The ACIT, Circle-2, JAMNAGAR V. M/s Hiravati Marine Products (P) Ltd., PORBANDAR

ITA 946/RJT/2010

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8278 (ITAT-RAJKOT)
• Duration Of Justice: 9 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 28-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PM MAHARSHI
• Keywords: Capital asset; Business income; Bad and doubtful debts
• Section: 143(3); 201; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH , RAJKOT BEFORE: SHRI RAJPAL YADAV, JUDICIAL MEMBER AND S H RI AMARJIT SINGH , ACCOUNTANT MEMBER [CONDUCTED THROUGH E - COURT AT AHMEDABAD] ACIT, CIRCLE - 2 , JAMNAGAR (APPELLANT /RESPONDENT ) VS M/S. HIRAVATI MARINE PRODUCTS (P) LTD. JAWARNAKA, PORBANDAR PAN: A ABCH2110C (RE SPONDENT /CROSS OBJECTOR ) REVENUE BY : S H RI JITENDRA KUMAR , CIT - D . R. ASSESSEE BY: S H RI P. M. MAHARSHI , A.R. DATE OF HEARING : 18 - 07 - 2 019 DATE OF PRONOUNC EMENT : 23 - 09 - 2 019 / ORDER P ER : AMARJIT SINGH, ACCOUNTANT MEMBER : - THI S REVENUE S APPEAL AND ASSESSEE S CROSS OBJECTION FOR A.Y. 2006 - 07 , AR ISE FROM ORDER OF THE CIT(A), JAMNAGAR DATED 16 - 03 - 2010 , I N PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: - 1. THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN DELETING THE ADDITION OF RS. 28,39,840/ - BEING THE DISALLOWANCE ON ACCOUNT OF BAD DEBT. I T A NO . 946 & CO NO. 36 / RJT /20 10 A SSESSMENT YEAR 200 6 - 07 I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 2 2. THE LD. CIT(A) HAS ERRED IN LAW AND IN F ACTS IN DELETING THE ADDITION OF RS. 3, 88,28, 210/ - BEING THE DISALLOWANCE ON ACCOUNT OF LOSS OF STOCK BY OBSOLESCENCE. 3 . THE FACT IN BRIEF IS THAT RETURN OF INCOME DECLARING LOSS OF RS. 6 , 75 , 56 , 896/ - WAS FILED ON 28 TH DECEMBER, 2006. THE CASE WAS SE LECTED UNDER SCRUTINY BY ISSUING OF NOTICE U/S. 143(2) OF THE ACT ON 12 TH DECEMBER, 2007. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROCESSING AND EXPORT OF MARINE PRODUCT. THE ASSESSMENT U/S. 1 4 3(3) OF THE ACT WAS FINALIZED ON 26 TH DECEMBER, 2008 AT TO TAL LOSS OF RS. 2,38,87,989/ - . THE LD. CIT(A) HAS PARTLY ALLOWED THE APPEAL OF THE ASSESSEE AND DELETED THE DISALLOWANCE OF BAD DEBT AND ADVANCE WRITTEN OFF OF RS. 28,39,840/ - AND DELETED THE DISALLOWAN CE OF CLAIM OF STOCK ON ABSOLESCENCE TO THE AMOUNT OF RS. 3 , 88 , 28 , 210/ - . THE REVENUE HAS FILED APPEAL AGAINST T H E DE CI SION OF LD. CIT(A) IN DELETING THE AFORESAID ADDITIONS ON BOTH T H E ISS U E S. THE FURTHER FACTS IN BRIEF ARE DISCUSSED WHILE ADJUDICATING THESE GROUNDS OF APPEAL AS UNDER: GROUND NO. 1 ( DE LETING CLAIM OF BAD DEBT CLAIM T O THE AMOUNT OF RS. 28 , 39 , 840 / - ) 4 . DURING THE COURSE OF ASSES SMENT, THE ASSESSING OFFICER N OTICED THAT THE ASSESSEE HAS CLAIMED BAD DEBT AND ADVANCES WRITTEN OFF TO THE AMOUNT OF RS. 38 , 41 , 247/ - IN THE P & L ACCOUNT . THE AS SESSING OFFICER HAS REPORTED PARTY WISE BREAK UP OF BAD DEBT AND ADVANCES AMOUNTING TO RS. 20 , 67 ,7 87/ - AND TRADE DEBT OF RS. 17 , 75 , 489/ - WRITTEN OFF AT PAGE 2 TO 5 OF THE ASSESSMENT ORDER . THE ASSESSING OFFICER HAS DISALLOWE D THE CLAIM OF BAD DEBT OF RS. 38 , 41 , 247/ - ON THE GROUND THAT AS SESSEE HAS NOT PROVED THAT DEBT HAS BECOME BAD. I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 3 5 . AGGRIEVED ASSESSEE HAS FILED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS PARTLY ALLOWED THE APPEAL OF THE ASSESSE E BY DELEING THE TR ADE DEBT OF R S. 20 , 67 , 787/ - AFTER RELYING ON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT AND DELETED THE DISALLOWANCES OUT OF ADVANCES WRITTEN OFF T O THE AMOUNT OF RS . 787084/ - AFTER RELYING ON THE DECISION OF HON BLE SUPREME COUR T IN THE CIT VS. MYSORE C OMPANY LTD. 46 ITR 649. RELEVANT PART OF DECISION OF LD. CIT(A) IS REPRODUCED AS UNDER: - 3. 1 HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT. THE FIRST ISSUE RAISED BEFORE ME IS REGARDING DISALLOWANCE OF BAD DEBT AND A DVANCES WRITTEN OFF OF RS. 38,41, 247/ - (RS. 20,67,787 BEING BAD DEBTS WRITTEN OFF AND RS. 17,75,489/ - BEING ADVANCES WRITTEN OFF). I HAVE CONSIDERED THE REASON FOR DISALLOWING THE CLAIM OF BAD DEBTS MENTIONED BY THE AO IN PARA NO. 5 ON PAGE 6 OF ASS ESSMENT ORDER. THE AO HAS DISALLOWED AN AMOUNT WRITTEN OFF OF RS. 38,41,247/ - . THESE AMOUNT COMPRISES OF RS. 20,67,787/ - BEING AMOUNT OF DEBT ARISING OUT OF SALE OF GOODS ACCOUNTED FOR IN EARLIER YEARS. THE ASSESSING OFFICER HAS DISALLOWED THIS AMOUNT ON T HE BASIS THAT BAD DEBT CAN BE ALLOWED ONLY IF THE ASSESSEE PROVES THAT THE DEBT HAS BECOME BAD. THE AO WAS OF THE VIEW THAT AS ASSESSEE HAS NOT PROVIDED ANY PROOF ABOUT THE DEBT BECOMING BAD THEREFORE SAME CANNOT BE ALLOWED AS DEDUCTION RELYING ON THE DECI SION ON HONOURABLE GUJARAT HIGH COURT IN THE CASE OF DHALL ENTERPRISES AND ENGINEERS PVT. LTD. VS. CIT 295 ITR 481. THE APPELLANT IN SUPPORT OF HIS CLAIM SUBMITTED DETAILS OF SALES ALONG WITH BILL NO. OF THE PARTIES AND STATED THAT SAME HAVE BEEN OLD FOR MORE THAN THREE YEARS AND HENCE THEY ARE BAD AND THEREFORE AS SOON AS THEY ARE WRITTEN OFF SAME SHOULD BE ALLOWED AS DEDUCTION. HE SUBMITTED THAT THESE AMOUNTS HAVE BEEN WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT AS IRRECOVERABLE AND PRODUCED DETAILS OF BAD DEBTS WRITTEN OFF IN BOOKS OF ACCOUNT AND COPY OF LEDGER ACCOUNT FOR THE RESPECTIVE YEARS. IT WAS ALSO SUBMITTED THAT THE CONDITION OF WRITE OFF IS ONLY REQUIRED TO BE SATISFIED FOR CLAIMING BAD DEBT AS DEDUCTION AS PRIOR TO AMENDMENT IN SECTION 36 (L)(VII) W.E.F. 01.04.1989 THE WORDS 'ANY BAD DEBT, OR PART THEREOF, WHICH IS ESTABLISHED TO HAVE BECOME A BAD DEBT I N THE PREVIOUS YEAR' WERE USED A ND AFTER THE ABOVE AMENDMENT THESE WORDS ARE SUBSTITUTED BY 'ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT OF THE ASSESSEE FOR THE PREVIOUS YEAR'. ACCORDINGLY FOR ALLOWING THE CLAIM OF BAD DEBTS WHAT IS REQUIRED IS THAT THERE MUST BE A DEBT INCIDENTAL TO THE BUSINESS OF THE ASSESSEE WHICH IS TAKEN INTO ACCOUNT IN COMPUTING AS SESSABLE INCOME AND MUST HAVE BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. APPELLANT HAS ALSO SUBMITTED COPY OF THE DECISION OF HONOURABLE SUPREME COURT IN THE CASE TRF LTD. VS. CIT RANCHI CIVIL APPEAL NO. 5293 OF 2003 DATED 9 TH FEBRUARY, 20 10 WHICH IS FAIRLY COVERING THE ISSUE AND HE ALSO STATED THAT THIS DECISION HAS OVERRULED THE DECISION OF GUJARAT HIGH COURT OF DHALL ENTERPRISES. I HAVE CAREFULLY CONSIDERED THE ISSUE. THE HONOURABLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT RANCHI HA S HELD THAT AFTER 1 ST APRIL, 1989 IT IS NOT RIECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME, IRRECOVERABLE. IT IS ENOUGH IF THE BED DEBT IS WRITTEN OF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. AS PER DECISION OF HON SC I T IS CLEAR THAT NOW ASSESSEE NEED NOT PROVE THAT THE DEBT HAS BECOME BAD. THEREFORE, NOW THE AO IS NOT ALLOWED TO QUESTION THE WISDOM OF THE APPELLANT AND NO DEMONSTRATIVE OR INFALLIBLE PROOF OF BAD DEBT HAVING BECOME BAD IS REQUIRED. IN THE C ASE THE APPELLANT SUBMITTED LEDGER ACC OUNT OF RESPECTIVE YEARS THAT THE AMOUNT WRITTEN OF IS A DEBT ARISING DURING THE COURSE OF THE BUSINESS OF THE ASSESSEE WHICH HAS BEEN SHOWN AS ITS INCOME AND IS WRITTEN OFF IN THE BOOKS AS IT HAS BECOME IRRECOVERABLE. APPELLANT ALSO SUBMITTED THAT THE TRANSACTIONS ARE 3 TO 4 YEARS OLDER AND IS LEGALLY NOT ENFORCEABLE AND THERE ARE NO CHANCES OF RECOVERING THESE AMOUNTS. IT IS HELD BY SUPREME COURT IN CIVIL APPEAL NO. 5292 OF 2003 IN CASE OF T.R.F. LIMITED VS. CIT, RANC HI THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 4 IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THEREFORE IN MY VIEW ALL THE CONDITIONS LAID DOWN U/S 36 (1) (VII) RWS 36(2) ARE SATISFIED AND APPELLANT IS ELIGIBLE FOR DEDUCTION OF THIS AMOUNT AS BAD DEBTS WRITTEN OFF. I DELETE THE ADDITION OF RS. 20,67,787/ - FOR DISALLOWANCE OF BAD DEBTS WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE APPELLANT. REGARDING AD DITION OF RS. 17,75,489/ - ON ACCOUNT OF ADVANCES WRITTEN OFF THE APPELLANT SUBMITTED RESPECTIVE YEAR'S LEDGER ACCOUNT SHOWING THE DATE, PURPOSE AND OTHER DETAILS FOR ADVANCES GIVEN. APPELLANT SUBMITTED THAT THIS ADVANCES ARE GIVEN TO VARIOUS FISHERMEN, FIS HERIES FOR PROCUREMENT OF RAW - MATERIAL, TO LABOUR CONTRACTOR FOR LABOUR WORK AND OTHER ADVANCES IN THE ORDINARY COURSE OF BUSINESS. THESE AMOUNTS WERE WRITTEN OFF AS THIS AMOUNTS ARE NOT RECOVERABLE AS THE PERSONS TO WHOM ADVANCES HAVE BEEN GIVE ARE NOT TR ACEABLE OR EITHER GONE BANKRUPT OR DIED. ALTERNATIVELY , APPELLANT HAS CLAIMED THE SAME U/S. 28 AND NOT U/S. 36(L)(VII). BEFORE A DEDUCTION CAN BE CLAIMED ON THE GROUND OF BUSINESS LOSS, THE LOSS SHOULD HAVE BEEN INCURRED IN THE COURSE OF BUSINESS AND IT S HOULD BE IN THE NATURE OF REVENUE LOSS. IN ANY BUSINESS, CREDIT IS AN INDISPENSABLE PART AND ADVANCE OF A TEMPORARY NATURE WITH OR WITHOUT INTEREST IS A COMMON INCIDENCE OF BUSINESS. LOOKING TO THE NATURE OF BUSINESS SUCH ADVANCES ARE ESSENTIAL PART OF THE BUSINESS. SUCH ADVANCES WERE NOT FOR ANY CAPITAL ASSET AND HENCE REVENUE IN NATURE. SOME OF THE ADVANCES ARE FOR THE PURPOSES OF REPAIRING WORK OF MACHINES ETC, WHICH HAS ALREADY BEEN CARRIED OUT BUT APPROPRIATE BILLS HAVE NOT BEEN RECEIVED. BUT SUCH AD VANCES WRITTEN OFF CANNOT BE ALLOWED AS THEY BECOME AS SUCH PRIOR PERIOD EXPENSES. APPELLANT IS IN THE BUSINESS OF FISHERIES. APPELLANT ACQUIRES FISH FROM FISHERMAN WHO GOES INTO SEA FOR CAPTURING FISH AND THIS IS AN ACCEPTED COMMERCIAL PRACTICE. AFTER' SUPPLY OF FISH IF THE AMOUNTS WERE NOT RECOVERABLE FULLY AND THEN BALANCE AMOUNT IS LOSS ARISING TO THE APPELLANT IN THE ORDINARY COURSE OF BUSINESS AND INCIDENTAL THERETO AND WAS THEREFORE A TRADING LOSS ALLOWABLE UNDER SECTION 28 ITSELF. APPELLANT HAS ALSO PLACED RELIANCE ON THE DECISION OF HONOURABLE SUPREME COURT IN THE CASE OF CIT V MYSORE SUGAR CO. LTD 46 ITR 649 (SC), IN THE CASE COMPANY HAS ADVANCED MONEY TO SUGARCANE GROWERS FOR PURCHASE OF SUGARCANE AND WHEN THEY ARE UNABLE TO SUPPLY SUGARCANE. THE AMOUNT WAS WRITTEN OFF AND CLAIMED AS TRADING LOSS AND SAME WAS ALLOWED. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF HON SUPREME COURT I DELETE THE DISALLOWANCE MADE IN CASE OF FOLLOWING ADVANCES WRITTEN OFF. 1. SHREE LALJIBH AI M KHOKHARI RS 4,43,000/ - 2. APL INDIA PRIVATE LIMITED RS. 20,892/ - 3. INTERNATIONA L MARINE PRODUCTS RS. 10,192/ - 4. INDO MARINE COCHIN RS. 3,00,000/ - HAVING REGARDS TO ALL THE CIRCUMSTANCES I DELETE DISALLOWANCE IN CASE OF ABOVE PARTIES AMO UNTING TO RS. 7,74,084/ - . HOWEVER IN THE CASE OF OTHER PARTIES WHERE ADVANCE GIVEN TO THE PARTIES FOR PURCHASES OF MACHINERY SPARES, REPAIRING ETC, THEY ARE ADVANCES IN THE ORDINARY COURSE OF BUSINESS HOWEVER MERELY BECAUSE THE BILLS ARE NOT RECEIVED THEY CANNOT BE CARRIED OVER TO THE NEXT YEAR AND ULTIMATELY WRITTEN OFF. IN THESE CIRCUMSTANCES IT BECOMES PRIOR PERIOD EXPENSES AND THEY ARE CERTAINLY NOT ALLOWABLE IN THIS YEAR. THEREFORE DISALLOWANCE TO THE EXTENT OF RS. 10,01,407/ - IS UPHELD. 4. SECOND GRO UND OF APPEAL IS REGARDING DISALLOWANCE OF SALARY ADVANCES WRITTEN OFF OF RS. 9,99,450/ - . THE AO DISALLOWED THE SALARY ADVANCES WRITTEN OF STATING THAT THE APPELLANT HAS FAILED TO PROVE THAT THE PERSONS TO WHOM THE ADVANCES WERE GIVEN ITS EMPLOYEES AND IT IS ALSO NOT PROVED THAT SAME WERE INCLUDED IN COMPUTING THE INCOME OF THE ASSESSEE FOR AND EARLIER YEAR OR YEAR UNDER CONSIDERATION. APPELLANT BEFORE ME SUBMITTED THAT THE ADVANCES WERE GIVEN TO EMPLOYEES IN PAST. THOSE EMPLOYEES LEFT JOB WITHOUT REFUNDING THE AMOUNT OF ADVANCES AND ARE NOT TRACEABLE AND THERE ARE NO CHANCES OF RECOVERING THE SAME. CONTENTION OF THE APPELLANT THAT AS HUGE TIME HAS PASSED SINCE ADVANCES ARE GIVEN AND ADVANCES TO EMPLOYEES, IS AN ORDINARY ACT IN ANY BUSINESS AND AS THE EMPLOY EES HAVE LEFT THE JOB BEFORE LONG TIME GAP AND THERE ARE NO CHANCES OF RECOVERING THE SAME IS NOT ACCEPTABLE. OF COURSE ADVANCES ARE GIVEN TO EMPLOYEES DURING THE REGULAR COURSE OF BUSINESS AND IT IS A NORMAL PRACTICE OF ANY BUSINESS, HOWEVER ASSESSEE HAS SEVERAL ALTERNATIVES BEFORE AN EMPLOYEES LEAVES THE JOB FOR RECOVERY OF THOSE ADVANCES, MOREOVER ASSESSEE HAS ALSO NOT GIVEN THE DETAILS OR NAMES OF EMPLOYEES, THEIR EMPLOYMENT RECORDS, DETAIL OF ADVANCE GIVEN, ITS TERMS AND CONDITIONS AND HOW MUCH IS RECO VERED. IN ABSENCE OF THESE DETAILS IT I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 5 IS NOT POSSIBLE TO ACCEPT THE CLAIM OF THE ASSESSEE. HENCE, I CONFIRM T HE DISALLOWANCE OF RS. 9,99,450/ - ON ACCOUNT OF WRITE OFF OF SALARY ADVA NCE. 6 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON R ECORD. DURING THE COURSE OF APPELLATE PROCEEDINGS BEF ORE US, THE LD. COUNSEL HAS SUBMITTED DETAILS OF INFORMATION AND COPIES OF DOCUMENTS BEFORE THE ASSESSING OFFICER AND CIT(A) AT THE TIME OF HEARING OF THIS CASE. A FTER CONSIDERING THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT CIVIL APPEAL NO. 5293 OF 2003 DATED 9 TH FEB, 2010 , IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRREVOCABLE . THEREFORE, CONSIDERING THE AFORESAID JUDICIAL FINDING OF THE HON BLE SUPREME COURT ON IDENTICAL ISSUE AND FACTS, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD. CIT(A) IN DELETING THE ADDITION OF RS. 20,67,787/ - PERTAINING TO TRADE BAD DEBT . REGARDING ADDITION OF R S. 17 , 75 , 489/ - ON ACCOUNT OF ADVANCES WRITT EN OFF , IT IS NOTICED THAT IT IS UNDISPUTED FACT THAT AN AMOUNT OF ADVANCE OF RS. 7 , 74 , 0 84/ - WERE GIVEN IN THE ORDINARY COURSE OF BUSINESS TO VARIOUS FISHERMEN, FISHERIES FOR PROCU RE MENT OF RAW MATERIAL AND LABOUR WORK. AFTER CONSIDERING THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF CIT MYSORE SUGAR COMPANY LTD 46 ITR 649(SC ) WHEREIN IT IS HELD THAT IN CASE THE COMPANY HAS ADVANCED MONEY TO SUGARCANE GROWER FOR PURCHASE OF SUGARCANE AND WHEN THEY WERE UNABLE TO PURCHASE SUGARCANE , THE AMOUNT WAS WR ITTEN OFF AND CLAIMED AS TRADING LOSS A N D THE SAME WAS ALLOWED. THEREFORE, AFTER CONSIDERING THE AFORESAID DECISION OF HON BLE SUPREME COURT ON IDENTICAL ISSUE AND FACTS, WE DO NOT FIND ANY ERROR IN THE DECISION OF LD. CIT(A) IN ALLOWING THE CLAIM OF ADVA NCES WRITTEN OFF TO THE AMOUNT OF RS. 7 , 74 , 084/ - WHICH WERE GIVEN IN THE ORDINARY COURSE OF BUSINESS BY THE ASSESSEE. ACCORDINGLY, WE DO NOT FIND I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 6 ANY MERIT IN THE APPEAL OF THE REVENUE AND CROSS OF THE ASSESSEE, THEREFORE, THE CROSS OBJECTION OF THE ASSESSE E AND APPEAL OF THE REVENUE BOTH ARE DISMISSED. SECOND GROUND OF CROSS OBJECTION OF THE ASSESSE IS PERTAINING TO DISALLOWANCE OF WRITTEN OFF SALARY ADVANCE OF RS. 9 , 99 , 450/ - 7 . DURING THE COURSE OF ASSESSMENT, THE ASSESSING OFFICER HAS DISALLOWED THE SA LARY WRITTEN OFF STATING THAT THE ASESSEE HAS FAILED TO PROVE THA T THE PERSON TO WHOM SALARY GIVEN WERE ITS EMPLOYEES AND HAS ALSO NOT PROVED THAT THE SAME WAS INCLUDED IN COMPUTING THE INCOME OF THE ASSESSEE FOR EARLIER YEARS AND FOR THE YEAR UNDER CONSI DERATIO N. THE ASSESSEE HAS FAILED TO SUBSTANTIATE WITH RELEVANT MATERIAL THAT THE SALA RY ADVANCES WERE GIVEN TO I T S EMPL OYEES EMPLOYED WITH IT . THEREFORE, WE DO NOT FIND ANY ERROR IN THE DECISION OF LD. CIT(A). ACCORDINGLY, THIS GROUND OF CROSS OBJECTIO N IS ALSO DISMISSED. GROUND NO. 2 (DELETING THE ADDITION OF RS. 3,88,28210/ - ON ACCOUNT OF LOSS OF STOCK BY ABSOLESCENE) 8 . DURING THE COURSE OF ASSESSMENT PROCEE DINGS, THE ASSESSING OFFICER NOTICED THAT ASSESSEE HA S SHOWN LOSS OF STOCK BY ABSOLE SCEN E IN THE P & L ACCOUNT TO THE AMOUNT OF RS. 3 , 88 , 28 ,010/ - . THE ASSESSEE EXPLAINED THAT CLOSING STOCK HAS BEEN VALUED AT COST OR MARKET VALUE OR NET REALIZABLE VALUE WHICHEVER IS LOWER AN D THE ASSESSE COMPANY HAS BEEN CONSISTENTLY FOLLOWING THIS POLICY O F THE VALUATION OF CLOSING FROM YEAR TO YEAR. THE ASSESSEE SUBMITTED DETAIL OF CLOSING STOCK TO T HE ASSESSING OFFICER AND STATED THAT LOSS ON ACCOUNT OF ABSOLESC E NE OF STOCK WAS DETERMINED ON THE BASIS OF NET REALIZING VALUE. THE NET REALIZED VALUE IS ES TIMATED ON THE BASIS OF SELLING I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 7 PRICES WHICH MAY BE REALIZED IN FUTU RE IN THE ORDINARY COURSE OF BUSINESS . IT WAS PLEADED THAT ASSESSEE HAS CONSISTENTLY VALUED THE STOCK AT COST OR NET REALISABL E VALUE WHICHE VER IS LESS AND THE STOCK WAS VALUED ON ABOVE B ASIS ON THE BASIS OF EVIDENCE AVAILABLE . THE ASSESSING OFFICER HAS NOT ACCEPTED THE SUBMISSION OF THE ASSESSEE STATING THAT THE ACCOUNT FURNISHED BY THE ASSESS EE DID NOT SHOW THE NAME AND QUALITY OF THE FISH ITEM SOLD THER EF ORE THE VALUATION OF THE CLOSIN G STOCK MADE BY T H E ASSESSEE CANNOT BE ACCEPTED . ACCORDINGLY, THE ASSESSING OFFICER HAS CONCLUDED THAT ASSESSEE HAS UNDERVALUED ITS CLOSING ST OCK BY RS. 3 , 88 , 28 , 010/ - AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 9 . THE ASSESSEE HAS PREFERRED AP PEAL BEFORE THE LD. CIT(A). T HE LD. CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE. RELEVANT PART OF THE DECISION OF LD. CIT(A) IS REPRODUCED AS UNDER: - 5. THIRD GROUND OF APPEAL IS AGAINST THE ADDITION OF RS. 3,88,28,010/ - ON ACCOUNT OF LOSS OF STOCK B Y OBSOLESCENCE. THE AO MADE THIS ADDITION FOR THE REASON THAT APPELLANT HAS UNDERVALUED ITS CLOSING STOCK BY RS. 3,88,28,010/ - AND THEREBY SUPPRESSED ITS INCOME BY THAT AMOUNT AND THE VALUATION DONE BY THE APPELLANT AT COST OR NRV WHICHEVER IS LESS CANNOT BE ACCEPTED ON THE BASIS OR EVIDENCES AVAILABLE OF 'LOCAL SALE' ACCOUNT. BEFORE ME, THE APPELLANT SUBMITTED THAT ASSESSEE IS A PRIVATE LIMITED COMPANY AND UNDER THE COMPANIES ACT, 1956, THE ACCOUNTING STANDARD ARE MANDATORY APP LICABLE TO THE COMPANY. AS PER ACCOUNTING STANDAR - 2 (REVISED) - VALUATION OF INVENTORIES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE ASSESSEE IS REQUIRED TO VALUE THE CLOSING STOCK OF THE COMPANY AT COST OR NET REALIZABLE VALUE WHICH EVER IS LOWER. THE NET REALIZABLE VALUE AS PER PRINCIPAL OF ACCOUNTING STANDARD IS ESTIMATED SELLING PRICE IN THE ORDINARY COURSE OF BUSINESS LESS THE ESTIMATED COST OF COMPLETION AND ESTIMATED COSTS NECESSARY TO MAKE THE SALE. NET REALIZABLE VALUE IS ESTIMATED AT EACH BALANCE SHEET DATE. THE COST OF INVENTORIES MAY NOT BE RECOVERABLE IF THOSE INVENTORIES ARE DAMAGED IF THEY HAVE BECOME WHOLLY OR PARTLY OBSOLETE OR IF THERE SELLING PRICE HAS DECLINED. THE COST OF INVENTORY MAY ALSO NOT BE RECOVERABLE IF THE ESTIMATED COST OF COMPLETION OR THE ESTIMATED COST NECESSARY TO MAKE THE SALE HAS INCREASED. THE PRACTICE OF WRITTEN DOWN INVENTORY BELOW COST TO NET REALIZABLE VALUE IS CONSISTENT WITH THE VIEW OF THAT ASSET SHOULD NOT BE CARRIED IN EXCESS OF AMOU NT EXPECTED TO BE REALIZED FROM THEIR SALE OR USE. FOR DETERMINING THE NET REALIZABLE VALUE IN RESPECT OF STOCK SOLD BY THE DATE OF SIGNING OF THE ACCOUNTS, THE ACTUAL PRICE SHOULD BE TAKEN FOR COMPUTING THE NET RELEASABLE VALUE AND FOR THE STOCK NOT SOLD BY THE DATE OF SIGNING OF THE ACCOUNTS, THE NET REALIZABLE VALUE SHOULD BE ESTIMATED ON THE BASIS OF SELLING PRICES WHICH MAY BE REALIZED IN FUTURE IN THE ORDINARY COURSE OF BUSINESS. ESTIMATES OF NET REALIZABLE VALUE ARE BASED ON THE MOST RELIABLE EVIDEN CE AVAILABLE AT THE TIME THE ESTIMATES ARE MADE AS TO THE AMOUNT THE INVENTORIES ARE EXPECTED TO REALIZE. SOME OF THE STOCK OF THE COMPANY COULD NOT BE SOLD OUT DURING THE YEAR. BY EFFLUX OF TIME AND OBSOLESCENCE, THE MARKET VALUE (NET REALI ZABLE VALUE) OF GOODS OF FISH , BEING A I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 8 PERISHABLE ITEM, DRASTICALLY FELL DOWN. THE DETAILED WORKING OF LOSS ARISING DUE TO VALUATION OF CLOSING STOCK AT MARKET VALUE (NET REALIZABLE VALUE) WAS PRESENTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. FOR BETTER PRESENTATI ON OF FINANCIAL STATEMENT THIS LOSS OF RS. 3,88,28,010/ - IS SEPARATELY DISCLOSED IN PROFIT AND LOSS ACCOUNT AS UNDER. SR. NO PARTICULARS RS. 1. AS SHOWN IN PARA (III) ABOVE AND SCHEDULE 13 OF FINANCIAL STATEMENT. 6,11,68,551/ - 2. LESS LOSS OF STOCK OF OBSOLESCENCE (SHOWN AS EXTRA ORDINARY ITEMS SEPARATELY) 3,88,28,010/ - 3. SHOWN DECREASE AND (INCREASE) IN STOCK (1 - 2) 2,23,40,541/ - I HAVE CAREFULLY CONSIDERED THE DECISION OF HONOURABLE RAJASTHAN HIGH COURT IN THE CASE OF CIT V WOLKEM IND IA LIMITED 221 CTR 767 (RAJ.) WHERE IN IT IS HELD THAT 'AS PER THE PROVISIONS OF S. 145A OF THE ACT OF 1.961, THE INCOME FROM BUSINESS UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS' HAS TO BE COMPUTED IN ACCORDANCE WITH METHOD OF ACCOUNTING REGULARLY EMP LOYED BY THE ASSESSEE SIMILARLY, S, 145A OF THE ACT OF 1961 PROVIDES THAT THE INVENTORY SHALL BE VALUED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE THEREFORE, IF THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE IS RECOGNISED METHOD THEN THE SAME CANNOT BE REJECTED ON THE GROUND THAT THE NET REALISABLE VALUE/MARKET VALUE HAS BEEN DETERMINED ON THE BASIS OF CERTAIN ESTIMATE. IT IS TO BE NOTICED THAT THE AO WHILE HOLDING THAT THE INVENTORIES VALUED BY THE ASSESSEE @ 5 PER CENT IS EXCESS IVE DID NOT CARE TO ESTIMATE THE NET REALISABLE VALUE OF THE STORE AND PROCEEDED TO DISALLOW THE AMOUNT OF RS. 68,59,108 WRITTEN OFF AS OBSOLETE STORES AND CLAIMED IN P&L A/C ALTOGETHER. IT HAS COME ON RECORD THAT THE ASSESSEE HAS VALUED THE INVENTORIES SU CH AS NUT BOLT GLASS FUSE BEARING BUSHES, LOCK PIN, PIPE, SCREW ETC. WHICH WERE RUSTED, NON - MOVING AND UNUSABLE ON ACCOUNT OF OBSOLESCENCE/DAMAGE/DETERIORATION BY EFFLUX OF TIME AT COST AND NET REALISATION VALUE, WHICHEVER IS LOWER. IT HAS ALSO COME ON REC ORD THAT THESE ITEMS WERE 5 - 6 YEARS OLD. IT IS A/SO NOT DISPUTED BEFORE THIS COURT THAT THE ASSESSEE HAD MADE THE REQUISITE EFFORTS TO DISPOSE OF THE SAME. THAT APART, SOME OF THESE ITEMS WERE ACTUALLY SOLD IN SUBSEQUENT YEARS AT A PRICE 8.43 PERCENT OF TH E COST. THUS, CONSIDERING THE TOTALITY .OF THE FACTS AND CIRCUMSTANCES, IN OUR CONSIDERED OPINION THE VALUE OF THE STORES INVENTORY WRITTEN DOWN TAKEN AT 10 PER CENT OF THE COST BY THE CIT(A), CANNOT BE FAULTED WITH.' IN THE CASE OF THE APPELLANT, KUTTOS A RE SOLD IN AY 2007 - 08 AND BASED ON THE AMOUNT REALIZED ON SALES; SAME HAS BEEN ADOPTED AS ESTIMATED NET REALISABLE VALUE FOR THE VALUATION OF CLOSING STOCK AS AT 31 - 3 - 2006. IN THE NEXT YEAR, OPENING STOCK OF THE APPELLANT AS WELL AS THE SALES OF FINISHED G OODS AS KUTTOS HAS ALSO BEEN ACCEPTED BY THE AO. AS PER THE PROVISIONS OF SECTION 145A OF THE ACT, INCOME FROM BUSINESS UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS' HAS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND INVENTORY SHALL BE VALUED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE THEREFORE, IF THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE IS RECOGNISED METHOD THEN THE SAME CANNOT BE REJECTED ON THE GROUND THAT THE NET REALIZABLE VALUE / MARKET VALUE HAS BEEN DETERMINED ON THE BASIS OF CERTAIN ESTIMATE. IT HAS COME ON RECORD THAT THE APPELLANT HAS VALUED THE INVENTORIES WHICH WERE NOT SALEABLE ON ACCOUNT OF NATURE OF THE PRODUCT WHICH IS FOOD PRODUCT AND PERISHABLE IN N ATURE AT NET REALIZABLE VALUE, WHICH IS LOWER THAN THE COST. THE METHOD OF VALUATION ADOPTED BY THE APPELLANT IS COST OR NET REALIZABLE VALUE WHICHEVER IS LESS. IN THE INSTANT CASE THE NET REALIZABLE VALUE WHICH IS LOWER THAN THE COST IS DOUBTED BY THE AO IN AY 2006 - 07. HOWEVER THE SAME IS ACCEPTED IN AY 2007 - 08. MERELY BECAUSE THE NET REALIZABLE VALUE IS VERY LESS, IT CANNOT BE REJECTED, I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 9 MORE SO WHEN THAT PRICE IS REALIZED IN SUBSEQUENT YEAR. THE AO HAS NOT STATED THAT HOW VALUATION IS NOT IN ACCORDANCE W ITH THE ACCOUNTING STANDARD - 2 AS WELL AS THE PROVISIONS OF THE COMPANIES ACT WHICH ARE MANDATORY FOR THE APPELLANT. OBSERVATION OF AO THAT AS THE APPELLANT IS DEALING IN VARIOUS MARINE PRODUCTS THEREFORE IT IS DIFFICULT TO MAINTAIN QUANTITY DETAIL S AND HENCE THE VALUATION BASED ON SALES REALIZATION OF SUBSEQUENT YEARS IS NOT PROPER AND THEREFORE HE REJECTED THE SAME, IS NOT CORRECT AS APPELLANT HAS GIVEN ITEM WISE DETAILS OF STOCK OBSOLESCENCE LOSS SHOWING QUANTITY, RATE AND AMOUNT. AS PER PARA NO 22 OF THE ACCOUNTING STANDARD ESTIMATES OF NET REALISABLE VALUE ARE BASED ON THE MOST RELIABLE EVIDENCE AVAILABLE AT THE TIME THE ESTIMATES ARE MADE AS TO THE AMOUNT THE INVENTORIES ARE EXPECTED TO REALISE. THESE ESTIMATES TAKE INTO CONSIDERATION FLUCTUATIONS OF PRICE OR COST DIRECTLY RELATING TO EVENTS OCCURRING AFTER THE BALANCE SHEET DATE TO THE EXTENT THAT SUCH EVENTS CONFIRM THE CONDITIONS EXISTING AT THE BALANCE SHEET DATE. THUS, CONSIDERING THE OVERALL CIRCUMSTANCES, I DELETE DISALLOWANCE OF RS. 3,88,28,010/ - MADE ON ACCOUNT OF STOCK OBSOLESCENCE. 6. IN THE RESULT APPEAL IS PARTLY ALLOWED. 10 . WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF LOSS ON ACCOUNT OF ABSOLES CENE OF STOCK OF FISH TO THE AMOUNT OF R S. 3 , 88 , 28 , 010/ - STATING THAT VALUATION SHOWN BY THE ASSESSEE ON THE BASIS OF STOCK OR NET REALIZING VALUE CANNOT BE ACCEPTED ON THE BASIS OF EVIDENCE AVAILABLE ON LOCAL SALE ACCOUNT. IT IS BROUGH T TO OUR NOTICE THA T ASSESSEE HAS BEEN CONSISTENTLY FOLLOWED ACCOUNTING STANDARD - 2 FOR VALUATION OF CLOSING OF STOCK AT COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER IN ACCORDANCE WITH THE ACCOUNTING STANDARD REFERRED IN SECTION 211(3E) OF THE COMPANY A CT, 1956. THE DETAI L OF ABSOLESCENE OF STOCK ALONG WITH DETAILED WORKING W E RE SUBMITTED BEFORE THE ASSESSING OFFICER AND CIT(A) AT THE TIME OF HEARING. THE COMPANY HAS VALUED THE STOCK AT NET REALIZABLE VALUE ON THE BASIS OF EVIDENCE AVAILABLE ON THE DATE OF SIGNING OF THE ACCOUNTS AND THE ACTUAL PRICE WAS TAKEN FOR COMPUTING THE NET REALIZABLE SALE VALUE. THE DETAIL REGARDING OPENING STOCK PURCHASE, SALES AND CLOSING STOCK FOR F.Y. 2005 - 06 SUBMITTED BY THE ASSESSEE IS REPRODUCED AS UNDER: - SL. NO. ITEM OPENING STOCK PROD UCTION DURING THE YEAR (QTY) TOTAL SALES (QTY) CLOSING STOCK (BEFORE OBSOLESCENCE) QTY RATE VALUE QTY RATE VALUE I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 10 1 SHRIMPS 4780 110 5,25,800 0 4180 600 125 75 ,00 0 2 CUTTLE FISH 9140 90 8,22,600 254300 262400 1040 97 1,00,880 3 POMFRET 640 160 51,2 00 600 20 172 3,440 4 CROAKER 2840 34 96,560 0 2800 40 36.50 1,460 5 SURIMI 543300 90.00 4,88,97,000 0 135300 4080000 92.50 3,77,40,000 6 OTHER FISH 135990 71.44 97,15,500 36000 165990 6000 63 3,78,000 7 BLUE WHIT E (R.M. ) 0 0 0 230380 182120 24130 5 8.39 14,08,890 8 BLUE WHITE (R.M.) 0 0 0 0 0 72218 17.59 12,70,315 9 SIQUID 18580 85 15,79,300 419600 438180 0 100 0 10 RIBBON FISH 37930 35 13,27,550 0 37930 0 34 0 TOTAL 753200 6,30,15,510 940280 1229500 512048 4,09,77985 ON PERUSAL OF THE MAT ERIAL ON RECORD, I T IS NOTICED THAT MAJOR PART OF LOSS TO THE AMOUNT O F RS. 3 , 69 , 24 , 000/ - IS PERTAINED TO LOSS OF STOCK BY ABSOLESC E NE OF SURMAI FISH. IT IS FURTHER NOTICED THAT DURING THE YEAR, THERE WAS NO PRODUCTION OF SURMAI FISH AND ITS STOCK WAS BR OUGHT FORWARD FROM THE CLOSING STOCK OF ASSESSMENT YEAR 2004 - 05. THE CLOSING STOCK VALUE FOR F.Y. 2004 - 05 WAS TO THE AMOUNT OF R S. 4 , 88 , 97 , 000/ - . IT WAS FURTHER NOTICED THAT MAJOR PART OF THE STOCK IN F.Y. 2004 - 05 WAS ALSO BROUGHT FROM F.Y. 2003 - 04 SINC E THE TOTAL VALU E O F OPENING STOCK FOR F.Y. 200 3 - 0 4 WAS TO THE AMOUNT OF RS. 29710361 / - . THE SAME IS DEMONSTRATED AS UNDER: - SR. NO . FINAN CIAL YEAR OPENIN G STOCK (QTY) PRICE/ KG TOTAL VALUE OF OPENING STOCK PRODUCTI ON DURING THE YEAR TOTAL SALES (QTY) CL OSIN G STOCK (QTY) PRICE/ KG TOTAL CLOSING STOCK VALUE 1 2004 - 05 449340 66.12 2,97,10,361 3515600 3421640 543300 90.00 4,88,97000 2 2003 - 04 595360 44.00 2,61,95,840 3899040 4045060 449340 66.12 2,97,10,361 IT IS INDICATED FROM THE ABOVE DEMONSTRATION THA T ASSESSEE HAS BROUGHT THE UNSOLD STOCK FROM THE EARLIER YEARS AND NO PRODUCTION OF SURMAI FISH WAS I.T.A NO. 946 & CO NO. 36 /RJT /20 10 A.Y. 2006 - 07 PAGE NO ACI T VS. M/S. HIRAVATI MARINE PRODUCTS P. LTD. 11 MADE DURING THE YEAR UNDER CONSIDERA TION. IT IS FURTHER NOTICED THAT THE CLOSING STOCK FOR THE YEAR UNDER CONSIDERATION HAS BEEN ACCEPTED BY THE ASSESSING OFFICER AS OPENING STOCK FOR THE SUBSEQUENT YEAR WITHOUT ANY VARIATION. WE OBSERVED THAT ASSESSING OFFICER HAS NOT ELABORATED THE DETAILED REASONS WITH SPECIFIC FINDING FOR REJECTING THE CLAIM OF LOSS OF STOCK BY ABSOLESC E N C E ON ACCOUNT OF UNSOLD OLD STOC K OF FISH WHICH ARE OF PERISHABLE NATURE . IN THE LIGHT OF THE ABOVE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD. CIT(A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. THEREFORE, WE DO NOT FIND ANY FORCE IN THE AP PEAL OF THE REVENUE AND THE SAME IS DISMISSED. 11 . IN THE RESULT, THE APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE BOTH ARE DISMISSED. ORDER PR ONOUNCED IN THE OPEN C OUR T ON 23 - 09 - 201 9 SD/ - SD/ - (RAJPAL YADAV ) ( AMARJIT SINGH ) J UDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD : DATED 23 /09 /201 9 / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, RAJKOT