TMI Blog2016 (5) TMI 1354X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Bharat Earth Movers vs. CIT (2000 (8) TMI 4 - SUPREME Court) has held that liability being a determined one, though to be discharged in future, did not make it a contingent liability and it is an allowable liability. - Decided against revenue Disallowance on account of valuation of slow moving, non moving and obsolete stores - Held that:- On perusal of relevant facts and circumstances we are of the view that the change effected by the assessee was aimed at obtaining correct business profits as per the recommendations of evaluation report submitted by the CAG and Engineer/Valuer respectively. It is nobody’s case that the assessee has not accumulated such stocks in the past. Undoubtedly, such stock went on losing its value for the purpose of assessee’s business, thereby deteriorating assessee’s profits year in and year out. It was in such a scenario that a decision was taken to investigate the entire matter by appointing a committee of experts on whose recommendations, based on proper study of market condition, the assessee company reduced the value of stocks and this value has been carried forward to the next year and assessed as such. Respectfully following the same, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s own case for Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013. The Tribunal for Assessment Year 200910, has relied upon the decision of Hon'ble Jurisdictional High Court as well as the decision of Coordinate Bench of this Tribunal in Mahlaxmi Sugar Mills Co. Ltd. Vs CIT (1986) 157 ITR 683 (Del.) and Imcola (Exports) Ltd., in I.T.A.No.974/Mum/2009 respectively. The relevant findings are given in para 7 page 4 of the said order and read as under: 7. Ground no.2 is against the deletion of addition of ₹ 2,36,00,000/- being demurrage wharfage charges. These charges are paid to the railways towards delay in loading and unloading operations beyond the time frame fixed by the Indian railways. The AO was of the view that the amount paid as demurrage and wharfage to the railways is a fine or penalty and hence disallowed the expenditure. The Ld. CIT(A) has dealt with the issue at page 44 para 5. The payment in question is not the penalty or fine for violation of any statute. It is compensatory in nature. The issue stands covered by the following decisions. i. Nanhoomal Jyoti Prasad vs. CIT (1980) 123 ITR 269 (All) ii. Mahalaxmi Sugar Mill Co. Ltd. vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion laid down in explanation to section 37(1) wherein it has been said any amount paid for the purpose which is an offense or which is prohibited by low shall not be allowed as expenditure. 8. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the Railway Act has defined the demurrage and wharfage as the charge levied, charge means the blame or accusation hence penalty. 9. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in low by directing the AO to verify the facts again and re-examine the case of the assessee alter giving opportunity of being heard to the assessee, though the AO had duly fallowed the said procedure at the time of the assessment proceedings. 10. Whether an the facts in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that the assessee has not filed any new/additional documents which needs to re-examined. 3.1 At the outset, Ld. A.R. submitted that grounds No. 1 to 5 are covered by the order of this Tribunal in assessee s own case for the Assessment Year 2009-10 in I.T.A.No. 4076/Del/2013 vide order dated 20.05.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings made at para 4.2 to 4.4 of his order. Now, the Department is in appeal. 3.4 Ld. A.R. submitted that Hon'ble Jurisdictional High Court has affirmed the order of the Tribunal for Assessment Year 2004-05 in I.T.A.No. 541/2012 vide order dated 24.09.2012 and has held as follows: The Tribunal endorsed the finding of the CIT(A). It relied upon its decision for AY 2004-05, as is apparent from its discussion in para 9. The Tribunal's finding would show that it had also relied upon the decision of the Supreme Court in Fuerst Day Lawson Ltd. Vs. Jindal Exports Ltd. (AIR 2001 SC 2293). This Court. also noticed that having regard to the terms of the repeated Arbitration Act, 1940, an award could not be enforceable. The same was the case with the foreign award, the Court had to first adjudicate as to the enforceability. In these circumstances, the assessee's right to interest was a mere claim, till the date of the judgement of the Court dt. 4th Dec, 2006. In other words, the right to interest crystallized after the judgement of the Court. Till then, it was inchoate. For this reason, the Tribunal's finding cannot be faulted with. No substantial question of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed mercantile system of accounting where there cannot be a situation of hypothetical income being taxed. In the entirety of the circumstances of the case before us, though the notional interest in the books of account noted as outstanding dues and based on the advance paid to the supplier, during the relevant time, there was no prospect of realization of the notional interest worked out by the Assessing Officer when principal amount itself was difficult to be recovered. 3.8 An income to be taxed, has to be real income and not a notional income and concept of accrual of income can be applied only to the real income as laid down in the judgement passed by the Hon'ble Supreme Court in the case of Godhra Electricity Company Ltd. Vs CIT (1997) 225 ITR 746. The Hon'ble Supreme Court held as under: The question whether there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal raised by the Revenue for the year under consideration are as under: 1. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in law by ignoring the fact that Section 145 of the IT Act, permits use of one type of accounting system in a particular year and mixed accounting system is not at all allowed. 2. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in law by not considering the fact that as per the provision of Section 145 of the IT Act. 3. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in low by ignoring the fact that by allowing the contention of the assessee, the assessee will be allowed to follow the hybrid system of accounting which is against the code of IT Act. 4. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred in law by deleting the additions made by the AO on account of accrued interest of ₹ 6.48 crores by ignoring the finding of Hon'ble High Court in the assessee's case for AY 2004-05, wherein court has held that the addition, if any can only be made in the year when the award become the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial security benefits which are as under: S.N. Nature of provision Debited to P L account (Rs.) Actual payment (Rs.) A Long service award 30.94 lacs 15.50 lacs B Post retirement medical benefit 155.12 lacs 38.16 lacss C TA on retirement 10.09 lacs 1.04 lacs D Social security benefits 175.64 lacs 122.63 lacs Total 371.79 lacs 177.33 lacs 4.2.1 The Assessing Officer held the liability as not ascertained, and disallowed the provisions to the extent of ₹ 194.46 lacs. 4.2.2 Ld. CIT(A) has dealt with the issue at page 52, para 7.4 of his order. Ld. CIT(A) relied upon the decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd. Vs CIT 37 ITR 01, Metal Block Co. of India Ltd. Vs their workmen reported in 73 ITR 53 and Bharat Earthmovers Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment Year 2006-07 to 2009-10 relate to the disallowance on account of valuation of slow moving, non moving and obsolete stores. Ld. A.O. during the assessment proceedings observed that the assessee has reduced the profits due to valuation of slow moving, non moving and obsolete stores and spares. Assessing Officer observed that there was due modification in accounting policy. He thus disallowed the valuation arrived at by the assessee for all the Assessment Years under consideration. 5.1 Aggrieved by the order of the Ld. A.O., the assessee preferred appeal before ld. CIT(A) whoconfirmed the addition made by the Assessing Officer. 5.2 Before us, Ld. A.R. submitted that the assessee is a public sector undertaking engaged in the business of manufacturing of fertilizers and other related products. He submitted that the assessee has been following accounting standard notified by Institute of Chartered Accountants of India (ICAI) in accordance with the provisions of Section 211(3A) of the Company s Act consistently. Ld. A.R. submitted that till the current year, the assessee had adopted AS-2, the same was yet to be fully implemented, in so far as valuation of non moving/slow mov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 015) 375 ITR 276, CIT Vs Corporation Bank Ltd. (1988) 174 ITR 616 (Kar.), Bharat Heavy Electricals Ltd. Vs DCIT (2005) (7) TMI-299-ITATDel. 6. On the contrary, Ld. D.R. submitted that the assessee has changed the method of valuation and has not reflected the true profits. He submitted that the assessee has not followed the mandate of Section 145A of the Act, which starts with a non obstinate clause and override the other provisions of the Act. He further submitted that the assessee s case is not similar to the facts of the case of M/s. Indian Rare Earth Ltd. (supra) as well as Corporation Bank Ltd (supra), the decisions which have been relied upon by the assessee. Ld. D.R. submitted that there is no deterioration in the spares/stores in assessee s case and if this principle as held in the case of Indian Rare Earth Ltd. (supra) is applied, the claim of assessee cannot be allowed. 6.1 Ld. D.R. submitted that in the case of Corporation Bank Ltd. (supra), the issue for consideration was as to whether the real value/market value needs to be adopted by arriving at the valuation of stocks in trade. He further submitted that assessee has devalued the spares/stores without any basis, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of slow-moving/surplus/obsolete stores, spares was made on the basis of the report of the approved valuer, and it can be said that the amount written off was not an arbitrary one and claim of loss on this account was actual. Assessee has followed this policy consistently in subsequent years. It is an established principle in context of section 145, that 'Regular does not mean Permanent for system of accounting. The statute stipulates that the income shall be computed on the system of accounting 'regularly' followed by the assessee. However, the provision u/s.145 cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. It has not been pointed out with reference to any provision that a change is impermissible or barred even when it is warranted by an existing situation. 10. As rightly pointed out by the Ld. A.R., the account of the company is subjected to audit not only by the statutory auditors but also by CAG. In these circumstances, the bona fides of procedure adopted for valuation or genuineness of claim cannot be doubted. Even otherwise, when the stock of material is actually found to be dead or non usable o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment; (b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. 8. In our view, the objection raised by the assessee on account of the method of accounting is not justifiable, inasmuch as Section 145A deals with the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head Profits and gains of business or profession and it requires the assessee to follow the method regularly employed by the assessee. In the present case, it is not in dispute that the method of accounting had been altered with effect from the Assessment Year 2001-02. However, the facts reveal that the write off was on account of deterioration in the condition of the non-moving stores since the assessee's plants were located in remote places and near the sea. The non-moving stores and spares were corroded over a period of time due to wear and tear. This method of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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