TMI Blog2018 (1) TMI 882X X X X Extracts X X X X X X X X Extracts X X X X ..... or net realisable value, as per the accounting policy which was followed by the assessee. Lower authorities had dislodged the claim of the assessee as regards the writing off the inventories of the amalgamating company, without placing record any material which could go to conclusively disprove the said claim of the assessee - now when the assessee had given specific reasons for having written off the stock inventories, therefore, in case if the A.O had a conviction that there was no justification for the assessee to have raised such a claim or that the same was found to be incorrect, then he remained under an obligation to have rebutted the explanation of the assessee by placing on record concrete material which would have conclusively disproved beyond doubt the authenticity of the claim of the assessee. No such exercise had been done by the lower authorities and no such material had been placed on record which could persuade us to conclude that the claim of writing off the inventory by the assessee was not found to be in order. Also unable to persuade ourselves to subscribe to the view of the CIT(A) that the claim of the assessee as regards the writing off the inventories w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses from the assessment order passed by the A.O under Sec. 143(3) of the Income tax Act, 1961 (for short Act ), dated 30.12.2011. The assessee had assailed the order of the CIT(A) on the following grounds of appeal: Being aggrieved by the order passed by the Asst. Commissioner of Income Tax, Range 3(3), Mumbai ('AO', for short), your appellant submits the following grounds of appeal for your sympathetic consideration: 1. On the facts and circumstances of the case and in law, the learned A.O erred in disregarding method of valuation of inventory at lower of cost or net realizable value and thereby erred in not allowing deduction of ₹ 14,40.81,661/- being difference between cost and net realizable value of certain inventory items. The learned AO further erred in considering adding the said amount to the book profits u/s 115JB by wrongly concluding it as provision for diminution in value of asset. 2. On the facts and circumstances of the case and in law, the learned A.O erred in disallowing expenses u/14A to the tune of ₹ 7,17,832/- comprising of ₹ 6,60,623/- out of interest expenses and ₹ 57,209/- out of other expenses by applying R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of both the companies were adopted on standalone basis for the purpose of the Companies Act, 1956. That as the order of the Hon ble High Court of Bombay approving the amalgamation was received by the assessee on 14.09.2009 i.e before the due date of filing of the return of income for A.Y 2009-10, therefore, the assessee while filing its return of income prepared consolidated accounts incorporating the assets and liabilities of the amalgamating company, viz. M/s Sequent Scientific Limited at their respective book values. However, the assessee after identifying and writing off the value of certain dead, non-moving and obsolete inventory of the amalgamating company, revised its return of income. 4. The A.O during the course of the assessment proceedings called upon the assessee to explain as to on what basis the inventories were written off by an amount of ₹ 14,40,81,661/- in the revised return of income. The assessee in its reply submitted before the A.O that though it was following the conventional method of valuation of inventory at Cost or net realizable value, whichever is lower , however, due to paucity of time and in the backdrop of the fact that it was occup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated in the notes to account that the inventory have been valued at lower of cost or net realizable value, one fails to understand, how the obsolete stock was not valued at Rs. Nil, as on the preparation of the financial accounts based on which the original return of income was filed. iv. On examination of details of stock written off attached with the submission dated 20.11.2011, it can be seen that the inventory which has been manufactured in the year 2009 has also been considered as obsolete (namely i.e, item No.5 - Triazine Stage -3 valuing ₹ 90,64,548/-, item No.9 Acitretin - ₹ 24,84,024/-, etc.). Similarly, the stock which is not older than even 2 years has also been identified as obsolete stock for filing the revised return. These also raise the question as to the appl ication of the accounting policies by the assessee over the years in respect of inventories. v. Though the assessee in it submission contended that they have str ingent FDA norms and the company is prohibi ted to sold the expires stock either in the market or as a scrap, however, the assessee failed to bring on record anything about the FDA norms and how the company has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same had become obsolete; (ii) that it was beyond comprehension that the inventory comprising of raw material, capital work in progress and finished products which were taken over by the assessee from the amalgamating company had been considered by the assessee as obsolete and non-moving and written off after 10 months of obtaining the approval of scheme of amalgamation by the Hon ble High Court; (iii) that in the standalone amalgamated financials of the amalgamating company the inventory was certified and physically verified by the management and valued at ₹ 14,40,81,661/- and nowhere it was mentioned that any part of the inventory was either obsolete or non-moving; (iv) that during the course of the assessment proceedings the certificate of physical verification by the management of the amalgamating company was placed on record, therefore, now when the said amalgamating company was also valuing its inventory at the lower of the cost or net realizable value, therefore, there was no justification for the assessee to have valued the inventory at Rs. Nil; (v) that now when a perusal of the notes to accounts of the stand alone financials of the assessee company revealed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no disallowance of expenses incurred for earning such tax free income was made by the assessee under Sec. 14A of the Act in its return of income. The A.O in the backdrop of the aforesaid facts worked out the disallowance under Sec. 14A r.w Rule 8D at ₹ 7,17,832/- in the hands of the assessee. 7. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The assessee assailed the rejection of its claim of writing off the inventory of ₹ 14,40,81,661/- by the A.O. The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the facts of the case, though was in agreement with the claim of writing off by the assessee of the top 10 items of the value of ₹ 12,00,67,368/-, which accounted for 83% of total inventory written off, but however, was not persuaded to subscribe to the claim of the assessee as regards writing off the inventories of less than one year of age of a value aggregating to ₹ 1,85,37,248/-. The CIT(A) while partly allowing the claim of the assessee, observed as under: 7.8 I have considered the A.O‟s order as well as the appellant‟s A/R submission and also the documents placed on record. I find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's submission and even af ter taking note of Accounting Standard AS-2, I am of the considered view that the justification given by the appellant in respect of inventory written off which is of less than 1 year of age cannot be held justified, as the reasoning given are not at all acceptable in a normal business parlance of the trading. The appellant's this argument that customer cancel the order cannot be held justif iable as in the present era of communication and also awareness of trading interest the appellant's submission is not at all acceptable. If the appellant was going for new product venture, he has to ensure its business interest and not only this, the appellant can also sue the party in the court on whose order such product was manufactured, if the said customer has not complied with terms and conditions of business agreement. Besides this, the appellant cannot write off its stock without even ascertaining its marketability and usefulness with some prospective customer. Further to that even in respect of Quent- 19 and ACITRETIN, the appellant cannot merely write off stock without ascertaining and examining the possibility of realization of such product in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he policy in the context of revised return as the claim of write off is made in the revised return. 7.11 Admittedly inventory valuation policy of SSL-E is same as of the appellant company i.e. lower of cost or net realisable value. The observation of the AO is that SSL-E has valued the same stock at cost and only in the revised return it was written down to its net realizable value. The AO has also argued that the whole arrangement was to reduce taxable income of the appellant company. I am inclined to agree with the appellant's explanation that it would not make a difference if inventory was valued lower by ₹ 14.40 crores in the books of SSL-E or in the books of the appellant company after amalgamation. Even if the inventory had been written off in the books of SSL-E before amalgamation, it would form part of carry forward losses of SSL-E. The appellant company submitted valuation report for determining share exchange ratio in the amalgamation. Enterprise value of both the companies is computed on Discounted Cash Flow basis which takes into account future cash flows. Thus, inventory write off has no impact of share exchange ratio. The appellant submitted that claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration. It was submitted by the ld. A.R that the inventories of the amalgamating company which were found by the assessee to be non-moving/obsolete or whose shelf life had expired were written off by the assessee. The ld. A.R submitted that the assessee which was following the conventional method of valuing its stock at cost or net realizable value, whichever is lower , had rightly as per AS-2 scaled down the value of the inventory to its net realizable value. The ld. A.R submitted that the claim of writing off the value of the inventories by the assessee was absolutely in conformity with the conventional method of valuation of inventories at cost or net realizable value, whichever is lower , as was followed by the assessee. The ld. A.R submitted that no infirmity did emerge from such writing off the inventories, which was duly substantiated in the course of the assessment proceedings before the A.O. The ld. A.R in support of his contention relied on the order of the coordinate bench of the Tribunal, viz. M/s Kopran Drugs Ltd. vs. ACIT (2010) 35 DTR 380 (Mum) . The ld. A.R further placed reliance on the order of the ITAT, Mumbai in the case of DCIT Vs. Beck Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er drew our attention to the Notes to accounts forming part of the financial statements of the assessee for the year ended 31.03.2009 (Page 13-15 of APB ). The ld. D.R supporting the order passed by the A.O, took us through the observations recorded by the A.O at Page 2-6 wherein the latter after deliberating at length had concluded that as the writing off the inventories of the value of ₹ 14,40,81,661/- by the assessee were not backed by any evidence, therefore, the same were liable to be rejected. The ld. D.R took us through Page 3 Para 5.4 of the assessment order where the A.O had given various reasons for rejecting the claim of writing off the inventory by the assessee. The ld. A.R in his rejoinder submitted that the order of the Hon ble High Court dated 16.06.2009 was delivered to the assessee only as on 14.09.2009. The ld. A.R in order to support his aforesaid claim drew our attention to the copy of the order of the Hon ble High Court at Page 122 of APB , which revealed the fact as was averred by the assessee before us. The ld. A.R submitted that despite the fact that the assessee had explained the reason for writing off each and every item of the inventory, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealizable value of the inventory on an analysis was found to be lower than the book value carried from the accounts of the amalgamating company. We find that the assessee after claiming that the net realizable value of the inventory was lower than its book value by an amount of ₹ 14,40,81,661/-, had thus written off the inventory to the said extent and revised its return of income. We are of the considered view that keeping in view the limited time that was available with the assessee at the time of filing of the return of income, the claim of the assessee that it had only subsequent to the filing of the return of income carried out the technical/chemical analysis, verified the shelf life and explored other commercial viability of the inventory items and valued the same at lower of cost or net realizable value, carries substantial force and could not have been summarily rejected. We find that the claim of the assessee that non-moving, unusable and expired stocks forming part of the inventory of the amalgamating company were written down to its net realizable value while filing the revised return of income was rejected by the lower authorities without placing on record any irr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R PHOSPHATE CRUDE 6,656,855 2006 This drug was meant for Tamilflu (Bird flue). We have procured material in 2005 and converted in to crude anticipating order from customer. The order did not materialize and the crude lost its shelf life and could not be sold. Hence written off not moved for more than 1.5 years. Stock pertains to prior to 31.03.2009. 7. FG Quent 19 4,714,488 2009 This is antioxidant meant for polymerisation and anti corrosive reaction. The product was not meeting the customer specification and hence written off. 8. RM BETA THYMIDINE 8,900,111 26.12.2006 It s a raw material for Zudovidine. Imported in 2007. Because of non usage of material for longer time the product quality got deteriorated. 9. WIP ACITRETIN 2,484,024 2009 Its used as drug for psoriasis. This is a development product. Written off after checking the stability da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on 14.09.2009, the assessee before filing of its return of income for A.Y 2009-10, being left with limited period for analysing and assessing the realisable value of the inventory of the amalgamating company, had thus recorded the same at the book value and prepared the accounts accordingly. We further are of the considered view that as observed by us hereinabove, there is no reason for us to doubt the claim of the assessee that it had after filing the return of income valued the inventory acquired from the amalgamating company and after making necessary adjustments shown the same at the correct realisable value in the books of account. We further are persuaded to subscribe to the claim of the assessee that keeping in view the fact that the assessee was valuing its inventory at cost or net realisable value, whichever was lower, therefore, even if the stock would have been written off in the books of accounts of the amalgamating company, viz. Sequent Scientific Ltd. before the amalgamation, the assessee would have been eligible for carry forward of the loss on account of such write off. We thus are of the considered view that though the amalgamating company, viz. Seqeunt Scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred on the development of the drug was not commercially viable, therefore, the said item remained with the assessee as such, with no realizable value. Rs.24,84,024/- We find that the assessee had given a detailed explanation as regards the reason for writing off the aforesaid three items that were purchased during the year 2009 itself, aggregating to a value of ₹ 1,62,63,060/-. We find ourselves to be in agreement with the claim of the assessee that as the criteria of products in the nature of chemicals, drugs and other pharmaceutical items becoming obsolete not only depend upon the period, but also on various factors, such as condition of the product and obsolescence due to technology changes etc. which changes the proprietary of the product with the passage of time, therein rendering such items as no longer usable even after one or two years, therefore, the veracity of the claim of the assessee as regard writing off the aforesaid products, viz. (i). Triazine Stage-3; (ii). Quent 19; and (iii). Acitretin and other such items which were purchased in the year 2009, could not be summarily dismissed. 12. We have given a thoughtful consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries, therefore, in case if the A.O had a conviction that there was no justification for the assessee to have raised such a claim or that the same was found to be incorrect, then he remained under an obligation to have rebutted the explanation of the assessee by placing on record concrete material which would have conclusively disproved beyond doubt the authenticity of the claim of the assessee. However, we are afraid that no such exercise had been done by the lower authorities and no such material had been placed on record which could persuade us to conclude that the claim of writing off the inventory by the assessee was not found to be in order. Before parting, we may herein observe that our aforesaid view is fortified by the order of the coordinate bench of the Tribunal in the case of M/s Kopran Drugs Ltd. vs. ACIT (2010) 35 DTR 380 (Mum) , as relied upon by the ld. A.R., wherein the Tribunal adjudicating on the issue as is there before us in the present case, had in the backdrop of similar facts involved in the said case observed as under: 4. On going through the above clauses of the scheme of arrangement, it clearly transpires that this arrangement was effective from 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that such inventory was acquired by the assessee after the close of the year by virtue of the order passed by the Hon‟ble Bombay High Court but w.e.f. 1st Jan., 1998. In this scenario the assessee became the owner of all the assets and became liable for the liabilities of this division of Kopran Ltd. w.e.f. 1st Jan., 1998 and that is the reason that the business transacted by Kopran Ltd. in the bulk drugs division from 1st Jan., 1998 to 31st March, 1998 was recorded by the assessee in its account. In other words, all the assets and liabilities of the bulk drugs division of Kopran Ltd. were deemed to have been received by the assessee on 1st Jan., 1998. Now, when the closing stock was to be valued as on 31st March, 1998. it was supposed to have been valued at its regular method of valuation, being at cost or net realisable value whichever is less . The realizable value of this stock as on 31st March, 1998 was less by ₹ 3.54 crores though the process of determination of the diminution in the value of inventory was undertaken at a later date. If the scheme had been approved by the Hon‟ble Bombay High Court in the month of, say February, 1998, then the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered as obsolete due to change in technology. We are of the considered view that the lower authorities merely by adopting a general view had summarily rejected the claim of the assessee, without even pointing out a single instance as to how and on what basis the said claim in respect of items of an age of less than one year was not to be accepted. We are also not persuaded to be in agreement with the view of the lower authorities that the claim of the assessee that certain proprietary goods which were purchased against specific orders of a customer had to be written off as the sale transactions did not materialize, was not to be accepted because the conduct of the assessee did not reveal business prudence on his part. We are of the considered view that the allowability of the aforesaid claim of the assessee would not be dependant on the satisfaction of the test of business prudence of the assessee. We are of a strong conviction that now when there was every justification on the part of the assessee to have reassessed the value of the inventory and thereafter written off the items acquired on the amalgamation of M/s Sequent Scientific Ltd, and valued the same as per its convention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 505 (Bom). We further find that the ld. A.R had averred before us that as the assessee had not received any exempt dividend income during the year under consideration, therefore, there was no occasion for making any disallowance under Sec.14A. We are persuaded to be in agreement with the aforesaid claim of the ld. A.R, and are of the considered view that now when there was no exempt income received or receivable by the assessee during the year under consideration, therefore, there remained no occasion for having disallowed any expenditure under Sec.14A of the Act. We find that our aforesaid view is supported by the judgment of Hon ble High Court of Delhi in the case of Joint Investment Pvt. Ltd. Vs. CIT (ITA No. 117/Mum/2005, dated 25.02.2015) , wherein the Hon ble High Court had held that the disallowance of expenditure under Sec. 14A has to be worked out in the backdrop of the exempt income of the assessee. We are of the considered view that as in the case of the present assessee no dividend income on the shares was received or receivable by the assessee during the year under consideration, therefore, no disallowance under Sec. 14A was called for in its hands. That without ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
