMA TION OF DISALLOWANCE OF RS.25,02,000/- FOR OBSOLESCENCE OF IN VENTORIES. ASSESSEE BY SHRI KETAN VED REVENUE BY SHRI HOUSHANG BOMAN IRANI DATE OF HEARING 11-12-2019 DATE OF PRONOUNCEMENT 12-12-2019 ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 2 3. BRIEFLY STATED, THE FACTS OF THE CASE, AS NOTED IN THE ASS ESSMENT ORDER, ARE THAT THE ASSESSEE MADE A PROVISION FOR OBSOLE SCENCE OF INVENTORY AMOUNTING TO RS.25.02 LAKH. THE ASSESSING OFFICE R (AO) REQUIRED THE ASSESSEE TO FURNISH THE DETAILS OF INVENTORY VALU ATION. THE ASSESSEE FURNISHED THE INVENTORY VALUATION POLICY, WHICH HAS BEEN REPRODUCED ON PAGE 3 ONWARDS OF THE ASSESSMENT ORDER. THE AO MADE ADDITION OF RS.25.02 LAKH ON THE GROUND THAT THE A SSESSEE DID NOT HAVE ANY DOCUMENTATION TO SUGGEST THAT THE SAID ITEMS OF INVENTORY HAD MARKET VALUE AT NIL/HALF OF COST PRICE. THE LD. CIT(A) AFFIRMED THE ACTION OF THE AO, AGAINST WHICH THE ASSESSEE H AS COME UP IN APPEAL BEFORE THE TRIBUNAL. 4. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MA TERIAL ON RECORD, IT IS OBSERVED FROM THE TABLE ON PAGE 7 OF TH E IMPUGNED ORDER THAT THE ASSESSEE DID NOT CREATE ANY PROVISION FOR O BSOLESCENCE FOR THE YEAR UNDER CONSIDERATION, WHICH IS CAPTURED AS UND ER: - PARTICULARS F.Y.05-06 F.Y.06-07 F.Y.07-08 F.Y.08-09 F.Y.09-10 OPENING PROVISION 5816 5816 2502 2985 16540 ADD :ADDITIONAL PROVISION 0 0 483 13555 0 LESS : REVERSAL OF PROVISION 0 3314 0 0 7728 CLOSING BALANCE 5816 2502 2985 16540 8812 ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 3 5. IT CAN BE SEEN FROM THE ABOVE TABLE THAT THE OPENING BA LANCE OF THE PROVISION FOR THE YEAR UNDER CONSIDERATION WAS AT RS.58.16 LAKH. THE ASSESSEE DID NOT MAKE ANY PROVISION FOR THE YE AR. EARLIER PROVISION OF RS.33.14 LAKH WAS REVERSED ON ACCOUNT OF INCURRING OF EXPENSES, THEREBY LEAVING THE CLOSING BALANCE OF PROVISION A T RS.25.02 LAKH. IT IS THIS AMOUNT WHICH HAS BEEN ADDED BY TH E AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE PROFIT AND LO SS ACCOUNT AND BALANCE SHEET OF THE ASSESSEE, WHICH FORTIFY TH E CONTENTS OF THE ABOVE TABLE AS ARE RELEVANT FOR THE YEAR UNDER CO NSIDERATION. IN ORDER TO MAKE ANY DISALLOWANCE, IT IS ELEMENTARY THAT THE RE SHOULD BE A CLAIM FOR DEDUCTION OF SUCH AN AMOUNT. SINCE NO ACTUA L PROVISION WAS CREATED DURING THE YEAR BY WAY OF DEBIT TO THE PROFIT AND LOSS ACCOUNT, MEANING THEREBY, NO DEDUCTION WAS CLAIME D, THERE COULD HAVE BEEN NO REASON TO MAKE ANY DISALLOWANCE. THIS GROUND IS, THEREFORE, ALLOWED. 6. GROUND NO.2 OF THE ASSESSEES APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS.89,66,000/- ON ACCOUNT OF C HANGE IN METHOD OF ACCOUNTING FOR VALUATION OF INVENTORY. 7. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE RE DUCED ITS PROFIT BY RS.89.66 LAKH ARISING ON ACCOUNT OF CHANGE IN THE METHOD ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 4 OF VALUATION OF STOCK FROM THE FIRST IN FIRST OUT (FIFO) METHOD TO WEIGHTED AVERAGE METHOD. THE AO DID NOT APPROVE THE CHAN GE AND HENCE MADE ADDITION FOR THE SAID SUM, WHICH CAME TO BE COUNTENANCED IN THE FIRST APPEAL. 8. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEV ANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE ASSESSEE ADMITTEDLY CHANGED ITS METHOD OF VALUATION OF INVENTORIES FROM FIFO TO WEIGHTED AVERAGE METHOD. THERE CAN BE NO BAR ON THE AS SESSEE IN CHANGING THE METHOD OF VALUATION PROVIDED SUCH CHANGE IS T O A RECOGNIZED METHOD AND THE SAME IS CONSISTENTLY FOLLOWED IN TH E SUCCEEDING YEARS AS WELL. UNDOUBTEDLY, WEIGHTED AVERAGE IS A RECOGNIZED METHOD FOR VALUATION. THOUGH THE LD. AR SUBMITTED THAT THE CHANGED METHOD WAS CONSISTENTLY FOLLOWED, HE COULD NOT PLACE ON RECORD ANY MATERIAL TO INDICATE SO. IN SUCH CIRCUMSTANCE S, WE SET-ASIDE THE IMPUGNED AND REMIT THE MATTER TO THE FILE OF THE AO FOR ALLOWING THE DEDUCTION OF RS.89.66 LAKH IF THE CHANGED METHOD OF VALUATION HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE IN TH E SUCCEEDING YEARS. IN THE OTHERWISE SCENARIO, THE AO WILL BE FREE TO DEAL WITH THE SITUATION AS PER LAW. ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 5 9. THE LAST GROUND OF THE ASSESSEES APPEAL IS AGAINST TH E CONFIRMATION OF ADDITION OF RS.1.50 CRORE ON ACCOUNT OF PRO VISION OF WARRANTY. 10. THE FACTS CONCERNING THIS GROUND ARE THAT THE AO OBSER VED THAT THE ASSESSEE MADE A PROVISION FOR WARRANTY OF RS.1.50 C RORE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. ON BEING CALLED UP ON TO SUBSTANTIATE THE SAME, THE ASSESSEE FURNISHED A TABULATION WHIC H HAS BEEN INCORPORATED ON PAGE 15 OF THE ASSESSMENT ORDER, SHOWING THAT THE ADDITIONAL PROVISION WAS MADE FOR RS.1.94 CRORE AND THE ACTUAL WARRANTY EXPENSES WERE ALSO AT THE SAME LEVEL, NAMELY, R S.1.94 CRORE. THE ASSESSEE DEMONSTRATED THAT RS.1.50 CRORE WA S THE OPENING BALANCE OF PROVISION OF WARRANTY, WHICH REMAINED AT THE SAME LEVEL AT THE END OF THE YEAR. THE AO MADE DISALLOWAN CE OF RS.1.50 CRORE, WHICH CAME TO BE ECHOED IN THE FIRST APPEA L. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE R ELEVANT MATERIAL ON RECORD. THE TABULATION FROM PAGE 15 OF THE ASSE SSMENT ORDER IS REPRODUCED AS UNDER : (ALL AMOUNTS IN THOUSANDS OF RUPEES) PARTICULARS A.Y.2008-09 A.Y.2007-08 A.Y. 2006-07 A.Y. 2005-06 GROSS SALES/TURNOVER DURING THE YEAR 13,51,594 12,66,246 12,07,607 8,67,971 CARRYING AMOUNT OF PROVISION AS ON IST APRIL 15,000 15,000 7,068 7,068 ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 6 ADDITIONAL PROVISION OF WARRANTY MADE DURING THE YEAR 23,171 19,465 23,943 NIL ACTUAL WARRANTY EXPENSES 23171 19,465 16,011 NIL CARRYING AMOUNT OF PROVISION AS ON 31 ST MARCH 15,000 15,000 15,000 7,068 12. IT CAN BE SEEN FROM THE ABOVE TABULATION THAT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION THERE WAS OPENING BA LANCE OF RS.1.50 CRORE. THE ASSESSEE MADE ADDITIONAL PROVISION O F RS.1.94 CRORE; INCURRED ACTUAL WARRANTY EXPENSES OF RS.1.94 CROR E AND CARRIED FORWARD THE PROVISION AT RS.1.50 CRORE. THUS, IT IS EVIDENT THAT THE AMOUNT OF PROVISION FOR THE YEAR IS EXACTLY EQUAL TO THE AMOUNT OF WARRANTY EXPENSES INCURRED DURING THE YEAR. H AD IT BEEN A CASE OF DIRECT DEBIT OF EXPENSES ON ACCOUNT OF REPAIRS TO THE PROFIT AND LOSS ACCOUNT, THERE WOULD NOT HAVE BEEN ANY DISALLOWA NCE. IT IS ONLY BECAUSE OF THE ASSESSEE CREATING PROVISION AND SPEND ING EQUAL AMOUNT THAT THE AO HAS GONE WITH THE MAKING OF ADDITION AND TH AT TOO, FOR THE CLOSING BALANCE OF THE PROVISION, WHICH HAS NO RELATION WITH THE CREATION OF PROVISION FOR THE YEAR UNDER CONSIDERATIO N. AS ACTUAL EXPENDITURE OF WARRANTY IS EQUAL TO THE AMOUNT OF PROV ISION, WE HOLD THAT NO DISALLOWANCE CAN BE MADE OR SUSTAINED. THIS GROUND IS, ERGO, ALLOWED. ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 7 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. A.Y. 2010-11 : 14. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE CONFIRM ATION OF ADDITION OF RS.55,66,289/- ON ACCOUNT OF DISALLOWANCE O F PROVISION FOR OBSOLESCENCE OF INVENTORY. 15. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESS EE SHOWED OPENING BALANCE OF PROVISION FOR OBSOLESCENCE OF IN VENTORY AT RS.1.22 CRORE. DURING THE YEAR UNDER CONSIDERATION, S UCH PROVISION WAS UTILIZED TO THE TUNE OF RS.62.22 LAKH AND REST O F THE AMOUNT OF RS.55.66 LAKH WAS CARRIED FORWARD TO THE NEXT Y EAR. THE AO MADE THE ADDITION ON ACCOUNT OF CLOSING BALANCE OF PROVIS ION AT RS.55.66 LAKH, WHICH CAME TO BE AFFIRMED IN THE FIRST APPEA L. 16. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELE VANT MATERIAL ON RECORD, IT IS SEEN THAT FOR THE YEAR UNDER CONSID ERATION THERE WAS NO CREATION OF PROVISION FOR OBSOLESCENCE OF INV ENTORY. SOME PART OF THE OPENING BALANCE OF THE PROVISION HAS BEE N REVERSED BECAUSE OF INCURRING OF ACTUAL EXPENSES. THE AUTHORITIES BELOW HAVE MADE AND CONFIRMED THE ADDITION IN RESPECT OF THE CLOSING BA LANCE OF THE PROVISION, WHICH IS UNTENABLE. SINCE NO PROVISION FOR OBSOLESCENCE OF INVENTORY WAS CLAIMED AS DEDUCTION BY WA Y OF DEBIT ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 8 TO THE PROFIT AND LOSS ACCOUNT FOR THE YEAR UNDER CONSIDER ATION, WE HOLD THAT THERE CAN BE NO QUESTION OF MAKING ANY DISALLOWANC E ON THIS COUNT. WE, THEREFORE, ORDER TO DELETE THE ADDITION. 17. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH DECEMBER, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 12 TH DECEMBER, 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-6, PUNE 4. 5. 6. THE PR.CIT-5, PUNE , , / DR B, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE ITA NOS.2919 & 2921/PUN/2016 RACOLD THERMO PRIVATE LIMITED 9 DATE 1. DRAFT DICTATED ON 11-12-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 11-12-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *