TMI Blog2013 (8) TMI 830X X X X Extracts X X X X X X X X Extracts X X X X ..... als and thus the confusion. The write back of provision is not sale proceeds of slow moving/obsolete inventory. The sale proceeds have been accounted for as income under the head turnover "Gross turnover" in the profits & loss account. It is not a case where sale proceeds of these obsolete stocks are not accounted for at all - no infirmity in the order of the first appellate authority - Decided against Revenue. - I.T.A. No. 4397/Del/2011 - - - Dated:- 3-7-2013 - Shri R. P. Tolani And Shri J. S. Reddy,JJ. For the Petitioner : Shri D. K. Mishra, CIT. DR. For the Respondent : Shri. Vikash Srivastava, Adv. Shri Sumit Mangal, CA. ORDER Per J. S. Reddy, AM:- This is an appeal filed by the revenue directed against the order of ld. CIT (A)-VII, New Delhi, dated 01.07.2011 for the A.Y. 2005-06. 2. The facts are brought out at Para 3 page 2-3 of the CIT (A) orders which is extracted for ready reference: "3. Briefly stated the facts of the case are that the appellant is a company engaged in the business of manufacturing of auto catalyst. For assessment year 2005-06, the appellant filed its return of income on 31.10.2005, declaring a total income of Rs.12,54,72,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention with supporting evidence before the A.O." 5. We have heard Mr. D. K. Mishra the ld. DR on behalf of the revenue and Mr. Vikash Srivastava, Advocate, the ld. counsel for the assessee. 6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows: The observation by the AO is at page two of the assessment order. The relevant portions are extracted for ready reference. "The assessee had deducted Rs.2,00,84,000/- on account of stock written off in earlier year, sold during the year. As the said amount had already been written off in accounts in earlier years the same should not be deducted from the net income of the year. Thus, an amount of Rs.2,00,84,000/- was proposed to be disallowed. The assessee submitted a reply dated 30.11.2010 which was examined and considered and was found to be unsatisfactory. As the said amount had already been written off in earlier years and the same was sold during the year, the same should not be allowed to be deducted from the computation of income. Thus an amount of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L a/c as such here). This provision is added back while making the computation of income and rightly so. However by reducing this amount from the net profit in the year of sale of this slow moving stock, assessee has depressed the income to that extent which is not permissible. The following example will highlight the method followed by assessee and the suppression to profit done by an accounting subterfuge. In the following example, we have taken the same cost and realizable value for the slow moving/obsolete machinery. i.e. cost per unit which is now considered obsolete /slow moving Rs.5000/- and realizable value of such unit at Rs.3000/-. Considering only one unit to be obsolete/slow moving which is so considered in year 1 and sold for Rs.3,000/- in year 2 and considering all other things to be constant (ceteris paribus), we draw the P L a/c as under. The assessee makes a provision of Rs.2,000/- in year 1 (i.e. provision assumed to be 100% perfect since anticipated realizable value and actually realizable value are taken to be the same i.e. 3,000/-) This is added to NP arrived at for year 1. YEAR 1 P L A/C OP STOCK OF OBSOLETE UNITS NIL SALE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken, profit goes down to that extent, showing a correct picture. When this stock is sold ultimately it should go to sales account. Per contra if assessee has adopted cost value, the profit has been shown more to that extent. But next year the same is shown as opening stock and that year the excess is again squared off. Thus increase/decrease in stock is only to know the truer picture of financial position of a business entity. The assessee can under no circumstances reduce the sales from net profit as it is an actual figure very much part of ultimate determination of profit. By reducing the sales taking the treatment in provision account, he has suppressed profit to that extent for the current year. It is well settled that accounting entries cannot affect the ultimate tax liability." 10.1 He submitted yet another note which is extracted for ready reference: "Obsolete stock Suppose in the first year 1 unit is obsolete. Then cl stock will be Rs.5000/- profit will be 11000. Next year cl stock will be 55000. Op stock will be 5000. Net profit is not affected. Suppose in the first year 1 unit is obsolete. Then cl stock is taken at 10000/- as such. P L a/c is debited to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y amounting to Rs.20,084 thousands in respect of aforesaid inventory has been written back to the profit and loss account. The Company is carrying year end provision for inventory amounting to Rs.10,215 thousands as at 31st March 2005 in respect of non-usable inventory." 13. A perusal of the above clearly indicates that what was written back was a "Provision" for inventory amounting to Rs.2,00,84,000/- from out of the total 'Provision' of Rs.3,02,99,000/- in the books of account. 14. Each year the assessee has been making a provision for inventory in the books of account maintained by the company. While filing its return of income, this provision for inventory made in the books of account, is added back to the income under the head "Profits and Gains of business or Profession," for the reason that it is not allowable under the IT Act. In other words the provision for slow moving/obsolete inventory, which is created each year in the profits loss account and balance sheet prepared in accordance with the Companies Act, 1956, has been specifically added back while computing taxable income under the IT Act, while filing the return of income of the respective year i.e. the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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