Appeal details
Counselvise Citation
506419914 RSA 2009
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 11 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
12-08-2011
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
E
Next Hearing Date
19-05-2011
Assessment Year
2005-2006
Appeal Filed On
04-09-2009
Judgement Text
ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, MUMBAI [CORAM : PRAMOD KUMAR AM AND V DURGA RAO, JM] ITA NO. 5064/MUM/2009 ASSESSMENT YEAR: 2005-06 EMERSONS PROCESS MANAGEMENT INDIA PVT LTD ...APPELLANT DELPHI B WING, 601 AND 602 CENTRAL AVENUE HIRANANDANI BUSINESS PARK POWAI, MUMBAI 400 076 [PAN : AAACF1167F] VS. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 3(1), MUMBAI RESPONDENT APPEARANCES: ARVIND SONDE, WITH ALOK SARDA, FOR THE ASSESSEE JAY KUMAR, VIJAY SHANKAR AND K RAVIKARAN, FOR THE REVENUE DATE OF HEARING: MAY 19 , 2011 DATE OF PRONOUNCEMENT: AUGUST 12 , 2011. O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CALLED I NTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 22 ND JANUARY 2009, IN THE MATTER OF ASSESSMENT UNDER SE CTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSM ENT YEAR 2005-06. 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE IS A GGRIEVED OF CIT (A)S CONFIRMING THE DISALLOWANCE OF RS 31,83,383 ON ACCOUNT OF OBSO LETE ITEM OF INVENTORY. ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 2 OF 7 3. VIDE OUR ORDER OF EVEN DATE, AND IN ASSESSEES O WN CASE FOR THE ASSESSMENT YEAR 2006-07, WE HAVE ALLOWED MATERIALLY SIMILAR GROUND OF APPEAL BY OBSERVING AS FOLLOWS: 3. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER N OTICED THAT THE ASSESSEE HAS WRITTEN OFF OBSOLETE INVENTORY AMOUNTING TO RS. 25,47,394, AND CLAIMED DEDUCTION, IN COMPUTATION OF BUSINESS INCOME, IN RE SPECT OF THIS WRITE OFF. IN RESPONSE TO ASSESSING OFFICERS REQUISITION FOR TH E NATURE AND DETAILS OF THIS WRITE OFF, IT WAS SUBMITTED BY THE ASSESSEE THAT, I N ACCORDANCE WITH THE ACCOUNTING POLICY REGULARLY FOLLOWED BY THE ASSESSE E, THE ASSESSEE REGULARLY IDENTIFIES AND WRITES OFF OBSOLETE INVENTORY. THE ITEMS SO IDENTIFIED INCLUDE THE INVENTORY ITEMS WHICH ARE LYING IN STOCK FOR MO RE THAN TWO YEARS, INVENTORY ITEMS WHICH HAVE NO PROBABLE OR FORECASTE D USE AND OBSOLESCENCE ARISING OUT OF TECHNOLOGICAL CHANGES. THE LIST O F ITEMS TO BE SO WRITTEN OFF, ACCORDING TO THE ASSESSEE, ARE PREPARED FOR EACH DI VISION AS ON A DATE AND FINALLY APPROVED BY THE DIVISIONAL CHIEF FINANCIAL OFFICER. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THESE OBSOLETE INVEN TORY ITEMS ARE KEPT SEPARATELY FOR DISPOSAL, AND, AFTER NECESSARY INTER NAL APPROVALS, DESTROYED OR SOLD AS SCRAP MATERIAL. IT WAS ALSO SUBMITTED TH AT THE SALE PROCEEDS AS SCRAP MATERIAL IS ACCOUNTED FOR AS AND WHEN THE SAM E IS REALIZED. THE ASSESSING OFFICER WAS NOT IMPRESSED BY ANY OF THESE SUBMISSIONS. HE WAS OF THE VIEW THAT THE ASSESSEE HAS FAILED TO ESTABLISH THAT ALL THESE ITEMS, WHICH HAVE BEEN CLASSIFIED AS OBSOLETE STOCK, WERE SLOW MOVING DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND THAT ADMITTEDLY THE VALUE OF THESE ITEMS IS NOT INCLUDED IN THE VALUE OF CLOSING STOCK. THE ASSESSING OFFICER ALSO REFERRED TO HONBLE BOMBAY H IGH COURTS JUDGMENT IN THE CASE OF CIT VS HEREDILLA CHEMICALS LIMITED (22 5 ITR 532) WHEREIN, ACCORDING TO THE ASSESSING OFFICER, IT HAS BEEN HEL D THAT THE MERE WRITE OFF OF AN ASSET IS NOT SUFFICIENT TO CLAIM THE DEDUCTIO N, AND THE DEDUCTION CAN ONLY BE CLAIMED IN THE YEAR IN WHICH THE ASSET IS A CTUALLY SOLD OFF. THE ASSESSING OFFICER FINALLY CONCLUDED THAT THE FACT REMAINS THAT THE VALUE OF THESE SO CALLED INVENTORIES IS NOT INCLUDED IN THE CLOSING STOCK. THE OBJECTION RAISED BY THE ASSESSEE BEFORE THE DISPUTE RESOLUTIO N PANEL WAS , RELYING UPON THE CIT(A)S ORDER FOR THE IMMEDIATELY PRECEDI NG YEAR, WAS SUMMARILY REJECTED. THE ASSESSEE IS AGGRIEVED OF T HE DISALLOWANCE SO MADE BY THE ASSESSING OFFICER AND IS IN APPEAL BEFORE US . 4. HAVING CONSIDERED THE RIVAL CONTENTION AND HAVIN G PERUSAL THE MATERIAL ON RECORD, WE ARE INCLINED TO UPHOLD THE G RIEVANCE OF THE ASSESSEE. IT IS ONLY ELEMENTARY, AND AS HAS BEEN RECOGNIZED B Y HONBLE SUPREME ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 3 OF 7 COURTS LANDMARK JUDGMENT IN THE CASE OF CHAINRUP SAMPATRAM VS CIT (24 ITR 481), AN ANTICIPATED LOSS WITH REGARD TO THE VA LUE OF STOCK IS TO BE PROVIDED FOR BY ADOPTING THE VALUE OF STOCK AT THE MARKET PRICE, WHEN THE SAME IS LOWER THAN THE COST PRICE. THEIR LORDSHIPS NOTED THAT WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCOUNT, ANTICI PATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BR OUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROF IT BEFORE ITS ACTUAL REALISATION. THIS PRINCIPLE, WHICH IS ALSO REFLEC TED BY ACCOUNTING THEORY OF CONSERVATISM, JUSTIFIES TAKING INTO ACCOUNT ALL REA SONABLY ANTICIPATED LOSSES WHILE COMPUTING THE BUSINESS PROFITS. IN T HE CASE BEFORE US, THE ITEMS OF STOCK ARE NOT MOVING FOR A PERIOD OF MORE THAN TWO YEARS, OR THE ITEMS HAVE BEEN FOUND TO BE USELESS OR OBSOLETE BY A SOUND INTERNAL CONTROL MECHANISM. THE SAME PARAMETERS FOR IDENTIFICATION A ND WRITE OFF OF OBSOLETE STOCKS HAVE BEEN USED FROM YEAR TO YEAR, A ND REVENUE AUTHORITIES DONOT EVEN QUESTION BONAFIDES OF THESE PARAMETERS. EVEN IN THE PRESENT YEAR, THE OBJECTIVITY OR BONAFIDES OF THIS MECHANIS M HAVE NOT BEEN CALLED INTO QUESTION BY THE REVENUE AUTHORITIES. AS WE FIN D FROM THE ADMITTED FACTS ON RECORD, THE ISSUE REALLY BEFORE US IS WHETHER TH E ASSESSEE WAS JUSTIFIED IN NOT INCLUDING THE VALUE OF THE SLOW MOVING INVENTOR Y, SO WRITTEN OFF, IN THE CLOSING STOCK. IT IS ONLY ELEMENTARY THAT CLOSING S TOCK IS TO BE VALUED AT THE COST PRICE OR MARKET PRICE WHICHEVER IS LESS. HOW EVER, IN THE PRESENT CASE AND PARTICULARLY BEARING IN MIND THE FACT THAT IN T HE PRESENT CASE THE INVENTORY ITEMS SO EXCLUDED FROM CLOSING STOCK ARE THE ITEMS WHICH HAVE NOT BEEN MOVING IN STOCK FOR OVER TWO YEARS, WHICH HAVE NO LIKELY USE AND WHICH HAVE BEEN APPROVED, THROUGH A SOUND INTERNAL CONTROL MECHANISM, FOR BEING DISCARDED, BY WAY OF DESTRUCTION OR SALE AS SCRAP, WE SEE JUSTIFICATION IN ADOPTING MARKET VALUE OF THESE ITE MS AS NIL. IN EFFECT, EVEN AS IT IS TERMED AS WRITE OFF OF OBSOLETE STOCK, IT IS ADOPTING NIL VALUE IN RESPECT OF MARKET VALUE OF THE ITEMS OF OBSOLETE ST OCK. WE HAVE ALSO NOTED THAT THIS IS A CONSISTENT POLICY FOLLOWED BY THE AS SESSEE, AND IT HAS BEEN ACCEPTED, RIGHTLY SO, BY THE REVENUE AUTHORITIES AL L ALONG. 5. THE OBJECTION OF THE ASSESSING OFFICER MAINLY R ESTS ON HIS RELIANCE ON HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF HEREDILLA CHEMICALS (SUPRA). THAT, HOWEVER, WAS A CASE IN WHICH ASSES SEE HAD WRITTEN OFF A PAN CATALYST BUT THERE WAS NO PARTICULAR JUSTIFICATION EVEN FOR THE WRITE OFF IN THAT PARTICULAR YEAR. THEIR LORDSHIPS HAVE OBSERVED THAT, IT IS THE CASE OF THE ASSESSEE THAT OVER THE COURSE OF YEARS THE PROD UCTION PROCESS OF THE CHEMICAL WAS CHANGED WHEREBY THE CATALYST PLANT WAS RENDERED SUPERFLUOUS AND AS A RESULT THEREOF, THE PAN CATALY ST BECAME OBSOLETE AND THAT MOREOVER, THE PRODUCTION PROCESS OF CHEMICAL IN THE FACTORY OF THE ASSESSEE DID NOT UNDERGO THE CHANGE IN THE YEAR UND ER CONSIDERATION. ADMITTEDLY AS SET OUT IN PARA 8 OF THE STATEMENT OF THE CASE, THE PRODUCTION PROCESS HAD BEEN CHANGED OVER THE COURSE OF THE YEA RS. IN SUCH A SITUATION THE ASSESSEE CANNOT CLAIM DEDUCTION FOR THE COST OF THE PAN CATALYST IN ANY ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 4 OF 7 YEAR HE LIKES. THERE WAS THUS NO GOOD REASON AS TO WHY THE DEDUCTION WAS CLAIMED OR WRITE OFF WAS MADE IN THAT PARTICULAR YE AR. IT WAS IN THIS BACKDROP THAT THEIR LORDSHIPS OBSERVED THAT MERELY BY WRITING OFF THE VALUE THEREOF, THE ASSESSEE IS NOT ENTITLED TO CLAI M DEDUCTION IN THE YEAR IN WHICH HE HAD WRITTEN OFF THE SAME. THERE MUST BE SO METHING POSITIVE TO SHOW THAT ITS VALUE BECAME NIL IN THE PARTICULAR YE AR TO JUSTIFY THE CLAIM FOR DEDUCTION IN THAT YEAR.. ONE MUST, HOWEVER, BEAR IN MIND THE FACT THAT THE OBSERVATIONS MADE BY THE JUDGES MUST BE CONSIDERED IN THE LIGHT OF THE FACTS WHICH WERE BEFORE THEM; THESE ARE NOT WORDS O F THE STATUTE. HONBLE SUPREME COURT HAS, IN THE CASE OF CIT VS SUN ENGINE ERING PVT LTD (198 ITR 297), BEAUTIFULLY SUMMED UP THE RIGHT APPROACH TO S UCH SITUATIONS BY LAYING DOWN THE PRINCIPLES LIKE THIS : IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OU T A WORD OR A SENTENCE FROM THE JUDGMENT OF THIS COURT, DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE 'LAW' DECLARED BY THIS COURT. THE JUDGMENT MUST BE READ A S A WHOLE AND THE OBSERVATIONS FROM THE JUDGMENT HAVE TO BE CONSIDERE D IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THIS COURT. A DECIS ION OF THIS COURT TAKES ITS COLOUR FROM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND, WHILE APPLYING THE DECISION TO A LATE R CASE, THE COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRUE PRINCIPLE LAID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK OUT WORDS OR SENTENCES FROM THE JUDGMENT, DIVORCED FROM THE CONTEXT OF THE QUESTION S UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASO NING. 6. IN THE LIGHT OF THE ABOVE OBSERVATIONS, WE DONOT THINK THAT OBSERVATIONS MADE BY HONBLE BOMBAY HIGH COURT IN T HE CASE OF HEREDILLA (SUPRA), WHICH WERE DEALING WITH A SITUATION IN WHI CH THE YEAR IN WHICH THE MACHINE HAD BECOME OBSOLETE COULD NOT BE IDENTIFIED ON THE BASIS OF ANY OBJECTIVE CRITERION AND IN WHICH ASSESSEE HAD NO JU STIFICATION FOR WRITE OFF OF THE OBSOLETE MACHINE IN THAT PARTICULAR YEAR, WO ULD APPLY TO THE FACT SITUATION THAT WE ARE NOW IN SEISIN OF . IN A LATER JUDGMENT, HONBLE BOMBAY HIGH COURT, IN THE CASE OF ALFA LAVAL INDIA LTD VS DCIT (186 ITR 390) [WHICH HAS BEEN APPROVED BY HONBLE SUPREME COURT IN THE J UDGMENT REPORTED AS CIT VS ALFA LAVAL INDIA LTD (295 ITR 451)], UPHELD THE ASSESSEES CLAIM OF WRITE OFF OF 90% OF SLOW MOVING STOCK IN AN EARLIER THAN THE YEAR IN WHICH SUCH OBSOLETE STOCK WAS ACTUALLY SOLD. THIS WRITE OFF WAS ALLOWED ON THE BASIS OF AUDITORS CERTIFICATION WHICH WAS NOT CHAL LENGED BY THE ASSESSING OFFICER. THIS JUDGMENT THUS CLEARLY INDICATE THAT T HE OBSERVATION MADE BY HONBLE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF HEREDILLA (SUPRA), TO THE EFFECT THAT DEDUCTION IS TO BE ALLOWED IN THE Y EAR IN WHICH ASSET IS ACTUALLY SOLD, IS NOT OF UNIVERSAL APPLICATION. IT WOULD, IN OUR HUMBLE ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 5 OF 7 UNDERSTANDING, ONLY APPLY IN A SITUATION IN WHICH T HERE IS NO SPECIFIC AND ACCEPTABLE EXPLANATION FOR WRITE OFF FOR A PARTICUL AR YEAR. IN ANY EVENT, WE HAVE TO READ THESE JUDGMENTS IN A HARMONIOUS MANNER , AND THAT IS WHAT A HARMONIOUS READING LEADS US TO. LETS NOT FORGET THA T RIGHT NOW WE ARE DEALING WITH A CASE IN WHICH WRITE OFF IS JUSTIFIED ON THE BASIS OF APPLICATION OF A UNIFORM CRITERION WHICH HAS BEEN APPLIED CONSI STENTLY OVER THE YEARS, IS DONE IN AN OBJECTIVE MANNER AND THE BONAFIDES OF THE MANNER OF PROVISIONING IS NOT CALLED INTO QUESTION AND THE SA ME HAS NOT BEEN OBJECTED TO BY THE REVENUE AUTHORITIES. THAT LEAVES US WI TH ONLY THE OBJECTION THAT SCRAP VALUE REALIZED IN THE CASE OF OBSOLETE STOCK HAS NOT BEEN ACCOUNTED FOR IN THE YEAR OF WRITE OFF, OR, IN OTHER WORDS, W RITE OFF IS CLAIMED ON GROSS BASIS AND NOT NET BASIS. THERE IS NOT MUCH MERIT IN THIS OBJECTION EITHER. IN MANY OF THE CASES, AS IS SUBMITTED BY THE ASSESSEE- AND NOT DISPUTED BY THE ASSESSING OFFICER, THE OBSOLETE INVENTORY IS TO BE DESTROYED AS SELLING THE SAME EVEN AS SCRAP WILL ADVERSELY AFFECT THE COMMER CIAL INTERESTS, AND THE VALUE REALIZED THUS MAY NOT BE SIGNIFICANT AT ALL, OR BE EVEN NEGATIVE VALUE. ONE OF THE FUNDAMENTAL ACCOUNTING PRINCIPLE IS OF M ATERIALITY, AND UNLESS THE SCRAP VALUE IS MATERIAL ENOUGH, IT IS NOT REAL LY NECESSARY TO ACCOUNT FOR THE SAME WHILE ACCOUNTING FOR WRITE OFF OF THE ASSE T. IN ANY EVENT, THESE REALIZATIONS HAVE BEEN ACCOUNTED FOR IN THE YEAR OF RECEIPT, AND IT IS NOBODYS CASE THAT SUCH REALIZATION VALUES COULD BE REASONABLY ESTIMATED OR WERE MATERIAL ENOUGH. IN VIEW OF THESE DISCUSSIONS, AND BEARING IN MIND ENTIRETY OF THE CASE AND PARTICULARLY PAST HISTORY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE 4. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY US IN ASSESSEES OWN CASE AND ON MATERIALLY IDEN TICAL FACTS. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE A ND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF RS 31,83,383. 5. GROUND NO.1 IS THUS ALLOWED. 6. IN THE SECOND GROUND OF APPEAL, THE ASSESSEE IS AGGRIEVED THAT THE ASSESSING OFFICER HAS NOT EXCLUDED RS 1,98,785 ,IN RESPECT OF DEPOSITS WRITTEN OFF IN EARLIER YEAR WHICH HAVE BEEN RECOVERED AND OFFERED TO TAX IN THI S YEAR, AS THE CLAIM FOR DEDUCTION HAS BEEN DISALLOWED IN THE YEAR OF WRITE OFF. 7. THE ISSUE IN DISPUTE IS ONLY CORRESPONDING EFFEC T OF DISALLOWANCE OF WRITE OFF OF ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 6 OF 7 DEPOSITS WHICH HAS SINCE REACHED FINALITY, BECAUSE IN THE PRESENT YEAR SOME OF THESE DEPOSITS WERE RECOVERED, AND, ACCORDINGLY, OFFERED TO TAX. HOWEVER, ONCE THE WRITE OFF ITSELF IS DISALLOWED, THIS INCOME CANNOT BE BROUGHT TO TAX EITHER. 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 9. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS M ATTER IS TO BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR FINDING OUT WHETHER TH E ASSESSEE IS INDEED SUBJECTED TO DOUBLE JEOPARDY INASMUCH AS, ON ONE HAND, WRITE OFF IS DISALLOWED, AND, ON THE OTHER HAND, AMOUNTS SUBSEQUENTLY RECOVERED HAVE BEEN OFFE RED TO, AND ACCEPTED FOR, TAXATION. IF SO, THE ASSESSING OFFICER SHALL EXCLUD E THE CORRESPONDING INCOME SUBSEQUENTLY OFFERED TO TAX, FROM INCOME OF THE ASS ESSE. WITH THESE DIRECTIONS, THE MATTER STANDS RESTORED TO THE FILE OF THE ASSESSING OFFICER. 10. GROUND NO. 2 IS THUS ALLOWED FOR STATISTICAL PU RPOSES. 11. IN THE RESULT, THE APPEAL IS ALLOWED. PRONOUNCE D IN THE OPEN COURT TODAY ON _12 TH DAY OF AUGUST, 2011. SD/- SD/- (V DURGA RAO ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER MUMBAI; 12 TH _ DAY OF AUGUST , 2011 . COPY FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. COMMISSIONER (APPEALS) , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY O RDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI ITA NO. 5064 /MUM/2009 ASSESSMENT YEAR: 2005-06 PAGE 7 OF 7
