TMI Blog2022 (3) TMI 1518X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of provision for obsolescence of finished goods and spares - HELD THAT:- There can be no dispute that inventory should be valued either at cost or market price, whichever is lower. In the present case, the appellant company followed inventory valuation policy, based on which item-wise analysis was carried out to determine whether a particular item or a part of finished goods has become obsolete or not and it also adopted a methodology for identification of obsolete finished goods, etc. Thus, the provision for obsolete items is clearly allowable, in view of the settled position of law that inventory should be valued at cost or market price whichever is lower in view of decision of Alfa Laval India [ 2003 (9) TMI 43 - BOMBAY HIGH COURT] is clearly applicable. Provision for obsolete stock is allowable but it requires to be satisfied that the value of obsolete items of finished goods is valued on the cost or market price whichever is less. In the circumstances, we remand the matter back to the file of AO with a direction that the provision for obsolete stock be allowed as deduction subject to satisfying himself that the valuation is done based on the principle that at co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowances is as under: During the previous year relevant to the assessment under consideration, the appellant company made a provision for warranty of Rs.4,79,66,000/- . The opening balance of provision for warranty stood at Rs.5,31,29,000/- as against the actual expenditure for warranty during the year under consideration only 4,45,70,000/-. During the course of assessment proceedings, the appellant company was called upon to furnish the basis of working of provision for warranty. In response to the same, the appellant company made a detailed submission as to how the working of the provision for warranty was arrived at, as under: 3.5 . Provision for warranty is computed on monthly basis based on the past experience and scientific method. It is computed considering the various products and sub products of the Company. Following are details pertaining to computation of warranty provision: For every product the provision for warranty is divided into two components: A. Repair [change of product (other than tank) + repairs] B. Replacement of tank Hence, provision for warranty = Provision for repairs [change of product (other than tank) + repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unit cost of intervention = Labour cost + Spare part cost Provision for replacement of tanks = Number tanks requiring intervention x unit cost of intervention Sample copy of the provision for warranty computation is enclosed as Annexure-1 Accordingly, it is respectfully submitted that the provision for warranty is made on scientific basis, past historical trend and in accordance with the law laid down by the Supreme Court in the cast of Rotork Controls India (P.) Ltd. v. CIT 314 ITR 62 (SC) .. 3. It is claimed that the above method of working for the provision of warranty is based on scientific method, past historical data, which is in consonance with the ratio laid down by the Hon'ble Supreme Court in Rotork Controls India (P.) Ltd. vs. CIT 314 ITR 62 (SC). However, the above submission of assessee had been rejected by the AO by holding that mere provision made towards warranty cannot be allowed as deduction while computing business income. It is further held that the methodology of working adopted by the assessee had not revealed any such scientific method / historical data. The AO noticing that the opening balance of provision for warranty st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional ground of appeal urging that difference arising on account of payment of net present value of sales tax liability and the deferred sales tax liability should be allowed as deduction in computation of taxable income. The appellant had availed the package scheme of incentives introduced by the Govt. of Maharashtra and as per this scheme the appellant was entitled to the defer the payment of sales tax collected during the period 1/7/2009 to 31/12/2014. This scheme was applicable in respect of the manufacturing unit setup at Nashik. The sales tax department of Maharashtra had allowed the premature payment of deferred sales tax liability at net present value and it was deemed to be the full discharge of deferred sales tax liability. The appellant company had a deferred sales tax amount of Rs.2,12,67,332/- and the net present value of the same was Rs.57,36,372/-. The appellant paid this net present value and as a result the difference of Rs.1,55,30,960/- was taken as a revenue receipt. The appellant claimed during the assessment proceedings that the amount should be treated as a capital receipt in view of the Special Bench decision in the case of Sulzer India Ltd vs. JCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of warranty inferred that the provision made is neither based on historical trends nor a robust and therefore, made disallowance of Rs.33,96,000/-. On an appeal before the ld. CIT(A), the ld. CIT(A) also confirmed the action of AO. We have gone through the orders of lower authorities and find that though the lower authorities had considered the decision of Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. vs. CIT (supra), had not applied the ratio of the said decision in right perspective. The appellant company also has failed to demonstrate before us as to how the methodology adopted by it for computation of provision for warranty satisfies the parameters laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. vs. CIT (supra). In the circumstances, we are of the considered opinion that the matter requires remand to the file of AO for de novo consideration of the issue in terms of the law laid down by the Hon'ble Supreme Court in Rotork Controls India (P.) Ltd. vs. CIT (supra). Accordingly, this ground of appeal is remitted back to the file of AO for de novo consideration and decide this issue in accordance with ratio of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r not and it also adopted a methodology for identification of obsolete finished goods, etc. Thus, the provision for obsolete items is clearly allowable, in view of the settled position of law that inventory should be valued at cost or market price whichever is lower in view of decision of Hon ble Bombay High Court in the case of Alfa Laval India Vs. DCIT 266 ITR 418 is clearly applicable, wherein the Hon ble Bombay High Court has held as under: 8. In the present case, there is no dispute that the duly certified auditor's report placed before the AO clearly justified valuation of obsolete items at 10 per cent of cost. There is no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower. It is also not in dispute that the value of the closing stock has been taken as the value of the opening stock in the subsequent year. Moreover, it is also not disputed that the obsolete items were in fact sold in the subsequent year at a price less than 10 per cent of the cost. Under the circumstances, it could not be said that the valuation of the obsolete items done by the assessee and certified by the auditors was not proper or arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal by holding that this issue is debatable, though decided by the jurisdictional High Court. The decision rendered by the Hon ble High Court is binding on all the authorities situated within the territorial jurisdiction of the Hon ble High Court. Once the issue is decided by the Hon ble High Court, it cannot be said that there exists a debate on the issue. The judicial discipline demands that the decision of Hon ble High Court should be followed by all the lower authorities employed in execution of Act. Thus, the ld. CIT(A) had clearly fell in error in not admitting and adjudicating this ground of appeal, since this ground of appeal is purely legal in nature and requires no verification of facts, we admit this ground of appeal for adjudication. The issue in this ground of appeal is decided by the Hon ble Bombay High Court in CIT Vs. Sulzer India Ltd. (2014) 369 ITR 717 (Bom), wherein the Hon ble High Court upheld the decision of Special Bench of Tribunal. Respectfully following this decision of the Hon ble High Court, we direct the AO to reduce the sum of Rs.1,55,30,960/- from the taxable income on account of difference between the net present value of deferred sales tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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