TMI Blog2011 (12) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... directed against the CIT(A) s order in deleting the addition of ₹ 18,19,034/- out of total addition of ₹ 24,25,379/- made in the Assessment Year 2004-05, and in deleting the addition of ₹ 2,60,412/- out of total addition of ₹ 3,47,216/- made in the Assessment Year 2005-06, by the Assessing Officer on account of provision made for impairment of stock. 4. The only ground raised by the assessee in both the Assessment Years is against sustaining the part disallowance to the extent of 25% of total disallowance made by the Assessing Officer on account of provision for impairment of stock in both the years under appeal. 5. Since the issues with regard to the assessee s claim of provision for impairment of stock in both the Assessment Years raised by the revenue as well as by the assessee are identical and inter-connected, these grounds are taken together for our decision. 6. Facts of the case giving rise to the aforesaid issues regarding assessee s claim of provision of impairment of stock as borne out from the orders of the authorities below and submissions of the assessee are set-out, in brief, below. 7. The assessee company is engaged in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by the AO that the adjustment made by the assessee was only notional and without any basis, and in case the inventory is sold, the resulting loss and gain will automatically be accounted in that year and therefore, there was no need to make any adjustment in that regard on provisional basis. By giving this reason also the claim of the assessee was rejected. 8. Being aggrieved, the assessee preferred an appeal before the learned CIT(A). 9. After considering the submissions of the assessee and the AO s order, the learned CIT(A) restricted the disallowance to 25% of the total disallowance made by the AO after placing a reliance upon the decision of ITAT, Calcutta in the case of Joint Commissioner of Income-tax vs. I.T.C. Calcutta as reported in (2005) 299 ITR 341 (AT)(Cal.). The relevant operative portion of the CIT(A) s order in A.Y. 2004-05 runs as under:- I have gone through the submission of the appellant. Even at the appellate stage the assessee could not furnish the details of the inventory on account of which it has debited on amount of ₹ 24,25,379/-. However, it is acceptable that there can be some diminishing in the value of inventory but in the absence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that in some of the items, even the value has been taken at Nil , which is not at all justifiable inasmuch as there must be some value of stock even if it is sold in the market as a scrap. 13. The learned counsel for the assessee on the other hand, submitted that the assessee as per the consistent method of valuation of stock, has valued the closing stock at cost or net realizable value, whichever is lower and in some items of inventories, the net realizable value has been taken at Nil because of the reason that these stocks could not be sold in the market and as such, the market price in the instant case would be Nil . He further submitted that the net realizable rate has been taken as per the assessment made by the person of technical division of the assessee company. He further submitted that the decision of Income-tax Appellate Tribunal, Special Bench in the case of JCIT vs. I.T.C. Calcutta reported in 299 ITR 0341 (AT) is not applicable to the present case inasmuch as in the present case, the assessee has furnished the details of inventories and the rate at which they were valued for the purpose of determining the value of closing stock at the end of the year. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 31.03.2003 vis- -vis as on 31.03.2004 in respect of certain items. For instance, in respect of item SAT-ANT-REFLKU- 1.2M-PROD, the assessee has taken a realizable rate at ₹ 4,000/- per piece as against ₹ 6000/- being realizable rate as on 31.03.2003. On an average, the realizable rate as on 31-03-2004 has been adopted by giving a discount from 10% to 30% on the net realizable rate taken as on 31.03.2003. In the immediate preceding Assessment Year ended on 31st March, 2003, the assessee had valued the used material at normal value of ₹ 2,30,29,825/- and net realizable value of the same has been taken at ₹ 1,69,93,049/-, thereby giving a reduction to the extent of ₹ 60,36,776/- to the normal value on account of wear and tear to the equipments, and the aforesaid sum of ₹ 60,36,776/- was claimed as devaluation in the value of inventories in that year, which has been allowed by the AO. No such devaluation seems to have been claimed in the year ended on March 31, 2002 as is evident from the inventory valuation as on March 31, 2003, a copy of which is placed at page 31 of the Paper Book. The assessee has also furnished the valuation of stock used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is entitled to value closing stock at cost or market price, whichever is lower. In other words, the method of valuing the closing stock at cost or net realizable value, whichever is lower, by the assessee cannot be said to be unacceptable. The assessee has relied upon the decisions of the Hon ble Supreme Court in the cases of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), where it has been held that it is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock and trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. The assessee also made a reference to the decision of Hon ble Delhi High Court in the case of CIT vs. Bharat Commerce and Industries Ltd. (1999) 240 ITR 256 (Del), where it was held that the assessee may value slow moving stock at the net realizable value. Reference was also made to some other decisions reiterating the same principle that the assessee is entitled to value the goods at a lower cost or market price, and if there is no demand for the goods in the market, the assessee is entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessment Year 2005-06, the assessee has merely claimed the devaluation in the stock to the extent of ₹ 3,47,216/- only against ₹ 24,25,379/- claimed in the immediate preceding Assessment Year 2004-05 and ₹ 60,37,776/- claimed in the Assessment Year 2003-04 inasmuch as the stocks were mostly became defective by 31-03-2003 and 31-03-2004 and slightly became more defective in the Assessment Year 2005-06. Thus, it is not a case where the assessee has adopted a practice to devalue the stock at its own will and desire without having any regard to the net realizable value of the asset at a particular date. In this view of the matter, we therefore, delete the disallowance of assessee s claim to the extent of 25% sustained by the learned CIT(A) and allow the assessee s total claim made in the return of income in both the Assessment Years. 19. In the result, this ground raised by the revenue in both the Assessment Years is rejected and that of the assessee is allowed. 20. Ground No.3 raised by the revenue in A.Y. 2004-05 is with regard to the addition of ₹ 7,93,503/- on account of Custom Duty deposited with Special Valuation Branch (SVB) loading, which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Taking this into consideration, the Tribunal felt that it would not be appropriate to limit the claim of the assessee only to the extent of the actual liability. It was found that there is no error in directing the Assessing Officer to make a verification with regard to the excess payment, if any and to tax the amount if it has not already been taxed. The Tribunal also limited the liability of the actual amount to the assessment year under consideration. 6. We cannot find any fault in the view taken by the Tribunal primarily because the liability was required to be discharged by the assessee on demand and the assessee had no option but to make the payment. This clearly falls within section 43B(a) of the Act. 7. Learned counsel for the revenue contended that the amount deposited by the assessee is not customs duty at all. No such argument was canvassed before the Tribunal and we cannot permit learned counsel to raise such an argument at this stage. 24. Identical ground has also been raised by the revenue, vide ground No.2, in A.Y. 2005-06, regarding assessee s claim of deduction of ₹ 45,556/- on account of custom duty deposited with Special Valuation Branch ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be allowed as deduction and is hence added back to the declared income. 28. Similarly, the claim of warranty expenses amounting to ₹ 87,41,759/- in A.Y. 2005-06 has been disallowed by the A.O. for the reason that the assessee has failed to furnish any evidences to prove that this liability of warranty has actually been ascertained and incurred by the assessee. 29. On an appeal, the learned CIT(A) allowed the assessee s claim after following the decision of the Tribunal in A.Y. 2003-04 in the assessee s own case. 30. We have heard both the parties and perused the material on records. 31. The assessee had entered into an agreement dated 18.02.2002 with Hughes Escorts Co. Ltd. (HECL) whereunder HECL had ensured warranty support to the assessee in respect of sale of certain hardware equipments together with providing certain services with respect to providing logistic support for sale of certain hardware equipments. The warranty support was required to be provided for a period of one year from the date of delivery/installation of the equipment, and it would include replacement repairing and providing onsite support as and when required, and in consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he liability shall have to be discharged is not certain. 58. Considering the claim of the assessee in view of the above mentioned observations of their Lordships, we find that the ld. CIT(A) has rightly held that such claim of the assessee is allowable. Therefore, we decline to interfere and the departmental appeal is dismissed. 32. In this connection, reliance may be placed upon the decision of Hon ble Supreme Court in the case of Rotork Control India P. Ltd. vs. CIT and some other related cases (2009) 314 ITR 62 (SC), where it has been held that when warranty is an integral part of the sale price, it stood attached to the sale price of the product and in that case, the warranty provisions had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources, and a reliable estimate could be made of the amount of the obligation, and, therefore, the assessee had incurred a liability during the assessment year which was entitled to deduction under sec. 37 of the Act. In the present case, the assessee has sold certain hardware equipments together with warranty provisions, and outsourced the warranty provision to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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