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Ambuja Cements Limited (Formerly known as Gujarat Ambuja Cement Limited) Versus CIT LTU, Mumbai

2017 (11) TMI 675 - ITAT MUMBAI

Validity of revision order u/s 263 - absence of any scientific basis for fixing the percentage to make the provision for slow moving inventories of spares - Held that:- As the non-satisfaction of the Commissioner about the scientific basis of creating the provision, has not been referred to in the notice, dated 26.02.2016, at all, whose relevant portion has been reproduced by us in the earlier part of the order. Therefore, the preliminary point which is sought to be raised by the assessee based .....

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portion has been reproduced by us in the earlier part of the order. Therefore, the preliminary point which is sought to be raised by the assessee based on the judgment of Hon’ble Supreme Court in the case of Amitabh Bachchan (supra) is very much applicable in the given facts of the present case. Notably, section 263(1) of the Act obligates the Commissioner to give the assessee an opportunity of being heard before passing of his order. - The relevant discussion in the order of the Commission .....

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is not elaborated. - Decided in favour of assessee. - ITA No. 3563/Mum/2016 - Dated:- 10-11-2017 - Shri G S Pannu, Accountant Member And Shri Ram Lal Negi, Judicial Member Appellant By : Shri Soumen Adak Respondent By : Shri R P Meena ORDER Per G S Pannu, Accountant Member This appeal by the assessee is directed against the order passed by the CIT(LTU) [in short the Commissioner], Mumbai, dated 29.03.2016, holding the assessment order passed by the Assessing Officer u/s. 143(3) of the Act, dated .....

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the total income was assessed at ₹ 9,94,52,94,305/- under the normal provisions of the Act and the book profit u/s. 115JB of the Act was determined at ₹ 19,13,21,89,572/-. Subsequently, the Commissioner invoked his revisionary jurisdiction and issued a notice u/s. 263 of the Act, dated 26.02.2016, proposing that the assessment order, dated 28.02.2014 (supra), was erroneous in so far as it was prejudicial to the interests of the Revenue, in as much as incorrect allowance of Provision .....

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age of the inventory and it was consequent to a change in policy of recognizing provisions for slow moving inventories of spares. The Commissioner further noticed that this provision was created for the first time and was meant for temporary diminution in the value of spares meant for plant and machinery and, hence, related to capital in nature. Thus, according to the Commissioner, it was an incorrect allowance made in the assessment order dated 28.02.2014 (supra). 3. In reply to the show cause .....

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the assessee. However, the Commissioner was not satisfied with the submissions put-forth and held that the requisite conditions prescribed for invoking section 263 of the Act were fulfilled in the present case and he justified the invoking of section 263 of the Act. 4. In so far as the merits of the issue was concerned, the Commissioner directed the Assessing Officer to withdraw the allowance of such provision and his relevant discussion is contained in para 5 of his order, which we would reprod .....

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o of the judgment of Hon ble Supreme Court in the case of CIT vs. Amitabh Bachchan [384 ITR 200]. It is sought to be emphasized that the basis on which the Commissioner has found the assessment order to be erroneous in his order is quite different from the point raised in the show cause noticed issued u/s. 263 of the Act, and that in fact the error finally established in the impugned order was not put to the assessee at all. On this basis, it has been argued that the order of the Commissioner is .....

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tice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner of Income-tax to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of section 263. Of course, there can be no dispute that while the Commissioner of Income-tax is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controv .....

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moving inventories. Vide Schedule P read with notes 18 to the accounts, it is stated that consequent of change in policy of recognizing, provisions for slow moving inventories of spares, based on the age of inventories, the company has made a provision of ₹ 52.80 crore for slow moving inventories. This provision was created for the first time having effect on profit for relevant assessment year. Further, the provision is meant for temporary diminution in the value of spares meant for plan .....

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ving inventories of spares is Capital in nature and, therefore, it has been incorrectly allowed by the Assessing Officer in the assessment order dated 28.02.2014 (supra). Thus, in the show cause notice, the Commissioner had found the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue for the aforesaid reason. 8. Now, we may touch upon the manner in which the Commissioner has justified the fulfilment of conditions prescribed in section 263 of the Act in his .....

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the Act would be untenable in law. In this background, we may now examine the manner in which the Commissioner has dealt with the conditions prescribed u/s. 263 of the Act in his order. The relevant discussion is contained in para 4 & 5 of his order, which reads as under: 4. I have carefully considered the issue and perused the records. The allegation of the AR that revisiting the inventory for its categorization amounts to taking alternative view, is ill founded. Unlike reopening of assessm .....

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y that spare parts purchase for existing machineries has to be treated as revenue expenditure as these spare parts are purchased for maintenance of existing equipments. But at the same time, part of spare parts are capitalized and in the name slow moving inventory, provision of 30%, 50% or 80% is made. The assessee does not have any scientific basis for fixing the percentage of which provision is made. Such provisioning is not supported by Accounting Standard, and hence deserves to be disallowed .....

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ee before him in the case of Dr Aswath N Rao vs. ACIT [326 ITR 188]. The assessee had relied upon the said judgment for the proposition that the cost of spare parts procured for the maintenance of the existing machineries were to be treated as revenue expenditure. The Commissioner notes that part of the spares are capitalized and that assessee was also making the provision for slow moving inventories of spares, which were being debited to the Profit & loss account. The Commissioner concludes .....

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en held to be erroneous in so far it was prejudicial to the interests of the Revenue ultimately. 9. When the aforesaid was put across to the learned CIT-DR, at the time of hearing, his only plea was that the said aspect was very much emerging from the show cause notice u/s. 263 dated 26.02.2016 (supra), and, therefore, it cannot be said that the assessee was not made aware about such a point. The aforesaid plea of the learned DR, in our view, is quite contrary to the factual situation in as much .....

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of the Act obligates the Commissioner to give the assessee an opportunity of being heard before passing of his order. No doubt the Commissioner is not disentitled to consider a point which is not stated in the notice so issued. However, the obligation to given an opportunity to the assessee of being heard on the point on the basis of which he finds it expedient to treat the assessment order erroneous in so far as it is prejudicial to the interests of the Revenue, is definitely cast on the Commi .....

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al before us. Thus, on this point itself, we find the impugned order of the Commissioner to be untenable in the eyes of law. 10. The aforesaid proposition can also be understood in the present case from a different angle. As observed by us earlier, in the show cause notice the Commissioner considered the assessment to be erroneous in so far as it was prejudicial to the interests of the Revenue on the ground that the provision in question was capital in nature and, thus, the same was incorrectly .....

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tion/basis of making the Provision, which impliedly conveys that he accepted the plea of the assessee of the Provision being in the nature of revenue item charged to the Profit & loss account. Of course, the Commissioner is free to exercise his revisionary power u/s. 263 of the Act on any ground but what is of essence is that the assessee ought to have been allowed an opportunity to explain the circumstances on the ground formulated by the Commissioner to treat the assessment being erroneous .....

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Therefore, the impugned order of the Commissioner is untenable in the eyes of law. 11. Before parting, we may also refer to the merit of the dispute in slight detail because the Commissioner has decided the issue on merits and held that the said provision is disallowable. In this context, the relevant facts are that the appellant is engaged in the manufacture of cement. In its submissions before the Commissioner, the assessee explained that in its line of business strict supervision of quality .....

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& loss account. With regard to the inventories of such type of spares, it made a provision of 30%, 50% and 80% depending upon the item of inventory, which is lying unused for more than one, two and three years respectively. It is this Provision, which is the subject matter of dispute. The second kind of spares were those which were specific to particular plant & machinery and their use was expected to be irregular and assessee had capitalized the purchase of such spares. In so far as th .....

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ovision. The objection of the Commissioner, in our view, is quite untenable in as much as the basis for making the provision was explained by the assessee to be the aging analysis of the spares lying in the inventory. Why and how the Commissioner does not find it to be a scientific basis is not elaborated. In fact, it is a case where the basis put forth by the assessee has been given a complete go-by without any cogent reasoning. Therefore, in our opinion, even the reason advanced by the Commiss .....

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