Commissioner of Income Tax vs Wolkem India Ltd.

This appeal u/s 260A of the IT Act, 1961 (for short ''the Act of 1961'' hereinafter) is directed against order dt. 23rd Nov., 2006 passed by the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur (for short ''the Tribunal'' hereinafter) in ITA No. 566/Jd/2004 in respect of the asst. yr. 2000-01, whereby the appeal of the Revenue as well as the cross-objection of the assessee have been dismissed and the order dt. 30th Sept., 2004 passed by the Commissioner of Income Tax (Appeals), Udaipur [in short ''the CIT(A)'' hereinafter], about the deducibility of obsolete stores along with its valuation has been confirmed.

The relevant facts in nutshell are that the assessee is engaged in mining, processing and grinding of minerals. During the relevant assessment year, it claimed deduction of Rs. 68,59,108 as obsolete store written off under the head "Plant and machinery repairs" account. The deduction claimed was sought to be justified by the assessee on the basis of Accounting Standard issued by the ICAI with the approval/acceptance of CBDT. After due consideration, the AO arrived at the finding that the assessee has estimated the inventories in most arbitrary manner @ 5 per cent of the cost writing off 95 per cent, without considering the period of purchase or the degree of damage or deterioration, if any. The AO noticed that even the items purchased during the year under consideration have been valued @ 5 per cent. In this view of the matter, the amount of Rs. 68,59,108 written off as obsolete stocks claimed in P&L a/c under the head "Plant and machinery repairs" was disallowed by the AO and the same was added to the income of the assessee.

On appeal by the assessee, the CIT(A) on the basis of the material on record arrived at the finding that most of stock inventories which were treated as obsolete were either sold or consumed by 31st March, 2004. From the details furnished by the assessee, the CIT(A) found that on the sale of written down value of store inventories of Rs. 2.05 lacs the assessee had made a profit of Rs. 1.41 lacs. The CIT(A) found that the value of some of the items sold in the subsequent year comes to 8.43 per cent of the cost. Therefore, considering the facts situation emerging from the record the CIT(A) held that the WDV taken by the assessee company is not justified and determined the value of stores inventory written down at 10 per cent of the cost. Accordingly, the addition made by the AO on account of obsolete stores written off was reduced from Rs. 68,59,108 to Rs. 3,61,005.

On further appeal by the Revenue, the learned Tribunal relying upon a decision of the Hon''ble Bombay High Court in the case of Alfa Laval India Ltd. Vs. Deputy Commissioner of Income Tax, , held that the CIT(A) was justified in valuing the stores at 10 per cent of the costs. Consequently, the appeal preferred by the Revenue so also the cross-objection filed on behalf of the assessee have been dismissed by the learned Tribunal by order dt. 23rd Nov., 2006, which is impugned in the present appeal.

The appeal was admitted by this Court vide order dt. 16th Aug., 2007 on following substantial question of law:

Whether on the facts and circumstances of the case as well as in the law, the learned Tribunal was justified in directing to value the obsolete stores @ 10 per cent of the cost without following the AS-2 issued by the ICAI in letter and spirit, and the provisions of the Section 145A of the IT Act?

It is contended by the learned Counsel for the Revenue that the learned Tribunal has grossly erred in law as well as in facts while holding that the revised AS-2 issued by the ICAI is mandatory for chartered accountants for finalisation of account but it is not mandatory for the Department. It is submitted by the learned Counsel that since the assessee has valued its stores/inventories on the cost or market price, whichever is less, therefore, it cannot be now valued on realisation value. That apart, it is submitted by the learned Counsel that the assessee has valued thousand of items @ 5 per cent of the cost irrespective of the year of purchase on the condition of the item, therefore, the AO had committed no error in disallowing the amount of Rs. 68,59,108 written off as obsolete stores and claimed in the P&L a/c under the head "Plant and machinery repairs". Accordingly, it is submitted by the learned Counsel that the learned Tribunal has seriously erred in confirming an erroneous order passed by the CIT(A).

Per contra, the learned Counsel appearing on behalf of the respondent assessee submitted that the practice of writing down the inventories below cost to net realisable value is consistent with the view that the assets should not be carried in excess of amount to be realised from there sale or use. It is submitted that the assessee has valued its inventories which were entirely rusted, non-moving and unusable on account of its obsolescence/damage or deterioration at cost or realisation value, whichever is low. It is further submitted by the learned Counsel that the learned Tribunal after due examination of the material on record has arrived at the categorical finding that the stores which were valued by the assessee at Rs. 3.5 lacs or partly consumed in subsequent years at Rs. 2.08 lacs and remaining portion was sold at Rs. 3.46 lacs, and accordingly, the value of the stores comes to Rs. 6.54 lacs as against the value estimated by the assessee at Rs. 3.59 lacs. Thus, keeping in view the aforesaid factual position the valuation of the stores @ 10 per cent of the cost made by the CIT(A) confirmed by the Tribunal cannot faulted with and no substantial question of law arises for consideration of this Court.

We have considered the rival submissions and perused the impugned order and other material available on record.

As per the provisions of Section 145A of the Act of 1961, the income from business under the head "Profits and gains from business" has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, Section 145A of the Act of 1961 provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee therefore, if the method of valuation adopted by the assessee is recognised method then the same cannot be rejected on the ground that the net realisable value/market value has been determined on the basis of certain estimate. It is to be noticed that the AO while holding that the inventories valued by the assessee @ 5 per cent is excessive did not care to estimate the net realisable value of the store and proceeded to disallow the amount of Rs. 68,59,108 written off as obsolete stores and claimed in P&L a/c altogether. It has come on record that the assessee has valued the inventories such as nut bolt glass fuse bearing bushes, lock pin, pipe, screw etc. which were rusted, non-moving and unusable on account of obsolescence/damage/deterioration by efflux of time at cost and net realisation value, whichever is lower. It has also come on record that these items were 5-6 years old. It is also not disputed before this Court that the assessee had made the requisite efforts to dispose of the same. That apart, some of these items were actually sold in subsequent years at a price 8.43 per cent of the cost. Thus, considering the totality of the facts and circumstances, in our considered opinion the value of the stores inventory written down taken at 10 per cent of the cost by the CIT(A), cannot be faulted with.

For the aforementioned reasons, we answer the question framed as aforesaid against the Revenue and in favour of the assessee.

In the result, the appeal fails and it is hereby dismissed. No order as to costs.