Research › Search › Judgment

Rajasthan High Court · body

2009 DIGILAW 108 (RAJ)

Commissioner of Income v. Wolkem India Ltd.

2009-01-14

A.M.KAPADIA, SANGEET LODHA

body2009
JUDGMENT 1. This appeal under section 260A of the Income-tax Act, 1961 (for short " the Act of 1961" hereinafter), is directed against order dated November 23, 2006, passed by the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur (for short " the ITAT" hereinafter) in I.T.A. No. 566/JU/2004 in respect of the assessment year 2000-01, whereby the appeal of the Revenue as well as the cross-objection of the assessee have been dismissed and the order dated September 30, 2004, passed by the Commissioner of Income-tax (Appeals), Udaipur (in short "the CIT(A)" hereinafter), about the deductibility of obsolete stores along with its valuation has been confirmed. 2. The relevant facts in a nutshell are that the assessee is engaged in mining, processing and grinding of minerals. During the relevant assessment year, it claimed deduction of Rs. 68,59,108, as obsolete store written off under the head " Plant and machinery repairs" account. The deduction claimed was sought to be justified by the assessee on the basis of accounting standard issued by the Institute of Chartered Accountants of India with the approval/acceptance of the Central Board of Direct Taxes. After due consideration, the Assessing Officer arrived at the finding that the assessee has estimated the inventories in the most arbitrary manner at 5 per cent. of the cost writing off 95 per cent. without considering the period of purchase or the degree of damage or deterioration, if any. The Assessing Officer noticed that even the item purchased during the year under consideration have been valued at 5 per cent. In this view of the matter, the amount of Rs. 68,59,108 written off as obsolete stocks claimed in profit and loss account under the head of "Plant and machinery repairs" was disallowed by the Assessing Officer and the same was added to the income of the assessee. 3. On appeal by the assessee, the Commissioner of Income-tax (Appeals) on the basis of the material on record arrived at the finding that most of the stock inventories which were treated as obsolete were either sold or consumed by March 31, 2004. From the details furnished by the assessee, the Commissioner of Income-tax (Appeals) found that on the sale of written down value of store inventories of Rs. 2.05 lakhs the assessee had made a profit of Rs. 1.41 lakhs. From the details furnished by the assessee, the Commissioner of Income-tax (Appeals) found that on the sale of written down value of store inventories of Rs. 2.05 lakhs the assessee had made a profit of Rs. 1.41 lakhs. The Commissioner of Income-tax (Appeals) found that the value of some of the items sold in the subsequent years comes to 8.43 per cent. of the cost. Therefore, considering the facts situation emerging from the record, the Commissioner of Income-tax (Appeals) held that the written down value taken by the assessee-company is not justified and determined the value of stores inventory written down at 10 per cent. of the cost. Accordingly, the addition made by the Assessing Officer on account of obsolete stores written off was reduced from Rs. 68,59,108 to Rs.3,61,005. 4. On further appeal by the Revenue, the learned Income-tax Appellate Tribunal relying upon a decision of the Hon'ble Bombay High Court in the case of Alfa Laval India Limited v. Deputy CIT (2004) 266 ITR 418 , held that the Commissioner of Income-tax (Appeals) was justified in valuing the stores at 10 per cent. of the cost. Consequently, the appeal preferred by the Revenue so also the cross-objection filed on behalf of the assessee have been dismissed by the learned Income-tax Appellate Tribunal by order dated November 23, 2006, which is impugned in the present appeal. 5. The appeal was admitted by this court, vide order dated August 16, 2007, on the following substantial question of law : "Whether, on the facts and circumstances of the case as well as in the law, the learned Income-tax Appellate Tribunal was justified in directing to value the obsolete stores at 10 per cent. of the cost with out following the AS-2 issued by the ICAI in letter and spirit, and the provisions of the section 145A of the Income-tax Act ?" 6. It is contended by the learned counsel for the Revenue that the learned Income-tax Appellate Tribunal has grossly erred in law as well as in facts while holding that the revised AS-2 issued by the ICAI is mandatory for chartered accountants for finalisation of accounts but it is not mandatory for the Department. It is submitted by the learned counsel that since the assessee has valued its stores/inventories on the cost or market price, whichever is less, therefore, it cannot be now valued on realisation value. It is submitted by the learned counsel that since the assessee has valued its stores/inventories on the cost or market price, whichever is less, therefore, it cannot be now valued on realisation value. That apart, it is submitted by the learned counsel that the assessee has valued thousands of items at 5 per cent. of the cost irrespective of the year of purchase or the condition of the item, therefore, the Assessing Officer had committed no error in disallowing the amount of Rs. 68,59,108 written off as obsolete stores and claimed in the profit and loss account under the head " Plant and machinery repairs". Accordingly, it is submitted by the learned counsel that the learned Income-tax Appellate Tribunal has seriously erred in confirming an erroneous order passed by the Commissioner of Income-tax (Appeals). 7. Per contra, the learned counsel appearing on behalf of the respondent-assessee submitted that the practise of writing down the inventories below cost to net realisable value is consistent with the view that the assets should not be carried in excess of amount to be realised from their sale or use. It is submitted that the assessee has valued its inventory which were entirely rusted, non-moving and unusable on account of its obsolescence/ damage of deterioration at cost or realisation value, whichever is lower. It is further submitted by the learned counsel that the learned Income-tax Appellate Tribunal after due examination of the material on record has arrived at the categorical finding that the stores which were valued by the assessee at Rs. 3.5 lakhs or partly consumed in subsequent years at Rs. 2.08 lakhs and remaining portion was sold at Rs. 3.46 lakhs and, accordingly, the value of the stores comes to Rs. 6.54 lakhs as against the value estimated by the assessee at Rs. 3.59 lakhs. Thus, keeping in view, the aforesaid factual position, the valuation of the stores at 10 per cent. of the cost made by the Commissioner of Income-tax (Appeals) confirmed by the Income-tax Appellate Tribunal cannot be faulted with and no substantial question of law arises for consideration of this court. 8. We have considered the rival submissions, and perused the impugned order and other material available on record. 9. of the cost made by the Commissioner of Income-tax (Appeals) confirmed by the Income-tax Appellate Tribunal cannot be faulted with and no substantial question of law arises for consideration of this court. 8. We have considered the rival submissions, and perused the impugned order and other material available on record. 9. As per the provisions of section 145A of the Act of 1961, the income from business under the head " Profits and gains from business" has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, section 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 Assessing Officer while holding that the inventories valued by the assessee at 5 per cent. is excessive, 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 profit and loss account altogether. It has come on record that the assessee has valued the inventories such 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 record that these items were 5-6 years old. It is also 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 per cent. of the 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 Commissioner of Income-tax (Appeals), cannot be faulted with. 10. For the aforementioned reasons, we answer the question framed as aforesaid against the Revenue and in favour of the assessee. 11. In the result, the appeal fails and it is hereby dismissed. No order as to costs. *******