DCIT, New Delhi V. M/s National Fertilizers Ltd., New Delhi

ITA 3947/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7419 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 16-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 24-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUNIL CHANDER SHARMA
• Keywords: Question of law; Valuation report; Notional interest
• Section: 43B; 37(1); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E, NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NOS.3947, 3948 & 3949/DEL/2013 (ASSESSMENT YEARS 2006-07, 2007-08 & 2008-09) DCIT, CIRCLE 13(1), VS. M/S. NATIONAL FERTILIZES LT D., NEW DELHI CORE-III, SCOPE COMPLEX, 7, INDUSTRIAL AREA, LODI ROAD, NEW DELHI GIR / PAN : AAACN0189N I.T.A.NOS.3520, 3519, 3518 & 3517/DEL/2013 (ASSESSMENT YEARS 2006-07, 2007-08, 2008-09 & 2009-10 RESPECTIVELY) M/S. NATIONAL FERTILIZERS LTD., VS. DCIT, CIRCLE 13 (1), CORE III, SCOPE COMPLEX, NEW DELHI 7, INDUSTRIAL AREA, LODI ROAD, NEW DELHI. GIR / PAN : AAACN0189N (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI SUNIL CHANDER SHARMA, CIT DR ASSESSEE BY : SHRI VED JAIN, ADV. SHRI ASHISH CHADHA, CA DATE OF HEARING: 30.05.2016 DATE OF PRONOUNCEMENT: 31.05.2016 ORDER PER BENCH: THESE ARE CROSS APPEALS ARISING OUT OF THE SEPARAT E ORDERS PASSED BY LD. CIT(A) XVI, NEW DELHI EACH DAT ED 25.03.2013 FOR THE ASSESSMENT YEAR 2006-07 TO 2009- 10. A. WE FIRST TAKE UP THE APPEALS FILED BY THE REVENU E: 2. ASSESSMENT YEAR 2006-07: 2 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 THE GROUNDS OF APPEAL RAISED BY THE REVENUE FOR TH E YEAR UNDER CONSIDERATION ARE AS UNDER: 1. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY NOT CONSIDERING THE DEMURRAGE & WHARFAGE EXPENSES AS PENALTY. 2. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES 0 E CASE, THE LD. CIT(A) HAS ERRED IN LAW IN NOT APPRECIATING THE PROVISION LAID DOWN IN EXPLANATION TO SECTION 37(1) WHEREIN IT HAS BEEN SAID ANY AMOUNT PAID FOR THE PURPOSE WHICH IS AN OFFENSE OR WHICH I S PROHIBITED BY LAW SHALL NOT BE ALLOWED AS EXPENDITU RE. 3. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT THE RAILWAY ACT HAS DEFINED THE DEMURRAGE AND WHARFAGE AS THE CHARGE LEVIED, CHARGE MEANS THE BLAME OR ACCUSATION HENCE PENALTY. 2.1 AT THE OUTSET, LD. A.R. SUBMITTED THAT THE ABOV E GROUNDS NO.1, 2 & 3 ARE AGAINST THE DELETION OF ADD ITION AMOUNTING TO RS.1,39,30,000/- ON ACCOUNT OF DEMURRA GE AND WHARFAGE CHARGES. HE SUBMITTED THAT THE ASSESS EE HAD DEBITED RS.1,39,30,000/- AS DEMURRAGE AND WHARF AGE CHARGES IN THE P & L ACCOUNT, AS IT WAS PAID TO THE INDIAN RAILWAYS TOWARDS DELAY IN LOADING/UNLOADING OPERATI ON AT THE UNITS BEYOND TIME FRAME FIXED BY INDIAN RAILWAY S. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMOU NT PAID AS DEMURRAGE AND WHARFAGE TO INDIAN RAILWAYS I S IN THE MATTER OF FINE OR PENALTY AND HENCE DISALLOWED THE EXPENDITURE. 3 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 2.2 LD. CIT(A) DEALT WITH THIS ISSUE AT PARA 11 PAG E 37 OF HIS ORDER WHEREIN, HE HELD THE PAYMENT ARE NOT IN T HE NATURE OF PENALTY OR FINE FOR VIOLATION OF ANY STAT UTE. 2.3 LD. A.R. SUBMITTED THAT THIS ISSUE IS COVERED B Y THE ORDER DATED 20.05.2015OF THIS TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2009-10 IN I.T.A.NO. 4076/DEL/2013. THE TRIBUNAL FOR ASSESSMENT YEAR 20 09- 10, HAS RELIED UPON THE DECISION OF HON'BLE JURISDI CTIONAL HIGH COURT AS WELL AS THE DECISION OF COORDINATE BE NCH OF THIS TRIBUNAL IN MAHLAXMI SUGAR MILLS CO. LTD. VS CIT (1986) 157 ITR 683 (DEL.) AND IMCOLA (EXPORTS) LTD. , IN I.T.A.NO.974/MUM/2009 RESPECTIVELY. THE RELEVANT FINDINGS ARE GIVEN IN PARA 7 PAGE 4 OF THE SAID ORD ER AND READ AS UNDER: 7. GROUND NO.2 IS AGAINST THE DELETION OF ADDITION OF RS.2,36,00,000/- BEING DEMURRAGE & WHARFAGE CHARGES. THESE CHARGES ARE PAID TO THE RAILWAYS TOWARDS DELAY IN LOADING AND UNLOADING OPERATIONS BEYOND THE TIME FRAME FIXED BY THE INDI AN RAILWAYS. THE AO WAS OF THE VIEW THAT THE AMOUNT PAID AS DEMURRAGE AND WHARFAGE TO THE RAILWAYS IS A FINE OR PENALTY AND HENCE DISALLOWED THE EXPENDITUR E. THE LD. CIT(A) HAS DEALT WITH THE ISSUE AT PAGE 44 PARA 5. THE PAYMENT IN QUESTION IS NOT THE PENALTY OR FINE FOR VIOLATION OF ANY STATUTE. IT IS COMPENSATO RY IN NATURE. THE ISSUE STANDS COVERED BY THE FOLLOWING DECISIONS. I. NANHOOMAL JYOTI PRASAD VS. CIT (1980) 123 ITR 269 (ALL) II. MAHALAXMI SUGAR MILL CO. LTD. VS. CIT (1986) 157 ITR 683 (DEL.) III. IMCOLA (EXPORTS) LTD. ITA 974/MUM/2009. 4 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 RESPECTFULLY FOLLOWING THE SAME WE UPHOLD THE FINDI NG OF THE FIRST APPELLATE AUTHORITY AND DISMISS THIS GROUND OF REVENUE. 2.4 RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE FINDINGS OF FIRST APPELLATE AUTHORITY AND DISMISS T HESE GROUNDS IN REVENUES APPEAL FOR THE ASSESSMENT YEAR 2006-07. APPEAL FILED BY THE REVENUE FOR THE ASSES SMENT YEAR 2006-07 STANDS DISMISSED. 3. ASSESSMENT YEAR 2007-08: THE GROUNDS OF APPEAL RAISED BY THE REVENUE FOR THE YEAR UNDER CONSIDERATION ARE AS UNDER: 1. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT SECTION 145 OF THE IT ACT, PERMITS US E OF ONE TYPE OF ACCOUNTING SYSTEM IN A PARTICULAR YEAR AND MIXED ACCOUNTING SYSTEM IS NOT AT ALL ALLOWED. 2. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY NOT CONSIDERING THE FACT THAT AS PER THE PROVISION OF SECTION 145 OF THE IT ACT, WHICH IS MANDATORY FOR EVERY ASSESSEE. 3. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LOW BY IGNORI NG THE FACT THAT BY ALLOWING THE CONTENTION OF THE ASSESSEE, THE ASSESSEE WILL BE ALLOWED TO FOLLOW TH E HYBRID SYSTEM OF ACCOUNTING WHICH IS AGAINST THE CO DE OF IT ACT. 4. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CLT(A) HAS ERRED IN LAW BY DELETI NG THE ADDITIONS MODE BY THE AO ON ACCOUNT OF ACCRUED INTEREST OF RS. 6.48 CRORES AND RS.266.14 CRORES ON PROTECTIVE BASIS BY IGNORING THE FINDING OF HON'BLE HIGH COURT IN THE ASSESSEE'S CASE FOR A Y 2004-05, WHEREIN COURT HAS HELD THAT 'THE ADDITION, IF ANY C ON ONLY BE MADE IN THE YEAR WHEN THE AWARD BECOME THE 5 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 RULE OF COURT, WHICH ON THE PLAIN FACTS OF THE CASE TOOK PLACE OF THE PREVIOUS YEAR CORRESPONDING TO A Y 200 7- 08. 5. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT MERE IMPROBABILITY OF RECOVERY, DOES NOT MEAN THAT NO REAL INCOME HAS ACCRUED TO THE ASSESSE E . 6. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY NOT CONSIDERING THE DEMURRAGE & WHARFAGE EXPENSES AS PENALTY. 7. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW IN NOT APPRECIATING THE PROVISION LAID DOWN IN EXPLANATION TO SECTION 37(1) WHEREIN IT HAS BEEN SAID ANY AMOUNT PAID FOR THE PURPOSE WHICH IS AN OFFENSE OR WHICH I S PROHIBITED BY LOW SHALL NOT BE ALLOWED AS EXPENDITU RE. 8. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT THE RAILWAY ACT HAS DEFINED THE DEMURRAGE AND WHARFAGE AS THE CHARGE LEVIED, CHARGE MEANS THE BLAME OR ACCUSATION HENCE PENALTY. 9. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LOW BY DIRECT ING THE AO TO VERIFY THE FACTS AGAIN AND RE-EXAMINE THE CASE OF THE ASSESSEE ALTER GIVING OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE, THOUGH THE AO HAD DULY FALLOWED THE SAID PROCEDURE AT THE TIME OF THE ASSESSMENT PROCEEDINGS. 10. WHETHER AN THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT THE ASSESSEE HAS NOT FILED ANY NEW / ADDITIONAL DOCUMENTS WHICH NEEDS TO RE-EXAMINED. 3.1 AT THE OUTSET, LD. A.R. SUBMITTED THAT GROUNDS NO. 1 TO 5 ARE COVERED BY THE ORDER OF THIS TRIBUNAL IN A SSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 IN I.T.A.N O. 4076/DEL/2013 VIDE ORDER DATED 20.05.2015. THIS IS SUE 6 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 HAS BEEN DISCUSSED AT PAGE 2 PARA 3 OF THE ASSESSME NT ORDER. ASSESSEE HAD MADE ADVANCE OF RS.130.69 CROR ES TO M/S. KARSAN IN THE YEAR 1995-96 AGAINST THE IMPORT OF UREA, , THE PRICE OF WHICH WERE NOT RECEIVED, THE ; SUPPLIES OF WHICH WERE NOT RECEIVED AND SUBSEQUENTLY, THE CO NTRACT WAS TERMINATED. ACCORDINGLY, THE ASSESSEE INITIATE D ARBITRATION PROCEEDINGS BEFORE THE INTERNATIONAL CO URT OF ARBITRATION (ICA) AGAINST NON PERFORMANCE OF THE CO NTRACT BY THE SUPPLIER. THE ARBITRATION AWARD WAS DELIVER ED ON 03.12.1998 IN FAVOUR OF THE ASSESSEE FOR US$40.69 M ILLION ALONG WITH SIMPLE INTEREST @ 5% P.A. ON THE PRINCIP AL AMOUNT OF US$37.62 MILLION W.E.F. 14.11.1995 TILL T HE DATE OF PAYMENT. 3.2 THE ICA AWARD WAS CHALLENGED BY M/S. KARSAN IN DISTRICT COURT AT AMSTERDAM IN 1999 AND BEFORE DUTC H COURT OF APPEAL THEREAFTER. DUTCH COURT OF APPEAL V IDE ITS JUDGMENT DATED 14.12.2006 REJECTED THE APPEAL OF M/ S. KARSAN. THE A.O. IN THE ASSESSMENT ORDER MADE ADDIT ION OF RS. 1 16.80 CRORE FOR A.Y. 2004-05, ON ACCOUNT O F INTEREST ACCRUED FOR THE PERIOD FROM 14/11/95 TO 31/03/2004 WHICH HAS BEEN DELETED BY THE HON'BLE IT AT VIDE ORDER DATED 20.05.2015. THE ORDER OF THE ITA T FOR A. Y. 2004-05 WAS NOT ACCEPTED BY THE DEPARTMENT AND APPEAL BEFORE THE HON'BLE DELHI HIGH COURT HAS BEEN FILED. SINCE, INTEREST HAS ACCRUED TO THE ASSESSEE IN THE SUBSEQUENT PERIOD UP TO A Y 2007-08 FOR THE PERIOD FROM 14/11/95 TO 31/03/2007 AMOUNTING TO RS. 7 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 266,14,09,000/- IN VIEW OF THE ARBITRATION AWARD DE CIDED IN FAVOUR OF THE ASSESSEE, ADDITION OF RS. 266.14 C RORE WAS MADE TO THE DECLARED INCOME OF THE ASSESSEE ON PROT ECTIVE BASIS BY LD. A.O. THE LD. AO MADE AN ADDITION OF RS . 6,48,18,5501- AS ACCRUED INTEREST FOR THE RELEVANT PREVIOUS YEAR. THE LD. AO HELD THAT THE ASSESSEE WA S PURSUING THE RECOVERY OF THE AMOUNT, THEREFORE, AS PER MERCANTILE SYSTEM OF ACCOUNTING THE INCOME SHOULD H AVE FIRST BEEN DECLARED AND THEREAFTER, AS AND WHEN THE ASSESSEE FEELS THAT THE AMOUNT IS IRRECOVERABLE THE SAME CAN BE WRITTEN OFF IN THE BOOKS OF ACCOUNTS BUT THE ASSESSEE NEITHER HAS SHOWN THE INTEREST RECEIVABLE AS INCOME, NOR WRITTEN IT OFF IN THE BOOKS OF ACCOUNT. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE L D. CIT(A). 3.3 LD. CIT(A) HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE ADDITION OF NOTIONAL INTERE ST ON THE BASIS OF DIRECTIONS AND FINDINGS MADE AT PARA 4.2 T O 4.4 OF HIS ORDER. NOW, THE DEPARTMENT IS IN APPEAL. 3.4 LD. A.R. SUBMITTED THAT HON'BLE JURISDICTIONAL HIGH COURT HAS AFFIRMED THE ORDER OF THE TRIBUNAL FOR ASSESSMENT YEAR 2004-05 IN I.T.A.NO. 541/2012 VIDE ORDER DATED 24.09.2012 AND HAS HELD AS FOLLOWS: THE TRIBUNAL ENDORSED THE FINDING OF THE CIT(A). I T RELIED UPON ITS DECISION FOR AY 2004-05, AS IS APPARENT FROM ITS DISCUSSION IN PARA 9. THE TRIBUNA L'S FINDING WOULD SHOW THAT IT HAD ALSO RELIED UPON THE DECISION OF THE SUPREME COURT IN FUERST DAY LAWSON LTD. VS. JINDAL EXPORTS LTD. (AIR 2001 SC 2293). TH IS 8 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 COURT. ALSO NOTICED THAT HAVING REGARD TO THE TERMS OF THE REPEATED ARBITRATION ACT, 1940, AN AWARD COULD NOT BE ENFORCEABLE. THE SAME WAS THE CASE WITH THE FOREIGN AWARD, THE COURT HAD TO FIRST ADJUDICATE AS TO THE ENFORCEABILITY. IN THESE CIRCUMSTANCES, THE ASSESSEE'S RIGHT TO INT EREST WAS A MERE CLAIM, TILL THE DATE OF THE JUDGEMENT OF THE COURT DT. 4TH DEC, 2006. IN OTHER WORDS, THE RIGHT TO INTEREST CRYSTALLIZED AFTER THE JUDGEMENT OF THE CO URT. TILL THEN, IT WAS INCHOATE. FOR THIS REASON, THE TRIBUNAL'S FINDING CANNOT BE FAULTED WITH. NO SUBSTANTIAL QUESTION OF LAW ARISES. THE APPEAL IS THEREFORE DISMISSED. 3.5 ON THE CONTRARY, LD. D.R. SUBMITTED THAT THE ASSESSING OFFICER IN HIS ORDER AT PAGE 2 PARA 3 HAS OBSERVED AS UNDER: COUNTER CLAIMS: M/S. KARSAN HAD FILED THEIR COUNTE R CLAIMS DURING THE ICC ARBITRATION AMOUNTIN9. TO US $ 33.63 MILLION AND GBP 73609.20 (INR 14661.68 LAKHS) AS ON 31.03.07), WHICH WERE REJECTED BY ICC . THE PARTY CHALLENGED THE AWARD IN DISTRICT COURT AT AMSTERDAM DURING MARCH 1999 WHICH WAS REJECTED VIDE THEIR JUDGEMENT DATED 12.12.2001. THE PARTY FILED AN APPEAL AGAINST THE JUDGEMENT OF DISTRICT C OURT BEFORE THE DUTCH HIGH COURT, AMSTERDAM, WHICH HAS BEEN REJECTED VIDE ITS JUDGEMENT DATED 22.01.2004. HOWEVER, M/S KARSAN DURING OCT, 2004 HAS FILED FRESH LITIGATIONS BEFORE DUTCH COURT OF APPEAL FOR ANNULMENT OF THE SAID ICC AWARD DT. 3.12.1998 AND DUTCH COURT OF APPEAL VIDE ITS JUDGEMENT DT. 14.12- 2006 HAS REJECTED THE APPEAL OF M/S. KARSAN AND NO FRESH LITIGATIONS AGAINST THE COMPANY IN RESPECT OF COUNTER CLAIMS OF M/S. KARSAN ARE KNOWN TO THE COMPANY. 3.6 LD. D.R. SUBMITTED THAT AS THE ARBITRATION ORDE R HAS ATTAINED FINALITY AND THE ASSESSEE HAS BEEN GRANTED 9 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 NOTIONAL INTEREST @ 5% P.A. FROM 14.11.1995 TILL TH E DATE OF PAYMENT JUSTIFYING THE ADDITION MADE BY THE ASSE SSING OFFICER. HE SUBMITTED THAT DUTCH COURT HAD DISMISS ED THE APPEAL FILED BY M/S. KARSAN AGAINST THE ARBITRA TION AWARD AND NO FRESH LITIGATION HAS BEEN FILED CHALLE NGING THE SAID ARBITRATION AWARD. HE SUPPORTED THE ADDIT ION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ACCRUE D INTEREST FOR THE RELEVANT PREVIOUS YEAR. 3.7 WE HAVE PERUSED THE RELEVANT ORDERS REFERRED BY THE PARTIES BEFORE US AS WELL AS THE SUBMISSIONS MADE B Y THEM. THERE IS NO DISPUTE THAT THE ICA HAS AWARDED INTEREST TO THE ASSESSEE @ 5% P.A. ON THE ADVANCE M ADE TO M/S. KARSAN. IT IS ALSO NOT DISPUTED THAT THE ASSE SSEE COULD NOT MAKE RECOVERY AGAINST THE ADVANCE (PRINCI PAL AMOUNT) OF RS.130.69 CRORES, AN AMOUNT OF RS.1.05 C RORES ONLY COULD BE RECOVERED LEAVING BALANCE ADVANCE OF RS.129.64 CRORS WHICH COULD NOT BE RECOVERED TILL D ATE. THE NOTIONAL INTEREST AWARDED BY THE INTERNATIONAL COURT OF ARBITRATION, WHICH HAS NOW ATTAINED FINALITY IS A HYPOTHETICAL INCOME WHICH CANNOT BE SUBJECTED TO TA X. MERELY BECAUSE THE SAID AMOUNT HAS BEEN AWARDED BY WAY OF AN ORDER, DOES NOT MEAN THAT THE ASSESSEE HA S RECEIVED SUCH INCOME. THE ASSESSEE FOLLOWED MERCAN TILE SYSTEM OF ACCOUNTING WHERE THERE CANNOT BE A SITUAT ION OF HYPOTHETICAL INCOME BEING TAXED. IN THE ENTIRETY O F THE CIRCUMSTANCES OF THE CASE BEFORE US, THOUGH THE NOT IONAL INTEREST IN THE BOOKS OF ACCOUNT NOTED AS OUTSTANDI NG 10 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 DUES AND BASED ON THE ADVANCE PAID TO THE SUPPLIER, DURING THE RELEVANT TIME, THERE WAS NO PROSPECT OF REALIZATION OF THE NOTIONAL INTEREST WORKED OUT BY THE ASSESSING OFFICER WHEN PRINCIPAL AMOUNT ITSELF WAS DIFFICULT TO BE RECOVERED. 3.8 AN INCOME TO BE TAXED, HAS TO BE REAL INCOME AN D NOT A NOTIONAL INCOME AND CONCEPT OF ACCRUAL OF INCOME CAN BE APPLIED ONLY TO THE REAL INCOME AS LAID DOWN IN THE JUDGEMENT PASSED BY THE HON'BLE SUPREME COURT IN TH E CASE OF GODHRA ELECTRICITY COMPANY LTD. VS CIT (199 7) 225 ITR 746. THE HON'BLE SUPREME COURT HELD AS UND ER: THE QUESTION WHETHER THERE WAS REAL ACCRUAL OF INCOME TO THE ASSESSEE- COMPANY IN RESPECT OF THE ENHANCED CHARGES FOR SUPPLY OF ELECTRICITY HAS TO B E CONSIDERED BY TAKING THE PROBABILITY OR IMPROBABILI TY OF REALISATION IN A REALISTIC MANNER. IF THE MATTER IS CONSIDERED IN THIS LIGHT, IT IS NOT POSSIBLE TO HOL D THAT THERE WAS REAL ACCRUAL OF INCOME TO THE ASSESSEE- COMPANY IN RESPECT OF THE ENHANCED CHARGES FOR SUPPLY OF ELECTRICITY WHICH WERE ADDED BY THE INCOM E- TAX OFFICER WHILE PASSING THE ASSESSMENT ORDERS IN RESPECT OF THE ASSESSMENT YEARS UNDER CONSIDERATION . THE APPELLATE ASSISTANT COMMISSIONER WAS RIGHT IN DELETING THE SAID ADDITION MADE BY THE INCOME-TAX OFFICER AND THE TRIBUNAL HAD RIGHTLY HELD THAT THE CLAIM AT THE INCREASED RATES AS MADE BY THE ASSESSE E- COMPANY ON THE BASIS OF WHICH NECESSARY ENTRIES WERE MADE REPRESENTED ONLY HYPOTHETICAL INCOME AND THE IMPUGNED AMOUNTS AS BROUGHT TO TAX BY THE INCOME-TAX OFFICER DID NOT REPRESENT THE INCOME WHI CH HAD REALLY ACCRUED TO THE ASSESSEE- COMPANY DURING THE RELEVANT PREVIOUS YEARS. THE HIGH COURT, IN OUR OPINION, WAS IN ERROR IN UPSETTING THE SAID VIEW OF THE TRIBUNAL. 11 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 3.9 IN THE AFORESAID JUDGMENT HON'BLE SUPREME COURT HAS EMPHASIZED THAT THOUGH THE INCOME TAX ENACTMENT TAKES INTO ACCOUNT TWO POINTS AT A TIME AS, SUCH TA XABLE LIABILITY IS DIRECT I.E. ACCRUAL OR RECEIPT OF INCO ME, NEVERTHELESS THE SUBSTANCE OF MATTER IS INCOME, A ND IF INCOME DOES NOT RESULT, THERE CANNOT BE TAX. IT HA S BEEN RECORDED BY THE LD. CIT(A) THAT IN THE PROCESS OF ENFORCEMENT OF AWARD PASSED BY ICA AGAINST THE IDEN TIFIED ASSET HELD IN THE NAME OF M/S. KARSAN, THE EXECUTIO N OF SUCH AWARD ARE PENDING AT TURKEY, BAHRAIN, MONACO, HYDERABAD (INDIA) & NEW DELHI (INDIA). VARIOUS INT ERIM ATTACHMENTS, CIVIL ATTACHMENTS ORDERS ETC. HAVE BEE N OBTAINED IN RESPECT OF SOME OF THE ASSETS HELD IN T HE NAME OF M/S. KARSAN. 3.10 FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE HAS NOT YET BEEN ABLE TO RECOVER EVEN THE PRINCIPAL AMOUNT ADVANCED TO M/S. KARSAN AND IT IS NOT POSSIBLE TO C ONSIDER THE NOTIONAL INTEREST ON THE ADVANCE AS INCOME IN T HE HANDS OF THE ASSESSEE, WHICH IS NOT RECEIVED YET. ACCORDINGLY, WE DISMISS THESE GROUNDS OF REVENUES APPEAL. 3.11 GROUNDS NO.6-8 OF THE REVENUES APPEAL ARE IN RESPECT OF DEMURRAGE AND WHARFAGE CHARGES PAID TO I NDIAN RAILWAYS. RESPECTFULLY FOLLOWING THE DECISION OF T HIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 IN I.T.A.NO. 4076/DEL/2013, DATED 20.05.201 5 (SUPRA), WE DISMISS THESE GROUNDS OF REVENUES APPE AL. 12 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 3.12 GROUNDS NO.9 & 10 ARE GENERAL IN NATURE AND HE NCE WE ARE NOT INCLINED TO ADJUDICATE THE SAME. 3.13 IN THE RESULT, APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2007-08 STANDS DISMISSED. 4. ASSESSMENT YEAR 2008-09: THE GROUNDS OF APPEAL RAISED BY THE REVENUE FOR THE YEAR UNDER CONSIDERATION ARE AS UNDER: 1. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT SECTION 145 OF THE IT ACT, PERMITS US E OF ONE TYPE OF ACCOUNTING SYSTEM IN A PARTICULAR YEAR AND MIXED ACCOUNTING SYSTEM IS NOT AT ALL ALLOWED. 2. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY NOT CONSIDERING THE FACT THAT AS PER THE PROVISION OF SECTION 145 OF THE IT ACT. 3. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LOW BY IGNORI NG THE FACT THAT BY ALLOWING THE CONTENTION OF THE ASSESSEE, THE ASSESSEE WILL BE ALLOWED TO FOLLOW TH E HYBRID SYSTEM OF ACCOUNTING WHICH IS AGAINST THE CO DE OF IT ACT . 4. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY DELETI NG THE ADDITIONS MADE BY THE AO ON ACCOUNT OF ACCRUED INTEREST OF RS. 6.48 CRORES BY IGNORING THE FINDING OF HON'BLE HIGH COURT IN THE ASSESSEE'S CASE FOR AY 2004-05, WHEREIN COURT HAS HELD THAT 'THE ADDITION, IF ANY CAN ONLY BE MADE IN THE YEAR WHEN THE AWARD BECOME THE RULE OF COURT, WHICH ON THE PLAIN FACTS OF THE CASE TOOK PLACE OF THE PREVIOUS YEAR CORRESPOND ING TO A Y 2007-08. 5. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG 13 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 THE PROVISIONS OF SEE 43B WHERE IN THE LEAVE ENCASHMENT WHICH IS POST RETIREMENT BENEFIT, HAS BEEN ALLOWED ON ASCERTAINED AMOUNT. 6. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY NOT CONSIDERING THE DEMURRAGE & WHARFAGE EXPENSES AS PENALTY. 7. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW IN NOT APPRECIATING THE PROVISION LAID DOWN IN EXPLANATION TO SECTION 37(1) WHEREIN IT HAS BEEN SAID ANY AMOUNT PAID FOR THE PURPOSE WHICH IS AN OFFENSE OR WHICH I S PROHIBITED BY LAW SHALL NOT BE ALLOWED AS EXPENDITU RE. 8. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT THE RAILWAY ACT HAS DEFINED THE DEMURRAGE AND WHARFAGE AS THE CHARGE LEVIED, CHARGE MEANS THE BLAME OR ACCUSATION HENCE PENALTY. 9. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY DIRECT ING THE AO TO VERIFY THE FACTS AGAIN AND RE-EXAMINE THE CASE OF THE ASSESSEE AFTER GIVING OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE, THOUGH THE AO HAD DULY FOLLOWED THE SAID PROCEDURE AT THE TIME OF THE ASSESSMENT PROCEEDINGS. 10. WHETHER ON THE FACTS & IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW BY IGNORI NG THE FACT THAT THE ASSESSEE HAS NOT FILED ANY NEW / ADDITIONAL DOCUMENTS WHICH NEED TO RE-EXAMINED. 4.1 GROUNDS NO.1-4 DEAL WITH THE ACCRUAL OF INTEREST ON ADVANCE GIVEN TO M/S. KASAN. AS WE HAVE DEALT WITH THIS ISSUE IN DETAIL IN ASSESSMENT YEAR 2007-08 ABOVE, T O VOID 14 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 REPETITION, FOLLOWING THE SAME DISCUSSION, WE DISMI SS THESE GROUNDS OF APPEAL RAISED BY THE REVENUE. 4.2 GROUND NO.5: LD. A.R. SUBMITTED THAT THIS ISSUE IS COVERED BY ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009- 10 IN I.T.A. NO. 4076/DEL/2013 DATED 20.05.2015. T HE ASSESSING OFFICER HAD MADE ADDITION OF RS.194.46 LA CS IN RESPECT OF THE PROVISIONS MADE BY THE ASSESSEE FOR POST RETIREMENT MEDICAL BENEFITS AS PER AS-15. THE ASSE SSEE HAD DEBITED AN AMOUNT OF RS.371.79 LACS ON ACCOUNT OF PROVISION TOWARDS LONG SERVICE AWARDS, POST RETIREM ENT MEDICAL BENEFITS, TA ON RETIREMENT AND SOCIAL SECUR ITY BENEFITS WHICH ARE AS UNDER: S.N. NATURE OF PROVISION DEBITED TO P & L ACCOUNT (RS.) ACTUAL PAYMENT (RS.) A LONG SERVICE AWARD 30.94 LACS 15.50 LACS B POST RETIREMENT MEDICAL BENEFIT 155.12 LACS 38.16 LACSS C TA ON RETIREMENT 10.09 LACS 1.04 LACS D SOCIAL SECURITY BENEFITS 175.64 LACS 122.63 LACS TOTAL 371.79 LACS 177.33 LACS 4.2.1 THE ASSESSING OFFICER HELD THE LIABILITY AS NOT ASCERTAINED, AND DISALLOWED THE PROVISIONS TO THE E XTENT OF RS.194.46 LACS. 4.2.2 LD. CIT(A) HAS DEALT WITH THE ISSUE AT PAGE 52, PARA 7.4 OF HIS ORDER. LD. CIT(A) RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CALCUTTA CO . LTD. VS CIT 37 ITR 01, METAL BLOCK CO. OF INDIA LTD. VS THEIR WORKMEN REPORTED IN 73 ITR 53 AND BHARAT EARTHMOVER S LTD. VS CIT 245 ITR 428, WHEREIN IT HAS BEEN HELD T HAT THE 15 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 LIABILITY BEING DETERMINED ONE, THOUGH TO BE DISCHA RGED IN FUTURE, DID NOT MAKE IT A CONTINGENT LIABILITY AND IS ALLOWABLE. HE FURTHER NOTED THAT THE PRINCIPLE ENU NCIATED BY HON'BLE SUPREME COURT IN THE ABOVE DECISION, HAS BEEN FOLLOWED BY HON'BLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT VS INSILCO LT. 179 TAXMAN 55, WHEREIN IT HAS BEEN HELD THAT THE LIABILITIES PROVIDED FOR LONG SERVICE AWARD PAYABLE IN FUTURE, ARE ALLOWABLE LIABILITIES. NOW THE DEPARTMENT IS IN APPEAL. 4.2.3 ON THE CONTRARY, LD. D.R. RELIED UPON THE OR DER PASSED BY LD. ASSESSING OFFICER. 4.2.4 WE HAVE PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW AND THE SUBMISSIONS ADVANCED BY B OTH THE PARTIES. IT IS OBSERVED THAT COORDINATE BENCH OF THIS TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASS ESSEE AND AGAINST THE DEPARTMENT IN ASSESSEES OWN CASE F OR ASSESSMENT YEAR 2009-10, IN I.T.A.NO. 4076/DEL/2013 VIDE ORDER DATED 20.05.2015 AT PAGE NO.4 IN PARA 8, AS UNDER: 8. GROUND NO.3 IS AGAINST DELETION OF DISALLOWANCE MADE BY THE AO OF RS.7,79,00,000 BEING PROVISION FO R POST RETIREMENT BENEFITS. 8.1. THE FIRST APPELLATE AUTHORITY AT PAGE 49 PARA 7.1 TO 7.6 HAS DEALT WITH THIS ISSUE. THE HONBLE SUPREME COURT IN THE CASE O F BHARAT EARTH MOVERS VS. CIT (SC) 245 ITR 428 HAS HELD THAT LIABILITY BEING A DETERMINED ONE, THOUGH TO BE DISCHARGED IN FUTURE, DID NOT MAKE IT A CONTINGE NT LIABILITY AND IT IS AN ALLOWABLE LIABILITY. THE FIR ST APPELLATE AUTHORITY IN THIS CASE HAS FOLLOWED THE 16 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 JUDGEMENT OF HONBLE SUPREME COURT. THUS WE FIND NO REASON TO INTERFERE WITH THE SAME. GROUND NO.3 IS DISMISSED. 4.2.5 RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GROUND OF APPEAL RAISED BY THE REVENUE. 4.3 GROUNDS NO.6-8 OF THE REVENUES APPEAL ARE IN RESPECT OF DEMURRAGE AND WHARFAGE CHARGES PAID TO I NDIAN RAILWAYS. RESPECTFULLY FOLLOWING THE DECISION OF T HIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 IN I.T.A.NO. 4076/DEL/2013, DATED 20.05.201 5, WE DISMISS THESE GROUNDS OF REVENUES APPEAL. 4.4 GROUNDS NO.9-10 ARE GENERAL IN NATURE AND HENCE WE ARE NOT INCLINED TO ADJUDICATE THE SAME. 4.4.1 IN THE RESULT, APPEAL FILED BY THE REVENUE F OR THE ASSESSMENT YEAR 2007-08 STANDS DISMISSED. B. ASSESSEES APPEALS: 5. LD. A.R. SUBMITTED THAT THE ONLY ISSUE RAISED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2006-07 TO 2009-10 RELATE TO THE DISALLOWANCE ON ACCOUNT OF VALUATION OF SLOW MOVING, NON MOVING AND OBSOLETE STORES. LD. A.O. D URING THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESS EE HAS REDUCED THE PROFITS DUE TO VALUATION OF SLOW MO VING, NON MOVING AND OBSOLETE STORES AND SPARES. ASSESSI NG OFFICER OBSERVED THAT THERE WAS DUE MODIFICATION IN ACCOUNTING POLICY. HE THUS DISALLOWED THE VALUATIO N ARRIVED AT BY THE ASSESSEE FOR ALL THE ASSESSMENT Y EARS UNDER CONSIDERATION. 17 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 5.1 AGGRIEVED BY THE ORDER OF THE LD. A.O., THE ASS ESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHOCONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER. 5.2 BEFORE US, LD. A.R. SUBMITTED THAT THE ASSESSE E IS A PUBLIC SECTOR UNDERTAKING ENGAGED IN THE BUSINESS O F MANUFACTURING OF FERTILIZERS AND OTHER RELATED PROD UCTS. HE SUBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING ACCOUNTING STANDARD NOTIFIED BY INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA (ICAI) IN ACCORDANCE WITH THE PROVISIONS OF SECTION 211(3A) OF THE COMPANYS ACT CONSISTENTLY. LD. A.R. SUBMITTED THAT TILL THE CUR RENT YEAR, THE ASSESSEE HAD ADOPTED AS-2, THE SAME WAS YET TO BE FULLY IMPLEMENTED, IN SO FAR AS VALUATION OF NON MO VING/ SLOW MOVING / OBSOLETE STORES AND SPARE PARTS WERE CONCERNED. LD. A.R. SUBMITTED THAT THE ACCOUNT OF ASSESSEE WAS AUDITED BY THE STATUTORY AUDITORS AS W ELL AS CONTROLLER AND AUDITOR GENERAL (CAG). HE SUBMITTED THAT DURING THE YEAR 2004-05, AUDITORS HAD MADE THE FOLL OWING OBSERVATIONS IN THE AUDIT REPORT FOR NON FOLLOWING OF ACCOUNTING STANDARD-2 (AS-2) IN RESPECT OF STORES A ND SPARE PARTS INVENTORY WHICH IS AS UNDER: 2(A) FURTHER TO OUR COMMENTS IN THE ANNEXURE REFERRED TO IN PARAGRAPH 1 ABOVE, WE REPORT THAT: PROVISIONS FOR DIMINUTION IN VALUE OF OBSOLETE/SURPLUS/NON MOVING ITEMS OF STORES AND SPARES HAVE BEEN AM DE BASED ON MANAGEMENT ASSESSMENT. PENDING FINAL DETAILED ANALYSIS OF THE SE STOCKS, CONSEQUENTIAL IMPART THEREOF, IF ANY, ON TH E ACCOUNTS REMAINS UNASCERTAINED. 18 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 5.3 LD. A.R. SUBMITTED THAT TO HAVE AN AUTHENTIC OP INION REGARDING FAIR VALUATION OF INVENTORY, THE ASSESSEE APPROACHED VARIOUS VALUATION OFFICERS / INDEPENDENT ENGINEER VALUERS, FOR STUDYING THE NATURE OF PLANT AND MACHINERY AND ASSOCIATED NON MOVING STOCKS / STORES AND SPARE PARTS HELD IN INVENTORY, TO ASSESS AND DETERM INE THE VALUE OF INVENTORY AS PER THE REQUIREMENT OF AS-2 I N RESPECT OF THE PLANTS SITUATED AT NANGAL, BHATINDA, PANIPAT AND VIJAYPUR PLANTS 1 & 2. LD. A.R. SUBMIT TED THAT THE VALUER /INDEPENDENT ENGINEER VALUERS SUBMI TTED THEIR REPORTS, WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 99-128 FOR ALL THE ASSESSMENT YEARS UNDER CONSIDERATION. 5.4 LD. A.R. SUBMITTED THAT IF A PARTICULAR ITEM O F STORES / SPARE PART IS NOT FOUND TO BE USEFUL FOR SEVERAL YEARS (IN THE PRESENT CASE OF ASSESSEE, FOR OVER 5 YEARS CONS IDERING THE TECHNICAL ASPECT OF PLANT AND MACHINERY) OR ITE MS SPECIFICALLY DETERMINED SURPLUS/ OBSOLETE SUCH STOR ES / SPARE PARTS CANNOT BE CARRIED FOR CONSUMPTION IN LI EU OF NON USABILITY OF THE COMPANY AND CARRYING HIGHER VA LUE OF SUCH INVENTORY, BECOME AN UNNECESSARY BURDEN. HE FURTHER SUBMITTED THAT THE VALUATION THUS CONFINED FOR DETERMINATION OF REALIZABLE VALUE OF SUCH STORES / SPARE PARTS, WHICH HAVE NOT MOVED FOR MORE THAN 5 YEARS, WERE IDENTIFIED AS SURPLUS / OBSOLETE. 5.5 LD. A.R. SUBMITTED THAT THESE REPORTS WERE FILE D BEFORE THE LD. A.O. AS WELL AS LD. CIT(A). HE RELI ED UPON 19 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F CHAINROOP SAMPATRAM VS CIT (1953) 24 ITR 481 (S.C.) AND HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS INDIAN RARE EARTHS LTD. (2015) 375 ITR 276, CIT VS CORPORATION BANK LTD. (1988) 174 ITR 616 (KAR.), B HARAT HEAVY ELECTRICALS LTD. VS DCIT (2005) (7) TMI-299-I TAT- DEL. 6. ON THE CONTRARY, LD. D.R. SUBMITTED THAT THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION AND HA S NOT REFLECTED THE TRUE PROFITS. HE SUBMITTED THAT THE ASSESSEE HAS NOT FOLLOWED THE MANDATE OF SECTION 14 5A OF THE ACT, WHICH STARTS WITH A NON OBSTINATE CLAUSE A ND OVERRIDE THE OTHER PROVISIONS OF THE ACT. HE FURTH ER SUBMITTED THAT THE ASSESSEES CASE IS NOT SIMILAR T O THE FACTS OF THE CASE OF M/S. INDIAN RARE EARTH LTD. (S UPRA) AS WELL AS CORPORATION BANK LTD (SUPRA), THE DECISIONS WHICH HAVE BEEN RELIED UPON BY THE ASSESSEE. LD. D.R. SUBMITTED THAT THERE IS NO DETERIORATION IN THE SPA RES / STORES IN ASSESSEES CASE AND IF THIS PRINCIPLE AS HELD IN THE CASE OF INDIAN RARE EARTH LTD. (SUPRA) IS APPLI ED, THE CLAIM OF ASSESSEE CANNOT BE ALLOWED. 6.1 LD. D.R. SUBMITTED THAT IN THE CASE OF CORPORAT ION BANK LTD. (SUPRA), THE ISSUE FOR CONSIDERATION WAS AS TO WHETHER THE REAL VALUE / MARKET VALUE NEEDS TO BE A DOPTED BY ARRIVING AT THE VALUATION OF STOCKS IN TRADE. H E FURTHER SUBMITTED THAT ASSESSEE HAS DEVALUED THE SPARES / S TORES WITHOUT ANY BASIS, AND THUS HAS DEVIATED FROM THE 20 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE ASS ESSEE IN PREVIOUS YEARS. 7. IN THE REJOINDER OF THE ABOVE SUBMISSIONS, LD. A .R. SUBMITTED THAT THE ASSESSEE CHANGED THE METHOD OF ACCOUNTING DUE TO THE OBSERVATIONS MADE BY CAG IN I TS REPORT FOR ASSESSMENT YEAR 2004-05 AS UNDER: 2(A) FURTHER TO OUR COMMENTS IN THE ANNEXURE REFERRED TO IN PARAGRAPH 1 ABOVE, WE REPORT THAT: PROVISIONS FOR DIMINUTION IN VALUE OF OBSOLETE/SURPLUS/NON MOVING ITEMS OF STORES AND SPARES HAVE BEEN AM DE BASED ON MANAGEMENT ASSESSMENT. PENDING FINAL DETAILED ANALYSIS OF THE SE STOCKS, CONSEQUENTIAL IMPART THEREOF, IF ANY, ON TH E ACCOUNTS REMAINS UNASCERTAINED. 8. LD. A.R. SUBMITTED THAT THE CHANGE IN THE VALUAT ION WAS NEEDED AS PER THE DIRECTION OF CAG WHICH IS SUPPORTED BY THE INDIVIDUAL REPORTS PLACED IN THE P APER BOOKS FOR RELEVANT ASSESSMENT YEARS. THIS CHANGE W AS BONA-FIDE, AND IT WAS FOLLOWED CONSISTENTLY IN THE SUCCEEDING YEARS. 9. WE HAVE PERUSED ALL THE RELEVANT MATERIAL REFERR ED TO BY BOTH THE PARTIES AND THE ORDERS RELIED UPON BY T HEM. 9.1. ON PERUSAL AND CAREFUL CONSIDERATION OF THE MA TTER, WE ARE OF THE VIEW THAT, HAVING REGARD TO THE PROCE DURE OF VALUATION ADOPTED BY THE ASSESSEE, GENUINENESS AND BONA FIDE OF THE CLAIM CANNOT BE DOUBTED. THE OBSERVATI ON OF CAG REPRODUCED AT PAGE 96 OF THE PAPER BOOK REFERRE D TO HEREINABOVE, INDICATED THAT THE ASSESSEE HAD CHANGE D THE METHOD OF VALUATION FROM ASSESSMENT YEAR 2006-07, 21 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 WHICH WAS BASED ON THE VALUATION REPORT SUBMITTED B Y M/S. K. D. KOHLI ASSOCIATE, NEW DELHI, AN INDEPENDE NT ENGINEERING VALUER, ENGAGED BY THE COMPANY TO CARRY OUT THE VALUATION OF INVENTORY OF STORES AND SPARES IN THE BACKGROUND OF AS-2 RELATED TO VALUATION OF INVENTO RY, WHICH HAS BEEN ISSUED BY ICAI, NEW DELHI. 9.2. IN THE PRESENT CASE, THE ASSESSEE HAD TO ADHER E TO AS-2 DUE TO THE REMARKS BY CAG IN THE ANNUAL REPORT FOR IMMEDIATE PREVIOUS YEAR I.E. F.Y. 2004-05. THIS CHA NGE WAS DONE ON THE BASIS OF THE REMARKS BY AUDITORS WH ICH WAS SUPPORTED BY OPINION OF HIGHLY REPUTED ENGINEER VALUER, AFTER PROPER ON THE SPOT STUDY OF NATURE OF PLANT & MACHINERY AND ASSOCIATED NON MOVING STOCKS OF STORE S AND SPARES HELD IN INVENTORY. THUS, THERE WAS NO MA LA FIDE IN VALUING THE SLOW MOVING/SURPLUS/OBSOLETE ST ORES AND SPARE PARTS AS PER THE VALUATION REPORT RECEIVE D FROM ENGINEERING VALUER. 9.3. IN THE INSTANT CASE, THE VALUATION OF SLOW-MOV ING/ SURPLUS / OBSOLETE STORES, SPARES WAS MADE ON THE B ASIS OF THE REPORT OF THE APPROVED VALUER, AND IT CAN BE SAID THAT THE AMOUNT WRITTEN OFF WAS NOT AN ARBITRARY ON E AND CLAIM OF LOSS ON THIS ACCOUNT WAS ACTUAL. ASSESSEE HAS FOLLOWED THIS POLICY CONSISTENTLY IN SUBSEQUENT YEA RS. IT IS AN ESTABLISHED PRINCIPLE IN CONTEXT OF SECTION 145, THAT 'REGULAR DOES NOT MEAN PERMANENT FOR SYSTEM OF ACCOUNTING. THE STATUTE STIPULATES THAT THE INCOME SHALL BE COMPUTED ON THE SYSTEM OF ACCOUNTING 'REGULARLY' 22 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 FOLLOWED BY THE ASSESSEE. HOWEVER, THE PROVISION U/ S.145 CANNOT BE INTERPRETED TO MEAN THAT ONCE A SYSTEM OF ACCOUNTING IS ADOPTED, IT CAN NEVER BE CHANGED. IT HAS NOT BEEN POINTED OUT WITH REFERENCE TO ANY PROVISION TH AT A CHANGE IS IMPERMISSIBLE OR BARRED EVEN WHEN IT IS WARRANTED BY AN EXISTING SITUATION. 10. AS RIGHTLY POINTED OUT BY THE LD. A.R., THE ACC OUNT OF THE COMPANY IS SUBJECTED TO AUDIT NOT ONLY BY THE STATUTORY AUDITORS BUT ALSO BY CAG. IN THESE CIRCUMSTANCES, THE BONA FIDES OF PROCEDURE ADOPTED FOR VALUATION OR GENUINENESS OF CLAIM CANNOT BE DOUBTED . EVEN OTHERWISE, WHEN THE STOCK OF MATERIAL IS ACTUA LLY FOUND TO BE DEAD OR NON USABLE OR OBSOLETE AND NOTH ING CAN BE REALIZED BECAUSE OF NO DEMAND, ITS VALUE FAL LS DRASTICALLY. THE ASSESSEE HAS CHANGED THE METHOD O F VALUATION OF SUCH STOCK CONSCIOUSLY AND BONA-FIDELY , DUE TO BUSINESS NECESSITY AND THIS METHOD WAS CONTINUOU SLY FOLLOWED FROM THE RELEVANT ASSESSMENT YEARS ONWARDS . 10.1 ON PERUSAL OF RELEVANT FACTS AND CIRCUMSTANCES AS DETAILED ABOVE, WE ARE OF THE VIEW THAT THE CHANGE EFFECTED BY THE ASSESSEE WAS AIMED AT OBTAINING CORRECT BUSI NESS PROFITS AS PER THE RECOMMENDATIONS OF EVALUATION RE PORT SUBMITTED BY THE CAG AND ENGINEER / VALUER RESPECTI VELY. IT IS NOBODYS CASE THAT THE ASSESSEE HAS NOT ACCUM ULATED SUCH STOCKS IN THE PAST. UNDOUBTEDLY, SUCH STOCK W ENT ON LOSING ITS VALUE FOR THE PURPOSE OF ASSESSEES B USINESS, THEREBY DETERIORATING ASSESSEES PROFITS YEAR IN AN D YEAR 23 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 OUT. IT WAS IN SUCH A SCENARIO THAT A DECISION WAS TAKEN TO INVESTIGATE THE ENTIRE MATTER BY APPOINTING A CO MMITTEE OF EXPERTS ON WHOSE RECOMMENDATIONS, BASED ON PROPE R STUDY OF MARKET CONDITION, THE ASSESSEE COMPANY RED UCED THE VALUE OF STOCKS AND THIS VALUE HAS BEEN CARRIED FORWARD TO THE NEXT YEAR AND ASSESSED AS SUCH. HON' BLE BOMBAY HIGH COURT IN THE CASE OF CIT VSS M/S. INDIA RARE EARTHS LTD(SUPRA), IN PARA 7-9 HAS HELD AS UND ER: 7. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES WHO HAVE TAKEN US THROUGH THE ORDERS OF THE ASSESSING OFFICER, THE COMMISSIONER AND THE TRIBUNA L. MR. SURESH KUMAR, LEARNED COUNSEL FOR THE REVENUE, RELIED UPON THE JUDGMENT IN THE CASE OF HEREDILLA CHEMICALS, WHICH IS ALREADY DIFFERENTIATED ON FACTS . HAVING CONSIDERED THE FACTS AND THE QUESTIONS PROPOSED AS SUBSTANTIAL QUESTIONS OF LAW, WE FIND T HAT SECTION 145A OF THE INCOME TAX ACT, 1961 READS AS UNDER: '145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 145,- (A) THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOM E CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE- (I) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE; AND (II) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALL Y PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITION AS ON THE D ATE OF VALUATION. EXPLANATION.- FOR THE PURPOSES OF THIS SECTION*, AN Y TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) UN DER ANY LAW FOR THE TIME BEING IN FORCE, SHALL INCLUDE ALL 24 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 SUCH PAYMENT NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT; (B) INTEREST RECEIVED BY AN ASSESSEE ON COMPENSATIO N OR ON ENHANCED COMPENSATION, AS THE CASE MAY BE, SHALL BE DEEMED TO BE THE INCOME OF THE YEAR IN WHI CH IT IS RECEIVED.' 8. IN OUR VIEW, THE OBJECTION RAISED BY THE ASSESSE E ON ACCOUNT OF THE METHOD OF ACCOUNTING IS NOT JUSTIFIA BLE, INASMUCH AS SECTION 145A DEALS WITH THE VALUATION O F PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON' AND IT REQUIRES THE ASSESSEE TO FOLLOW THE METHOD REGULARLY EMPLOYED BY THE ASSESSEE. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE METHOD OF ACCOU NTING HAD BEEN ALTERED WITH EFFECT FROM THE ASSESSMENT YEAR 2001-02. HOWEVER, THE FACTS REVEAL THAT THE WR ITE OFF WAS ON ACCOUNT OF DETERIORATION IN THE CONDITIO N OF THE NON-MOVING STORES SINCE THE ASSESSEE'S PLANTS WERE LOCATED IN REMOTE PLACES AND NEAR THE SEA. THE NON-MOVING STORES AND SPARES WERE CORRODED OVER A PERIOD OF TIME DUE TO WEAR AND TEAR. THIS METHOD OF ACCOUNTING HAVING BEEN ADOPTED IN THE EARLIER YEARS , THERE WAS NO REASON FOR THE ASSESSING OFFICER TO DISALLOW THE SAME ON THE GROUND THAT THE ACCOUNTING METHOD HAD CHANGED. 9. ACCORDINGLY, WE ARE OF THE VIEW THAT THE JUDGMEN T OF THIS COURT IN THE CASE OF HEREDILLA CHEMICALS WI LL NOT AFFECT THE WRITE OFF BY THE ASSESSEE IN THE PRE SENT CASE BEING DISTINGUISHABLE ON FACTS. IT IS NOT MERE LY ON THE BASIS OF OBSOLESCENCE OF ANY PARTICULAR EQUIPME NT THAT THE ASSESSEE HAS CLAIMED WRITE OFF OF THE SLOW/NON-MOVING ITEMS. THE WRITE OFF CLAIMED IS ESSENTIALLY ON THE BASIS OF DETERIORATION OF VARIOU S MATERIALS, INCLUDING RAW-MATERIALS AND IN PARTICULA R SLOW MOVING ITEMS OF MACHINERY. IN THE CIRCUMSTANCE S, WE ARE OF THE VIEW, THAT NO SUBSTANTIAL QUESTION OF LAW 25 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 ARISES IN THESE APPEALS AND THE SAME ARE ACCORDINGL Y DISMISSED. THERE WILL BE NO ORDER AS TO COSTS. 10.2 RESPECTFULLY FOLLOWING THE SAME, WE ARE OF TH E CONSIDERED OPINION THAT ASSESSEES CLAIM REQUIRES T O BE ACCEPTED. 10.3 ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESS EE IN RESPECT OF VALUATION OF SPARES/ NON MOVING / SLO W MOVING / OBSOLETE PARTS / SPARES, STAND ALLOWED IN RESPECT OF ALL THE ASSESSMENT YEARS. HENCE, APPEALS FILED BY THE ASSESSEE FOR ALL THE ASSESSMENT YEARS ARE ALLOWED. 11. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE DISMISSED AND THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED FOR ALL THE ASSESSMENT YEARS. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2016. SD./- SD./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 31.05.2016/SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) 26 I.T.A.NOS.3947,3048,3949/DEL/2013 I.T.A.NOS.3517-3520/DEL/2013 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 31/5/16 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER