National Fertilizers Ltd, New Delhi V. DCIT, New Delhi

ITA 479/DEL/2009

• Counselvise Citation: 47920114 RSA 2009
• Duration Of Justice: 4 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 05-12-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 09-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GUNJAN P RASAD
• Assessee Lawyers: VED JAIN F
• Keywords: Depreciation; Cost of acquisition

Judgement Text

ITA NO.479/DEL/2009 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : E : NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE VICE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO.479/DEL/2009 ASSESSMENT YEAR : 2003-04 NATIONAL FERTILIZERS LTD., SCOPE COMPLEX CORE III, 7, INSTITUTIONAL AREA, LODHI ROAD, NEW DELHI. PAN : AAACN0189N VS. DCIT, CIRCLE 13 (1), NEW DELHI. (APPELLANT) ( RESPONDENT ) ASSESSEE BY : SHRI VED JAIN, F CA DEPARTMENT BY : S HRI GUNJAN PRASAD, CIT, DR ORDER PER A.D. JAIN, JUDICIAL MEMBER: THIS IS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2003-04 AGAINST THE ORDER DATED 24.11.2008, PASSED BY THE CIT (A)-XVI, NE W DELHI, CONTENDING THAT THE LD. CIT (A) HAS ERRED IN DISALLOWING AN AMOU NT OF ` 24,24,00,000/- ON ACCOUNT OF SERVICEABLE SPARE PARTS AND STAND BY ASSEMBLIE S. 2. THE ASSESSING OFFICER MADE THE ADDITION ON ACCOUNT O F STORES AND SPARES ON THE BASIS OF A NOTE GIVEN IN THE BALANCE SHEE T OF THE ASSESSEE, ON THE GROUND THAT THE AMOUNT PERTAINED TO EARLIER YEA RS. THE LD. CIT (A) CONFIRMED THE ADDITION BY VIRTUE OF THE IMPUGNED OR DER. ITA NO.479/DEL/2009 2 3. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS CONTEND ED THAT THE LD. CIT (A) HAS ERRED IN CONFIRMING THE ADDITION WRONGLY MADE ON THE BASIS OF THE NOTE GIVEN IN THE BALANCE SHEET OF THE ASSESSEE. IT HAS B EEN POINTED OUT THAT THIS NOTE CONTAINED IN THE BALANCE SHEET APPEARS AT P AGE 62 OF THE ASSESSEES PAPER BOOK. AS PER THIS NOTE, THE ASSESSEE COMPANY CHANGED ITS ACCOUNTING POLICY ON ACCOUNTING FOR STANDBY ASSEMBLIE S/INSURANCE AND OTHER SPECIFIC SPARES, THE USE OF WHICH WAS IRREGULAR AND WHIC H COULD BE USED ONLY IN CONNECTION WITH AN ITEM OF FIXED ASSETS AND THE SAME WERE NOT CAPITALIZED IN LIEU OF AS-10; THE RE-CONDITIONED ASSEMBLIES, SPARE S, ETC., WERE CAPITALIZED AT THE CARRYING VALUE, I.E., RE-CONDITIONING COST, SI NCE THE ASCERTAINMENT OF THE ACQUISITION COST THEREOF WAS NOT FEASIBLE; THE DEP RECIATION ON SUCH ITEMS WAS PROVIDED FOR DURING THE YEAR FROM THE DATE OF AC QUISITION OR THE DATE OF RE-CONDITIONING, WHICHEVER WAS KNOWN; SUCH ASSETS ARE DE PRECIATED OVER THE TECHNICAL USEFUL LIFE OF THE PLANT AS PER THE ASSESSMENT OF THE MANAGEMENT; HOWEVER, THE IMPACT ON THIS WAS SIGNIFICANT; AND CONSEQ UENT TO SUCH CHANGE IN ACCOUNTING POLICY, THE GROSS BLOCK OF FIXED ASSETS WA S HIGHER BY THE CARRYING VALUE OF ` 136.07 CRORES, THE INVENTORY WAS LOWER BY ` 158.31 CRORES, THE DEPRECIATION WAS HIGHER BY ` 56.49 CRORES, INCLUDING ` 49.63 CRORES FOR EARLIER YEARS, REPAIR AND MAINTENANCE WAS HIGHER BY 22.24 CRORES AND THE NET PROFIT WAS LOWER BY ` 78.73 CRORES. IT H AS BEEN CONTENDED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE HAD BEEN CARRYING STORES AND SPARES ACQUISITION UNDER THE HEAD STORES AND SPARES, AS PART OF THE INVENTORY; THAT THE CHANGE IN THE ACCOUNTING POLICY WAS NECESSITATED BY THE REQUIREMENT OF THE COMPANIES ACT, 1956, WHEREUNDER T HE ACCOUNTING STANDARDS NOTIFIED BY THE INSTITUTE OF CHARTERED ACCO UNTANTS OF INDIA ARE MANDATORILY TO BE FOLLOWED BY COMPANIES IN VIEW OF T HE PROVISIONS OF SECTION 2 (11)(C) AND IT WAS AS SUCH, THAT THE STORES AND SPARE S TO THE EXTENT OF ` 158.31 CRORES WERE RE-CLASSIFIED AND THE VALUE OF THES E STORES AND SPARES AT THE TIME OF CLASSIFICATION WAS WORKED OUT AT ` 136.07 CRORES AND THE DIFFERENCE OF ` 22.24 CRORES OF THIS VALUE OF THE STOR ES AND SPARES WAS CHARGED TO THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE COMP ANY; THAT ITA NO.479/DEL/2009 3 THEREFORE, THIS AMOUNT OF ` 22.24 CRORES WAS THE AMOUN T CONSEQUENT TO THE CHANGE IN THE VALUATION OF THE STORES AND SPARES WHICH, AS PER THE METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE AND AS ALSO AL LOWED UNDER THE INCOME-TAX ACT, HAS TO BE COST OR REALIZABLE VALUE, WHICHEVER IS LOWER AS ON THE DATE OF THE DRAWING OF THE BALANCE SHEET; THAT T HIS CHANGE IS JUSTIFIED LIKE IN THE CASE WHERE THE INVENTORY HELD BY THE COMPANY IS VALUED AS ON THE LAST DATE AND IF ON THE LAST DATE, THE VALUATION THEREOF IS LESSER THAN THE COST, THE LOWER VALUE WILL BE TAKEN WHILE PREPARING THE PROFI T & LOSS ACCOUNT; THAT AS SUCH, THIS DOES NOT REPRESENT THE EXPENDITURE OF EARLIE R YEAR AND IT IS THE AMOUNT CONSEQUENT TO THE CHANGE IN THE VALUE OF STORE S AND SPARES WHICH HAS TO BE VALUED AT COST OR REALIZABLE VALUE, WHICHEV ER IS LOWER; THAT SO, THIS IS AN ALLOWABLE EXPENDITURE; AND THAT IN THIS LIGHT, NEITHER OF THE AUTHORITIES BELOW HAS BEEN ABLE TO APPRECIATE THE NOTE GIVEN IN THE BALANCE SHEET. 4. THE LD. DR, ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER, CONTENDING THAT THE NOTE NO.9 CONTA INED IN THE BALANCE SHEET OF THE ASSESSEE (APB 62) IS SELF-EXPLANATORY AND I T WAS ON THE BASIS THEREOF THAT THE ADDITION WAS CORRECTLY MADE AND COR RECTLY UPHELD BY THE LD. CIT (A). 5. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MAT ERIAL ON RECORD. NOTE NO.9 TO THE ASSESSEES BALANCE SHEET (APB 62) READS AS FOLLOWS:- 9. THE COMPANY HAS CHANGED THE ACCOUNTING POLICY ON ACCOUNTING FOR STANDBY ASSEMBLIES/INSURANCE AND OTHER SPECIFIC S PARES THE USE OF WHICH IS IRREGULAR AND CAN BE USED ONLY IN CONNECTIO N WITH AN ITEM OF FIXED ASSETS AND THE SAME ARE CAPITALIZED IN LINE WITH THE ACCOUNTING STANDARD-10. THE RECONDITIONED ASSEMBLIES, SPARES, ET C. ARE CAPITALIZED AT THE CARRYING VALUE I.E., RECONDITIONING COST SINCE TH E ASCERTAINMENT OF ACQUISITION COST IS NOT FEASIBLE. THE DEPRECIATION ON SUCH ITEMS IS PROVIDED FOR DURING THE YEAR FROM THE DATE OF ACQUISITI ON OR THE DATE OF RECONDITIONING WHICHEVER IS KNOWN. SUCH ASSETS ARE DE PRECIATED OVER THE TECHNICAL USEFUL LIFE OF THE PLANT AS PER THE MANAG EMENT ASSESSMENT. HOWEVER, IMPACT ON THIS IS SIGNIFICANT. CONSEQUENT TO SUCH CHANGE IN ACCOUNTING POLICY, THE GRO SS BLOCK OF FIXED ASSETS IS HIGHER BY THE CARRYING VALUE OF RS.13 6.07 CRORES, INVENTORY IS LOWER BY RS.158.31 CRORES, DEPRECIATION IS HIGHER BY ITA NO.479/DEL/2009 4 RS.56.49 CRORES (INCLUDING RS.49.63 CRORES FOR EARL IER YEARS), REPAIR & MAINTENANCE IS HIGHER BY RS.22.24 CRORES AND THE NET PROFIT IS LOWER BY RS.78.73 CRORES. 6. IT IS CLEAR THAT THE ASSESSEE WAS CARRYING STORES AND SPA RES ACQUISITION AS SUCH, AS PART OF ITS INVENTORY. IT WAS ONLY IN VIEW O F AS-10 THAT THE ASSESSEE COMPANY HAD TO MANDATORILY CHANGE ITS ACCOUNTI NG POLICY ON ACCOUNTING FOR STANDBY ASSEMBLIES/INSURANCE AND OTHER S PECIFIC SPARES, THE USE WHEREOF WAS IRREGULAR AND WHICH COULD BE USED ONLY IN CONNECTION WITH AN ITEM OF FIXED ASSETS. THESE WERE CAPITALIZED, IN KEE PING WITH THE PRESCRIBED AS-10 AT THE CARRYING VALUE OR RE-CONDITI ONING COST, THE ASCERTAINMENT OF THE ACQUISITION COST THEREOF BEING IN FEASIBLE. THERE CAN BE NO DISPUTE THAT THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ARE BINDING ON COMPAN IES IN VIEW OF THE PROVISIONS OF SECTION 211(3C) OF THE COMPANIES ACT. I T WAS AS SUCH, THAT THE STORES AND SPARES TO THE EXTENT OF ` 158.31 CRORES WERE RE-CLASSIFIED AND THE VALUE THEREOF WAS WORKED OUT AT ` 136.07 CRORES AT T HE TIME OF CLASSIFICATION. IT WAS THE DIFFERENCE OF ` 22.24 CRORES WHICH WAS CHA RGED BY THE ASSESSEE COMPANY TO THE PROFIT & LOSS ACCOUNT, AS STATED. IF T HIS IS SO, AS RIGHTLY CONTENDED, THIS DIFFERENCE OF ` 22.24 CRORES HAS COME ABOUT ONLY AS A CONSEQUENCE OF THE CHANGE OF VALUATION OF THE STORES A ND SPARES. SUCH VALUATION, ACCORDING TO THE METHOD OF ACCOUNTING BE ING FOLLOWED BY THE ASSESSEE, AS ALSO ALLOWED UNDER THE ACT, HAS TO BE AT COST OR REALIZABLE VALUE, WHICHEVER IS LOWER ON THE DATE OF THE BALANCE SHEET. NO DISPUTE STANDS RAISED IN THIS CONNECTION. 7. IN OUR CONSIDERED OPINION, THE MATTER NEEDS TO BE REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR RE-DETERMINATION ON VERIFICAT ION OF THE ABOVE POSITION. IF THE AVERMENTS OF THE ASSESSEE ARE FOUND TO BE CORRECT, THE AMOUNT OF ` 22.24 CRORES WOULD NOT REPRESENT THE EXPE NDITURE OF EARLIER YEARS. THEY WOULD HAVE TO BE VALUED AT COST OR REALI ZABLE VALUE, WHICHEVER IS ALLOWED ON THE DATE OF THE BALANCE SHEET AND WOULD H AVE TO BE TREATED AS AN ALLOWABLE EXPENDITURE. IT IS A SETTLED POSITION THAT I F THERE IS A BONA FIDE ITA NO.479/DEL/2009 5 CHANGE IN THE ACCOUNTING POLICY OF A COMPANY, THE P OLICY BEING A WIDELY ACCEPTED ACCOUNTING POLICY WHICH IS CONSISTENTLY FOLLO WED, THE EFFECT DUE TO SUCH CHANGE NEEDS MUST BE GIVEN, AS HELD IN CIT VS. DA LMIA CEMENT (BHARAT) LTD., 215 ITR 441 (DEL), CIT VS. MODI RUB BER LTD. (NO.2), 230 ITR 820 (DEL), MELMOULD CORPORATION VS. CIT, 202 ITR 7 89 (BOM) AND CIT TAMIL NADU VS. LARBORANDUM UNIVERSAL LTD., 149 ITR 759 (MA D) [UPHELD BY THE HONBLE SUPREME COURT IN SLP (C) NO.6410 OF 1985, COMMISSIONER OF INCOME-TAX VS. LARBORANDUM UNIVERSAL LTD., 187 ITR ( STAT.) 38]. ORDERED ACCORDINGLY. 8. IN THE RESULT, FOR STATISTICAL PURPOSES, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 17.01.201 4. SD/- SD/- [ G.D. AGRAWAL ] [A.D. JAIN] VICE PRESIDENT JUDICIAL MEMBER DATED, 17 TH JANUARY, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.