2008 (7) TMI 842 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 3,54,52,494 in respect of obsolete items of inventory written off by the assessee.
2. Adjustment to "book profit" u/s 115JA due to the write-off of obsolete inventory.

Summary:

Issue 1: Disallowance of Rs. 3,54,52,494 for Obsolete Inventory

The assessee contested the disallowance of Rs. 3,54,52,494 related to obsolete inventory items written off. The original return was filed on November 30, 1998, and later revised to reflect a loss of Rs. 13,77,67,657 following a scheme of arrangement approved by the Bombay High Court on December 24, 1998. This scheme transferred the bulk drug division of Kopran Ltd. to the assessee, effective from January 1, 1998. The assessee identified obsolete items in the acquired inventory and wrote off Rs. 3.54 crores in its books. The Assessing Officer (AO) challenged the write-off, arguing that Kopran Ltd. had valued the stock properly as of March 31, 1998, and the assessee's sudden realization of obsolescence was unjustified. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's view, stating that the loss was crystallized only after the relevant financial year. However, the Tribunal found that the scheme of arrangement was effective from January 1, 1998, and the assessee became the owner of the assets from that date. The Tribunal concluded that the valuation of inventory as of March 31, 1998, should reflect the net realizable value, which was less by Rs. 3.54 crores. Therefore, the Tribunal ordered the deletion of the disallowance.

Issue 2: Adjustment to "Book Profit" u/s 115JA

The Revenue appealed against the adjustment made to "book profit" u/s 115JA due to the write-off of obsolete inventory. The assessee had withdrawn an equivalent amount from the reserve transferred from Kopran Ltd. and credited it to the profit and loss account. The AO did not allow the deduction of this amount while computing the book profit. The CIT(A) directed the AO to reduce the sum of Rs. 3.54 crores for arriving at the book profit u/s 115JA. The Tribunal noted that u/s 115JA, the net profit as shown in the profit and loss account should be reduced by the amount withdrawn from any reserves or provisions if credited to the profit and loss account. The Tribunal found that the reserve of Rs. 60.98 crores was transferred to the assessee from Kopran Ltd., which was created in 1993-94. Since the reserve was created before the period specified in the proviso to clause (i) of the Explanation to section 115JA, the Tribunal upheld the CIT(A)'s decision to allow the deduction.

Conclusion:

In the result, the appeal of the assessee is allowed, and that of the Revenue is dismissed.

Order Pronounced:

The order was pronounced on July 31, 2008.