TMI Blog2020 (12) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... gument advanced by the ld. DR about the conduct of the assessee of having decided to write off the said stock during this year is concerned, we find that no ulterior motive in any manner whatsoever could be attributed to the assessee in view of the fact that even after disallowance of stock write off to the tune of ₹ 11.99 Crores is made by the AO there was no taxable income for the assessee in view of the set off of loss brought forward from earlier years which had also been duly granted by the ld. AO in the assessment. Even if these stale stocks had been written off in any earlier years as accepted by the ld. AO in his assessment order and by the ld. DR before us, the same would have only enabled the brought forward losses to get increased. In any case it will have no impact in the computation of total income for the year under consideration. One more observation made by the AO that assessee had not offered any income in respect of these stocks. This observation is factually incorrect in as much as the stocks worth ₹ 11.99 crores was included in the closing stock valuation upto 31.3.2011 and hence income was duly offered for the same. The crucial point to be und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.Y.2012-13 on 29/09/2012 declaring total income of Rs. Nil. The assessee apart from engaging itself in the business of manufacturing of pickles as stated supra had also engaged in the business of trading in the local market. The assessee company is having two manufacturing activities one unit is at Ratlam and second unit is at Nasik. The Nasik unit is run under the wholly owned subsidiary called Wisdem Machines Pvt. Ltd., The Ratlam unit is engaged in manufacturing activities of curry powder and some spice products whereas the Nasik unit is engaged in manufacturing of pickles, pastes, sauces and ready meals etc., The Nasik unit of Wisdem Machines Pvt. Ltd., is undertaking job work in the assessee company. The ld. AO during the course of assessment proceedings observed that assessee during the year had written off stock worth ₹ 11,99,41,682/- on the ground that the said stock had become stale. Assessee had already treated the said stock as obsolete and had accordingly, reduced the same from the valuation of closing stock made at the end of the year. The ld. AO show caused the assessee as to why the said stock written off should not be disallowed in the assessment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.55 Crores in the F.Y.2010-11 to ₹ 13.19 Crores in the F.Y.11-12 resulting in over all increase of 54%. The ld. AO also observed that though the assessee company has shown gross profit in different years however, in earlier years the assessee had booked net loss. The ld. AO observed that during year under consideration, the assessee company has shown net profit and had set it off against the stale stock written off which had resulted in reduction of taxable income. Accordingly, the ld. AO observed that the stocks which were the subject matter of write off during the year under consideration were stocks pertaining to earlier years which assessee had not chosen to write off in those years and had conveniently chosen to write off during the year under consideration because of net profit earned by the assessee during the year. The ld. AO also observed that assessee company had never offered any revenue of the above stock in the past. With these observations, the ld. AO proceeded to disallow the stock write off amounting to ₹ 11.99 Crores in the assessment. 3.2. We find that assessee had made the following submissions:- a) Assessee is dealing in food products which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause notice for closure of the business and reason stated for the closure of the business. From the perusal of series of incidents, this took place since May 2009, which resulted in closure of unit in August, 2012. Prolonged slow tactics has resulted in deterioration of raw material, stores and semi finished stock. Shelf life of the raw materials, semi finished produce and some old stock of finished goods is not more than 2 years, as a result, the semifinished stock was taken valuation as on 31/03/2012, and the stock worth ₹ 11.99 cr is written off, as it has no marketable value. Because the export made in March 2012 to M/s Nimco Foods, stationed at Sydney, Australia, wherein the customer has sent email with Photograph which indicates that the Pickles exported were overflowing and solidified white stuff. 70% of bottles have overflowing solidified white stuff, This spoilage is due to accumulation of semi processed raw material since long. Complaint filed before the Industrial Court Maharashtra at Nasik which has added 12 more employees in addition to complaint VLP 11/2013 which also state tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us that the observation made by the ld. AO that assessee had written off the stale stock of ₹ 11.99 Crores during the year to offset the income earned during the year is factually incorrect in view of the fact that during the year also, the assessee had actually incurred loss and even if the loss of earlier year is adjusted against income computed by the ld. AO and even after the said disallowance, there was no taxable income for the assessee due to availability of losses carried forward from earlier years. It was also submitted on without prejudice basis that even if the obsolete stocks are accumulated from earlier years and then claimed in subsequent year, the same would still be an allowable expenditure. In support of this contention, the ld. AR placed the reliance on the decision of Delhi Tribunal in the case of Milton Cycle Pvt. Ltd., vs. DCIT reported in 54 TTJ 380. 3.5. The ld. CIT(A) duly appreciated the entire contentions of the assessee and deleted the addition by holding as under:- 5.3. I have considered the stand of the Assessing Officer as well as the submission made by the appellant. On perusal of details I find that the appellant is in dealing in the perish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On perusal of details (Page No. 19 of Paper Book) it is found that the stock written off by the appellant is out of opening stock. Goods purchase during the year is fully consumed and some of opening stock also gets consumed in manufacturing of good. Appellant written off only 1/3 rd of the opening stock which is very justifiable after considering the nature of goods and movement and labour problem. Remaining item which written off is packing material and finished goods. The non movement of goods, the finished goods also gets expired. Even the company faces the complaint from the customer that 70% goods exported by appellant are non usable. This shows that the appellant goods are not usable. Against the sample of 70% goods non usable appellant only written off approx 37% of finished goods. Hence, the action of appellant is justifiable. Appellant following the method of Cost of net realizable value whichever is lower for valuation of closing stock regularly as mention in Annexure XVI of Audited Financial Statement. The above method is recognized and prescribed method for valuation of stock by ICAI and accepted by the department. Therefore, the same has to be accepted by the depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be disallowed merely on the ipse dixit of the Assessing Officer. The assessee's claim with regard to the provision of loss in respect of obsolete items of stock was accordingly allowed. [Para 15] (ii) Further in appellant case stock as written off due to the exceptional circumstances of labour gets happened. Therefore/ the appellantwas forced to write off the stale stock to reflect the true financial statement. Therefore, the stock written off by the appellant is allowable. In this regard reference is made and reliance is placed on the decision of Hon'ble Delhi Tribunal in case of Milton Cycle Industries Ltd. v. DCIT [1996]54 TTJ (Delhi) 380 where the tribunal has observed and held as under: 8. The next grievance of the assessee is that the learned Commissioner (Appeals) erred in upholding the disallowance of a sum of Ks. 2/90/299 being the provisions made by the assessee-company during the year against dead and obsolete stock. Here the relevant facts are that the assessee is engaged in the business of manufacturing bicycles and parts for the last 25 years. During the relevant previous year, it appointed a committee of experts to determine the correct va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken to change the method of valuation of such stocks due to business necessity and the same method continued to be followed subsequently as also the reduced value was taken as value of opening stock as on the first day of the following previous year. It was accordingly submitted that on these facts and under these circumstances, the claim made was bona fide and, therefore, allowable. In support of his proposition, the learned Authorised Representative placed reliance on K. Mohammed Adam Sahib v. Commissioner (1965) 56 ITR 360(Mad.)/ Commissioner v. Carborundum Universal Ltd. (1984) 149 ITR 759 (Mad.), Gujarat Machinery Mfg. Ltd. v. ITO (1992) 42 ITD 35(Ahd.) and ITO v. Modi Rubber Ltd. (1993) 45 1TJ 415 (Del.). 9. The learned Departmental Representative on the other hand supported the orders of authorities below and submitted that such accumulated loss could not be claimed by the assessee during the relevant previous year. 10. We have heard the learned representatives and also perused the relevant record. On a perusal of relevant facts and circumstances as detailed above, we are of the view that the change effected by the assessee is bona fide and aimed at obtaining corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition of ₹ 90,35,298/- made by the Assessing officer on account of provisions for impairment of stock? 2.2. Whether learned ITAT/CIT (A) erred in deleting the addition of ₹ 5,00,00,000/-made by the Assessing officer on account of Sales of VSAT equipment? 3. We may straightaway say that so far as the second question is concerned, the learned standing counsel for the revenue fairly stated that the addition was made on the basis of the sales tax assessment and that the Tribunal deleted the addition on the basis of the order passed by the Joint Commissioner of Sales Tax (U.P.) on 22.12.2006 in appeal by the assessee. The appellate authority by the aforesaid order had deleted the addition. The Tribunal, therefore, held that the addition made in the income tax assessment can no longer survive. It further noted that the assessing officer had no case that the service charges for installation and / or de-installation of VSATs were not declared by the assessee in its books of accounts. In other words, it was the view of the Tribunal mat the amount of ₹ 5 crores cannot also be added as service charges. Having regard to the stand taken by the standing co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) The method of valuing the closing stock at cost or net realisable value, whichever is lower is a recognised and accepted principle of accounting; (d) The above method was consistently followed by the assessee. In the other years in which the assessee adopted the same method, the assessing officer has accepted the same; (e) No defect or irregularity in the details submitted by the assessee has been pointed out. The assessing officer has also not been able to show that the figure of net realisable value shown by the assessee was wrong. In the light of the above findings the Tribunal dismissed the appeal of the revenue and the appeal of the revenue and allowed the appeal of the assessee. 7. The findings recorded by the Tribunal are not challenged. In fact the learned standing counsel fairly stated that the assessee can value the stock at the lower of the cost or the net realisable value as it is a recognised and accepted method. He, however, submitted that the claim of the assessee was not supported by any details. But this submission is contrary ,to the finding of the Tribunal which has referred to the assessee's letter dated 27.12.2006 submitted be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee during the year had become perishable in nature and that the same should have been written off in earlier years itself. The ld. DR vehemently argued that the conduct of the assessee by its decision to decide to write off the same during this year to offset the net profit earned by the assessee during the year is not appreciable. He also submitted that no expert committee report was made available for writing off the stock during the year under consideration. 3.7. We find the intention of the assessee to write off the stale stock should be understood in a pragmatic manner and due to negative developments that had happened during the year under consideration in October 2011 , factory of the assessee was closed due to labour unrest and assessee had also become a defaulter in bank by not able to pay its regular dues to the bank and the bank had declared the assessee account as a non-performing asset (NPA) in its books. Due to the closure of the factory during the year, the assessee thought it fit to reduce the stale stock from the closing stock in its books and there was no possibility of opening the factory in the near future. Hence, retaining the said stale stock would ..... X X X X Extracts X X X X X X X X Extracts X X X X
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