The ACIT, Circle-1, Eluru V. M/s Foods, Fats & Fertilizers Ltd., Tadepallegudem

ITA 381/VIZ/2004

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7264 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 6 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 03-11-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 24-05-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: TH LUCAS PETER
• Assessee Lawyers: C SUBRAMANYAM
• Keywords: Depreciation; Set aside
• Section: 80HHC; 250

Judgement Text

ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.381/VIZAG/2004 ASSESSMENT YEAR: 2000-01 ACIT CIRCLE-1, ELURU VS. FOODS, FATS & FERTILIZERS LTD., TADEPALLEGUDEM (APPELLANT) (RESPONDENT) PAN NO:AAACF 2643 K APPELLANT BY: SHRI T.H. LUCAS PETER, CIT (DR) RESPONDENT BY: SHRI C. SUBRAMANYAM, CA ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 31.3.2004 PASSED BY LEARNED CIT(A), RAJAHMUNDRY AND IT RELATES TO THE ASSESSMENT YEAR 2000-01. 2. THE GROUNDS RAISED BY THE REVENUE RELATES TO THE FOLLOWING ISSUES: A) DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT B) RATE OF DEPRECIATION ADMISSIBLE ON BARGES C) ADDITION OF RS.2.29 CRORES, RELATING TO THE REDU CTION IN PROFIT DUE TO THE CHANGE IN THE METHOD OF VALUATION OF STO CK. D) COMPUTATION OF DEDUCTION UNDER SECTION 80HHC 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURE OF EDIBLE OIL, VA NASPATI, POWER ETC. DURING THE SCRUTINY PROCEEDINGS, THE ASSESSING OFFI CER DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.2.34 CRORES AS AGAINST NIL INCOME DECLARED BY THE ASSESSEE. IN THE APPEAL PREFERRED BY THE ASSE SSEE, IT GOT PARTIAL RELIEF. THE DEPARTMENT IS AGGRIEVED AGAINST THE REL IEFS GRANTED TO THE ASSESSEE IN RESPECT OF THE ITEMS CITED IN THE PRECE DING PARAGRAPH. ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 2 OF 6 4. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF P ROVISION FOR LEAVE ENCASHMENT. THE ASSESSEE HAD PROVIDED FOR INCREMENT AL LIABILITY ON LEAVE ENCASHMENT AT RS.1,17,734/-. THE ASSESSING OFFICER DISALLOWED THE SAME BY HOLDING THAT THE SAID PROVISION IS NOT AN ASCERTAIN ED LIABILITY. HOWEVER, THE LEARNED CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE B Y FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (245 ITR 428) (S.C). BEFORE US, THE REVENUE DID NO T PLACE ANY MATERIAL TO SHOW THAT THE ABOVE SAID DECISION OF THE HON'BLE AP EX COURT DOES NOT APPLY TO THE FACTS IN THE HANDS OF THE ASSESSEE. IN THE C ASE OF M/S BHARAT EARTH MOVERS LTD. SUPRA, THE HON'BLE APEX COURT HAS HELD THAT THE PROVISION MADE FOR LEAVE ENCASHMENT CANNOT BE TAKEN AS A CONTINGEN T LIABILITY AND HENCE IT IS AN ASCERTAINED LIABILITY. SINCE THE LEARNED CIT (A) HAS FOLLOWED THE DECISION OF THE HON'BLE APEX COURT, WE DO NOT FIND IT NECESSARY TO INTERFERE IN HIS DECISION ON THIS ISSUE. 5. THE NEXT ISSUE RELATES TO THE RATE OF DEPRECIATI ON ADMISSIBLE ON BARGES. THE ASSESSEE CLAIMED DEPRECIATION ON BARGES @ 20%. HOWEVER, THE ASSESSING OFFICER RESTRICTED THE CLAIM TO 10%. THE LEARNED CIT (A) ALLOWED DEPRECIATION AT THE RATE CLAIMED BY THE ASSESSEE. IT WAS BROUGHT TO OUR NOTICE THAT THIS ISSUE IS SQUARELY COVERED BY THE D ECISION OF THIS TRIBUNAL DATED 16-5-2008 IN THE ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 1997-98 IN ITA NO.158/VIZAG/2002; WHEREIN IT HAS BE EN HELD THAT THE DEPRECIATION SHALL BE ALLOWED ON BARGES @ 20%. SINC E THE VIEW TAKEN BY THE LEARNED CIT (A) IS IN ACCORDANCE WITH THE DECIS ION OF THE TRIBUNAL CITED ABOVE, WE AFFIRM HIS ORDER ON THIS ISSUE. 6. THE NEXT ISSUE RELATES TO THE ADDITION OF RS. 2. 29 CRORES MADE ON ACCOUNT OF CHANGE IN THE METHOD OF VALUATION OF CLO SING STOCK OF FINISHED GOODS. DURING THE YEAR UNDER CONSIDERATION, IT WAS NOTICED THAT THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION OF FIN ISHED GOODS, AS A RESULT OF WHICH, THE PROFIT STOOD REDUCED BY RS.2.29 CRORE S. EARLIER, THE ASSESSEE HAD BEEN VALUING THE STOCK OF FINISHED GOODS UNDER THE METHOD MARKET RATES SINCE REALIZED/LATEST AVAILABLE. HOWEVER, D URING THE YEAR UNDER CONSIDERATION, IT HAS CHANGED THE METHOD OF VALUATI ON TO LOWER OF COST OR ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 3 OF 6 NET REALIZABLE VALUE, AS A RESULT OF WHICH THE VAL UE OF CLOSING STOCK GOT REDUCED BY RS.2.29 CRORES VIS--VIS EARLIER METHOD. CONSEQUENTLY, THE PROFIT WAS ALSO GOT REDUCED BY AN EQUAL AMOUNT. THE ASSES SEE EXPLAINED THAT SUCH A CHANGE WAS NECESSITATED AS PER ACCOUNTING ST ANDARD-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) AN D THE ADHERING TO THE SAID ACCOUNTING STANDARDS HAS BECOME MANDATORY AS P ER THE PROVISIONS OF THE COMPANIES ACT. HOWEVER, THE ASSESSING OFFICER TOOK THE VIEW THAT THE METHOD FOLLOWED BY THE ASSESSEE HAS DISTORTED THE T RUE AND FAIR VIEW OF THE FINANCIAL TRANSACTIONS AND ACCORDINGLY ADDED THE AB OVE SAID AMOUNT OF RS.2,29,31,369/- TO THE TOTAL INCOME OF THE ASSESSE E. THE LEARNED CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE WITH THE FOLLOWIN G OBSERVATIONS: 5.4 THE ORDER OF THE ASSESSING OFFICER, THE GROUND S OF APPEAL, THE WRITTEN SUBMISSIONS FILED AND THE ORAL SUBMISSI ONS MADE BY THE AUTHORISED REPRESENTATIVE AT THE TIME OF APPEAL HEARING HAVE BEEN CONSIDERED. THE APPELLANT WAS FOLLOWING T HE METHOD OF VALUATION OF CLOSING STOCK NET REALIZABLE VALUE FOR EARLIER YEARS, BUT IT CHANGED THE METHOD OF VALUATION OF ST OCK AT LOWER OF COST OR NET REALIZABLE VALUE. ACCORDING TO THE A SSESSING OFFICER THIS RESULTED IN DISTORTION OF THE TRUE PRO FITS OF THE BUSINESS OF THE ASSESSEE. BUT ACCORDING TO THE APPE LLANT, THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS REVIS ED ITS ACCOUNTING STANDARDS (AS-2), WHICH COMES INTO EFFEC T FROM 1- 04-1999, AND IS MANDATORY IN NATURE. AS PER CLAUSE (5) OF AS- 2, INVENTORY SHOULD BE VALUED AT THE LOWER COST OR NET REALIZABLE VALUE. HENCE, THE APPELLANT COMPANY REVI SED ITS INVENTORY VALUATION BY ADOPTING COST METHOD, INSTEA D OF REALIZABLE VALUE ADOPTED IN EARLIER YEARS. COMPANIE S AMENDMENT ACT, 1999 EMPOWERED THE CENTRAL GOVERNMEN T TO CONSTITUTE AN ADVISORY COMMITTEE TO ADVISE THE GOVE RNMENT ON FORMULATION AND LAYING DOWN OF ACCOUNTING POLICIES AND ACCOUNTING STANDARDS FOR ADOPTION BY COMPANIES . TILL SUCH TIME AN ADVISORY COMMITTEE IS CONSTITUTED, THE STANDARD OF ACCOUNTING SPECIFIED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA, SHALL BE DEEMED TO BE THE ACCOUNTING STANDARDS WHICH WILL CONTINUE TILL T HE CENTRAL GOVERNMENT PRESCRIBES THE NEW ACCOUNTING STANDARDS. THE APPELLANT HAD PLACED RELIANCE ON CIT VS. MOPED INDIA LTD . IT IS HELD BY THE HON'BLE JURISDICTIONAL HIGH COURT THAT THE VIEW OF THE TRIBUNAL WAS CORRECT IN THE FACE OF THE FINDING THAT THE CHANGE ADOPTED BY THE ASSESSEE WAS FOR BONAFIDE PURPOSES AND WAS NOT ACTUATED BY CONSIDERATION OF REDUCING INCOME FOR INCOME-TAX PURPOSES, THE REVENUE HAD NO RIGHT TO INTERFERE WITH THE CHANGE IN THE METHOD OF VALUATIO N OF THE CLOSING STOCK AND HELD IN FAVOUR OF ASSESSEE. IN THE ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 4 OF 6 APPELLANTS CASE ALSO THE ASSESSING OFFICER HAS NOT BROUGHT ANY MATERIAL ON RECORD THAT THE CHANGE IN THE METHOD OF ACCOUNTING WAS FOR MALAFIDE INTENTIONS, AND FOR RED UCING THE INCOME OF THE ASSESSEE FOR INCOME-TAX PURPOSES. ALL THAT WAS SAID BY THE ASSESSING OFFICER WAS THAT THE CHANGE O F METHOD OF ACCOUNTING BY THE ASSESSEE HAS RESULTED IN UNDERSTA TEMENT OF CLOSING STOCK TO THE TUNE OF RS.2,29,31,369/-. HE P LACED RELIANCE ON CIT VS. BRITISH PAINTS INDIA LTD. THIS CASE IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE, AS THE FACTS ON THAT CASE DID NOT EXIST IN APPELLANTS CASE. WHAT IS IMP ORTANT IS THAT THE NEW METHOD WHICH WAS ADOPTED HAS CONTINUOUSLY T O BE FOLLOWED IN THE SUBSEQUENT YEARS, WHICH THE ASSESSE E DID, AS PER THE AUTHORISED REPRESENTATIVE AND ALSO AS SEEN FROM AUDIT REPORT FOR THE ASSESSMENT YEAR 2002-03. IT IS HELD B Y THE HON'BLE GUJARAT HIGH COURT IN CIT VS. ATUL PRODUCTS LTD., REPORTED IN 125 TAXMAN 727, RELIED UPON BY THE APPE LLANTS AUTHORISED REPRESENTATIVE AT THE TIME OF APPEAL HEA RING, AS UNDER:- THUS, LOOKING TO THE LAW LAID DOWN BY SEVERAL HIGH COURTS ON THE SUBJECT MATTER, IT IS VERY CLEAR THAT IF THE ME THOD OF STOCK VALUATION IS CHANGED BY THE ASSESSEE, AND IF THE CH ANGE IS BONAFIDE, EVEN IF TAXABLE INCOME IS REDUCED ON ACCO UNT OF CHANGED METHOD OF STOCK VALUATION, IT IS NOT OPEN T O THE REVENUE TO ADD ANY AMOUNT IN THE TAXABLE INCOME OF THE ASSESSEE, WHICH IS THE RESULTANT EFFECT OF THE CHAN GED METHOD OF VALUATION. IN VIEW OF THE ABOVE, AS THE CHANGE OF METHOD OF VAL UATION OF CLOSING STOCK BY THE ASSESSEE IS FOR GOOD AND SUFFI CIENT REASON, THE ADDITION MADE BY THE ASSESSING OFFICER CANNOT B E SUSTAINED AND THE SAME IS DELETED, THE APPELLANT GE TS RELIEF OF RS.2,29,31,369/-. 6.1 DURING THE COURSE OF HEARING, THE LEARNED AUTHO RISED REPRESENTATIVE RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF THE DECISION OF THE LEARNED CIT (A): A) CIT VS. H.P. STATE CIVIL SUPPLIES CORPORATION LT D., (2009) (309 ITR 102 (HP) B) CIT VS. NATIONAL AND GRINDLAYS BANK LTD., (1984) 145 ITR 457 (CAL) THE RELEVANT PORTIONS OF OBSERVATIONS MADE BY THE H ON'BLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF H.P. STATE CIVIL SUPPLIES CORPORATION LTD ARE EXTRACTED BELOW: ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 5 OF 6 6. IT IS TRUE THAT THE ASSESSEE CANNOT KEEP CHANGI NG THE SYSTEM OF ACCOUNTING VERY FREQUENTLY SO AS TO AVOID PAYMEN T OF TAX. IN THIS CASE, THE ASSESSEE HAS GIVEN REASONABLE GROUND S FOR CHANGING THE METHOD OF VALUATING ITS STOCK. THE KARNATAKA HIGH COURT IN KARNATAKA STATE FOREST INDU STRIES CORPORATION LTD., V. CIT (1993)201 ITR 674, CLEARLY HELD THAT THE ASSESSEE HAS THE RIGHT TO CHANGE THE METHOD OF VALUATING THE STOCK. IT WAS FURTHER HELD THAT THE INCOME-TAX O FFICER CANNOT REJECT THE CHANGE ONLY ON THE GROUND THAT TH E STATUTORY AUDITOR HAD NOT AGREED TO THE SAID SYSTEM. SIMILARLY, THE BOMBAY HIGH COURT IN MELMOULD CORPOR ATION V. CIT (1993) 202 ITR, 789, HELD THAT UNDER SECTION 14 5 OF THE INCOME-TAX ACT, 1961, THE ASSESSEE CAN ADOPT A METHO D OF VALUATION WHICH IS TO BE FOLLOWED BY IT REGULARLY. IT ALSO LAID DOWN THAT THE ASSESSEE CAN CHANGE THE METHOD OF VAL UATION. WHENEVER THERE IS A CHANGE IN THE METHOD OF VALUATI ON, THERE MAY BE SOME DISTORTION OR DISCREPANCY IN THE CALCUL ATIONS OF PROFITS IN THE YEAR IN WHICH THE CHANGE TAKES PLACE . BUT IF THE CHANGE IS BROUGHT ABOUT BONAFIDE AND IS IN ACCORDAN CE WITH THE NORMALLY ACCEPTED ACCOUNTING PRACTICE, THE RE IS NO REASON WHY SUCH A CHANGE SHOULD NOT BE PERMITTED . IN THE PRESENT CASE, WE FIND THAT THE ASSESSEE WAS V ALUATING ITS STOCK ON THE BASIS OF FIFO METHOD. IT FOUND THAT THI S METHOD WAS NOT SUITABLE SINCE THE STOCK WAS SPREAD OUT OVE R 250 LOCATIONS AND IT WOULD NOT BE EASY TO VALUATE THE S AME ON THE FIFO BASIS. THEREFORE, THEY DECIDED TO SHIFT TO THE AVERAGE COST BASIS. ASSUMING FOR THE SAKE OF ARGUMENT THAT BY AP PLYING THIS COST METHOD, THE INCOME OF THE ASSESSEE GOT DEPRESS ED IN THE RELEVANT ASSESSMENT YEAR BUT THIS DEDUCTION IN THE INCOME WOULD BE MADE OVER IN THE SUBSEQUENT YEAR SINCE THE VALUATION OF THE REMAINING STOCK ON AN AVERAGE COST BASIS WOU LD BE HIGHER IN THE SUBSEQUENT YEARS. THEREFORE, THERE WA S NO JUSTIFICATION TO REJECT THE CHANGE IN ACCOUNTING PR ACTICE OF THE ASSESSEE. ACCORDINGLY, BOTH THE QUESTIONS ARE ANSWE RED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 6.2 IN THE INSTANT CASE ALSO, THE ASSESSEE HAS E XPLAINED THE REASONS WHICH NECESSITATED IT TO CHANGE ITS METHOD OF VALUA TION, I.E. THE MANDATORY REQUIREMENT TO FOLLOW THE ACCOUNTING STANDARDS PRES CRIBED BY THE ICAI. THE SAID EXPLANATION OF THE ASSESSEE HAS NOT BEEN F OUND TO BE FALSE. SINCE THE ASSESSEE HAS CHANGED THE METHOD FOR BONAFIDE RE ASONS, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LEARNED CIT(A) ON THIS ISSUE ALSO. ITA NO.381 OF 2004 FOOD FATS AND FERTILIZERS TADEPA LLEGUDEM PAGE 6 OF 6 7. THE LAST ISSUE RELATES TO THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. IT WAS BROUGHT TO OUR NOTICE THAT , ON IDENTICAL FACTS, THE TRIBUNAL HAS ASIDE SIMILAR ISSUE TO THE FILE OF THE ASSESSING OFFICER IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1997-98 AN D 1998-99 IN ITA NO.158/V/2002 AND ITA NO.159/V/2002, VIDE ITS ORDER DATED 16.05.2008 AND 15.5.2009 RESPECTIVELY. IN THOSE APPEALS, THE ASSESSING OFFICER WAS DIRECTED TO COMPUTE THE DEDUCTION UNDER SECTION 80H HC IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN BY HON'BLE SUPREME COURT I N THE CASE OF CIT VS. K. RAVINDRAN NAIR (2007) 295 ITR 228. CONSISTENT WITH THE VIEW TAKEN IN THE ABOVE CITED CASES, WE SET ASIDE THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO COMPUTE THE DEDUCTION U NDER SECTION 80HHC OF THE ACT IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN IN THE CASE OF K. RAVINDRAN NAIR, (SUPRA). 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 24-01-2011 COPY TO 1 THE A.C.I.T. CIRCLE-1, ELURU 2 M/S FOODS FATS & FERTILIZERS, TANUKU ROAD, TADEPA LLEGUDEM, WEST GODAVARI DISTT. 3 4. THE CIT RAJAHMUNDRY THE CIT(A), RAJAHMUNDRY 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM