2016 (5) TMI 1354 - AT - Income Tax

Considering the demurrage & wharfage expenses as penalty - Held that - This Tribunal in assessee s own case for Assessment Year 2009-10 as relied upon the decision of Mahlaxmi Sugar Mills Co. Ltd. Vs CIT (1984 (5) TMI 6 - DELHI High Court ) held that the payment in question is not the penalty or fine for violation of any statute. It is compensatory in nature. - Decided against revenue Notional interest on the advance as income in the hands of the assessee - Held that - As the assessee has not yet been able to recover even the principal amount advanced to M/s. Karsan and it is not possible to consider the notional interest on the advance as income in the hands of the assessee which is not received yet. Accordingly we dismiss these grounds of revenue s appeal. Addition in respect of the provisions made for post retirement medical benefits as per AS-15 - Held that - Coordinate Bench of this Tribunal has decided the issue in favour of the assessee and against the Department in assessee s own case for Assessment Year 2009-10 held that Hon ble Supreme Court in the case of Bharat Earth Movers vs. CIT (2000 (8) TMI 4 - SUPREME Court) has held that liability being a determined one though to be discharged in future did not make it a contingent liability and it is an allowable liability. - Decided against revenue Disallowance on account of valuation of slow moving non moving and obsolete stores - Held that - On perusal of relevant facts and circumstances we are of the view that the change effected by the assessee was aimed at obtaining correct business profits as per the recommendations of evaluation report submitted by the CAG and Engineer/Valuer respectively. It is nobody s case that the assessee has not accumulated such stocks in the past. Undoubtedly such stock went on losing its value for the purpose of assessee s business thereby deteriorating assessee s profits year in and year out. It was in such a scenario that a decision was taken to investigate the entire matter by appointing a committee of experts on whose recommendations based on proper study of market condition the assessee company reduced the value of stocks and this value has been carried forward to the next year and assessed as such. Respectfully following the same we are of the considered opinion that assessee s claim requires to be accepted.- Decided against revenue

Summary

Issues Involved:
1. Whether demurrage and wharfage expenses should be considered as penalties.
2. Whether the hybrid system of accounting is permissible under Section 145 of the IT Act.
3. Accrual of interest on advances given.
4. Allowability of provisions for post-retirement benefits.
5. Valuation of slow-moving, non-moving, and obsolete stores.

Detailed Analysis:

1. Demurrage and Wharfage Expenses as Penalties:
- Assessment Year 2006-07: The Revenue argued that demurrage and wharfage expenses should be treated as penalties. The CIT(A) disagreed, stating these payments are not penalties or fines for statutory violations but are compensatory in nature. The Tribunal upheld this view, citing precedents like Mahalaxmi Sugar Mills Co. Ltd. vs. CIT and Imcola (Exports) Ltd. The appeal for this year was dismissed.
- Assessment Year 2007-08 & 2008-09: The Tribunal followed the same reasoning as in the 2006-07 assessment year, dismissing the Revenue’s appeals for these years as well.

2. Hybrid System of Accounting:
- Assessment Year 2007-08 & 2008-09: The Revenue contended that the hybrid system of accounting is not allowed under Section 145 of the IT Act. The CIT(A) had deleted additions made by the AO on accrued interest, stating that income should be real and not notional. The Tribunal upheld this view, referencing the Supreme Court’s decision in Godhra Electricity Company Ltd. vs. CIT, which emphasized that only real income should be taxed. The appeals for these years were dismissed.

3. Accrual of Interest on Advances:
- Assessment Year 2007-08 & 2008-09: The AO added notional interest on advances given to M/s. Karsan, which the CIT(A) deleted. The Tribunal upheld this deletion, stating that the interest awarded by the International Court of Arbitration was hypothetical and not yet realized. The Tribunal noted that the principal amount itself was difficult to recover, and thus notional interest could not be taxed. The appeals for these years were dismissed.

4. Provisions for Post-Retirement Benefits:
- Assessment Year 2008-09: The AO disallowed provisions for post-retirement benefits, considering them unascertained liabilities. The CIT(A) allowed these provisions, referencing Supreme Court decisions that determined such liabilities, though payable in the future, are not contingent and thus allowable. The Tribunal upheld this view, dismissing the Revenue’s appeal.

5. Valuation of Slow-Moving, Non-Moving, and Obsolete Stores:
- Assessment Years 2006-07 to 2009-10: The assessee’s appeals focused on the disallowance of valuation of slow-moving, non-moving, and obsolete stores. The AO disallowed these valuations, but the Tribunal found the assessee’s method, based on independent valuer reports and CAG observations, to be bona fide and aimed at reflecting true business profits. The Tribunal noted that the change in valuation was consistent with AS-2 and followed in subsequent years. The Tribunal allowed the assessee’s appeals for all these years.

Conclusion:
- The Tribunal dismissed the Revenue’s appeals for the assessment years 2006-07 to 2009-10, upholding the CIT(A)’s decisions on all contested issues.
- The Tribunal allowed the assessee’s appeals for the assessment years 2006-07 to 2009-10, accepting the valuation method for slow-moving, non-moving, and obsolete stores.

Order Pronounced:
- The appeals filed by the Revenue were dismissed, and the appeals filed by the assessee were allowed for all the assessment years. The order was pronounced in the open court on 31st May, 2016.