COMMISSIONER OF INCOME TAX, ROHTAK V. M/S CAPSUGEL HEALTHCARE LTD

ITA/273/2011

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax, Rohtak against M/s Capsugel Healthcare Limited concerning the assessment year 2003-04. The primary issues were the disallowances made by the Assessing Officer regarding provisions made for aging of inventory and depreciation claimed on foreign exchange fluctuations. The CIT(A) and the Tribunal both ruled in favor of the assessee, leading to the revenue's appeal in the High Court. The court found no substantial question of law arising from the case, affirming the lower authorities' decisions.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 718925 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 28-08-2012
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Woodward Governor India P. Limited, (2009) 312 ITR 254
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: INDERPREET SINGH
• Keywords: Assessment year 2003-04; Depreciation; Foreign exchange fluctuation; Income Tax; Inventory Valuation; Provisions
• Section: 37(1); 260A; 43A

Judgement Text

"ITA No.273 of 2011 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 273 of 2011 Date of decision: 28.8.2012 The Commissioner of Income Tax, Rohtak -----Appellant Vs. M/s Capsugel Healthcare Limited, Rewari ----Respondent CORAM:- HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE GURMEET SINGH SANDHAWALIA Present:- Mr. Inderpreet Singh, Advocate for the appellant. Ajay Kumar Mittal,J. 1. The revenue has preferred this appeal under section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 10.1.2011 passed by the Income Tax Appellate Tribunal, Delhi Bench 'A' New Delhi in ITA No.2124/Del/2008 and C.O. No.313/Del/2009 for the assessment year 2003-04, claiming following substantial questions of law:- “i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances of Rs.28,45,951/- made on account of provisions made towards ageing of inventory of work in progress and finished goods? ii) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in deleting the disallowances made on account of depreciation at Rs.1,47,876/- claimed on amount capitalized on account of foreign exchange fluctuation for increase in cost of liability due to capitalization of foreign exchange rate fluctuations when section 43A of the IT ITA No.273 of 2011 2 Act was not applicable to the facts of the case? 2. Briefly, the facts as narrated in the appeal may be noticed. Return in this case was filed on 25.11.2003 declaring nil income under the head 'income from business or profession'. Assessment was completed after making additions of ` 1,83,25,364/- under various heads. During the course of assessment proceedings, it was noticed that the assessee debited an amount of ` 28,45,951/- on account of provisions made towards ageing of inventory of work in progress and finished goods and addition was made by the Assessing Officer accordingly. The CIT(A) deleted the said addition. The Tribunal dismissed the appeal of the department. Further, the assessee added `5,91,505/- to capital cost on account of exchange fluctuation loss and depreciation of ` 1,47,876/- was claimed on this account. The CIT(A) deleted the disallowance made on this account. The Tribunal dismissed the appeal of the department. The assessee also debited loss at ` 2,61,469/- due to exchange fluctuation in respect of debtors and creditors and therefore, addition of this amount was made. The CIT(A) deleted the addition and the Tribunal dismissed the appeal of the department relying upon decision of the Apex Court in Commissioner of Income Tax v. Woodward Governor India P. Limited, (2009) 312 ITR 254. Further, addition of ` 36,067/- on account of telephone and postal expenses, car expenses of ` 1,18,520/- and ` 84,043/- on account of labour welfare expenses was made for personal usage. The CIT(A) disposed of the appeal on the same lines as in the assessment year 2002-03. The assessee filed cross objections for sustenance of the ITA No.273 of 2011 3 above disallowances. The Tribunal allowed the cross objections of the assessee and dismissed the appeal of the department. Hence the revenue is before this Court through the present appeal. 3. Learned counsel for the revenue did not dispute that Question No.(ii) stands concluded against the revenue by the Apex Court decision in Woodward Governor India P. Limited,'s case (supra). Accordingly, the said question is answered against the revenue and in favour of the assessee. It is held that the assessee was entitled to capitalize on account of foreign exchange fluctuation for increase in cost of the asset due to fluctuations of foreign exchange rate and accordingly claim depreciation thereon. 4. Adverting to question No.(i), the primary issue that arises for consideration is whether the assessee was justified in claiming Rs.28,45,951/- on account of provisions made towards ageing of inventory of work in progress and finished goods. The CIT(A) while adjudicating the issue in favour of the assessee had noticed as under:- “The appellant company has its accounting policy to value inventories of finished goods & WIP at cost or net realisable value whichever is lower. Reference has been made to Schedule 17 of Annual Accounts for the year ending 31.3.2003 in this regard. This accounting policy is also in consonance with the Accounting standard 2 on valuation of inventories issued by the Institute of Chartered Accountants of India. The AO has not understood the accounting carried out by the company. He has stated that 'once the inventory valuation has been completed as per manufacturing/trading account nothing requires to be ITA No.273 of 2011 4 allowed as a deduction to Profit and Loss Account either on account of provision for devaluation of stock or permanent impairment of asset or on account of write off of the stock whether finished goods or work-in- progress.' The treatment followed by the assessee company was that while determining the manufacturing/trading account valuation of inventory was carried and the realisable value determined. The amount of depreciation/impairment of the finished goods and work in progress had to be reflected separately as per the Accounting Standards. Reference is drawn to Schedule 10 which shows the increase/decrease in stock which is part of the trading stock. A perusal of this Schedule will show that the amount of devaluation of Rs.28,45,951/- has been reflected in the Schedule by reducing the difference between the opening and closing stock and taking the balance to the Profit and Loss account. On the contra side the debit had to be made to the Profit and Loss account as an extra ordinary item arising out of the devaluation/depreciation of the inventory. The fact that Rs.28,45,951/- was reflected separately in the Profit and Loss account was only because of the presentation. The amount could have easily been shown in the Profit and Loss account against Schedule 10 at a figure of Rs.23,92,687/- (Rs.453264 – 2845951). The result would have been same. This disproves the understanding of the AO that the provisions have been made for loss after the determination of the trading account. This is not so as this debit of Rs.28,45,951/- has to be read as part of the trading account determination. The disclosure of Rs.28,45,951/- is merely reflection of the manner of presentation required as per Accounting Standards. It has ITA No.273 of 2011 5 been reiterated that Rs.28,45,951/- is a valid charge to the trading account and correctly claimed as per law as a deduction. It has further been submitted that the impugned loss claimed was ascertained loss as there has been permanent impairment of asset i.e. inventories as explained above and accordingly is fully allowable as business loss under Section 37(1) of the Income Tax Act, 1961.” 5. The aforesaid order was affirmed by the Tribunal following its earlier order dated 7.11.2008 in the case of the assessee for the assessment years 2000-01 and 2001-02 passed in ITA Nos.3952 and 2558. Learned counsel for the revenue fairly submitted that no appeal had been filed against the aforesaid order of the Tribunal. No error could be shown in the findings recorded by the CIT (A) and affirmed by the Tribunal. 6. In view of the above, no question of law much less substantial question of law arises for consideration. 7. Accordingly, the appeal is dismissed. (Ajay Kumar Mittal) Judge August 28, 2012 (Gurmeet Singh Sandhawalia) 'gs' Judge "