2016 (6) TMI 1229 - AT - Income Tax

Valuation of closing stock - identification of stock - Held that - Inventory taken by the Revenue authorities could not be identified with the physical stock with reference to bynumbers. If the Assessing Officer could not identify the stocks with reference to by-numbers, it is not known how the Revenue authorities claim that the stock was taken properly on the day of search. This observation of the Assessing Officer clearly indicates that the stocks were not taken properly as claimed by the assessee. This Tribunal is of the considered opinion that there is no justification on the part of the Assessing Officer to ignore the old stocks which could not be sold and remain in the stocks on the date of search during the course of inventory. Therefore, this Tribunal is unable to uphold the orders of the authorities below. Accordingly, the orders of the lower authorities are set aside and the entire addition made by the Assessing Officer is deleted. Disallowance of donations and lease commitment charges - nature of expenditure - revenue or capital expenditure - Held that - As rightly contended by the Ld.counsel for the assessee, the HR&CE Department intervened and they directed the assessee to pay donation to various temples. In fact, the donations were paid to various temples as directed by HR&CE Department. Subsequently, the HR&CE Department directed the Executive Officers of the respective temples to execute lease deed in favour of the assessee. Therefore, it is obvious that the assessee paid money to the legal heirs of the erstwhile tenants of HR&CE Department and obtained registered sale deed. To regularize the lease deed, the assessee in fact paid another sum of ₹ 1 Crore to various temples as donation. This Tribunal is of the considered opinion that the payment of donation has to be necessarily treated as revenue in nature. Moreover, the land in question cannot be used for any other purpose other than the business. The assessee cannot put up any permanent structure over the land. In those circumstances, this Tribunal is of the considered opinion that the donation given to various tenants as per the direction of HR&CE Department has to be treated as revenue in nature in the hands of the assessee-firm. This Tribunal is of the considered opinion that the payment of donation is only for the purpose of carrying on the business effectively in the course of earning profit. Therefore, it cannot be treated as capital in nature. In view of the above, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the donations and lease commitment charges as revenue expenditure. Addition towards stock discrepancy - Held that - This Tribunal is of the considered opinion that the assessee s claim that certain inventories, which are identified with by-numbers, could not be taken as closing stock by the Revenue authorities would go to show that the difference is because the Revenue has not taken into consideration the items which were lying in the show room for sale. The assessee has claimed that the stocks were sold subsequent to search operation. In fact, the assessee has produced all the details to identify those goods which are sold subsequent to search. In view of these reasons, merely because the Assessing Officer could not verify that cannot be the reason to make addition. Therefore, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition made on the stock discrepancy. Expenditure incurred for renovation and repair of the building taken on lease - revenue or capital - Held that - When the assessee incurred expenditure and it cannot be retrieved after expiry of term of lease, it has to be treated as revenue in nature. In this case, admittedly, the expenditure was incurred in interior decoration, flooring, painting and temporary partitions, etc. These expenditures cannot be retrieved by the assessee at the expiry of lease term. Therefore, such expenditure cannot be treated as capital in nature as found by Kerala High Court in Joyallukas India Pvt. Ltd. v. ACIT (2014 (6) TMI 80 - KERALA HIGH COURT). It has to be necessarily treated as revenue expenditure. Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Assessee appeal allowed.

Summary

Issues Involved:
1. Valuation of closing stock.
2. Disallowance of lease commitment charges.
3. Addition towards stock discrepancy.
4. Expenditure incurred for renovation and repair of the building taken on lease.

Issue-wise Detailed Analysis:

1. Valuation of Closing Stock:
The first common issue pertains to the valuation of closing stock. The assessee valued the closing stock at cost or realizable value, whichever is less, based on market conditions and the quality of old stock. The estimation was done at 50% in the second year and 25% in the third year, with very old stock valued at ?100 per item to prevent pilferage. The assessee argued that this method was consistently applied and based on business experience. The Assessing Officer (AO) admitted the lack of inventory of individual stock identified with reference to by-numbers, making it difficult to verify the stock. The AO's determination of deficit stock was challenged by the assessee, who claimed the valuation was based on experience and market conditions. The Tribunal held that the AO, not being an expert in textiles, should have referred the valuation to experts before disapproving the assessee's claim. The Tribunal found no contrary material on record to doubt the assessee's valuation and set aside the lower authorities' orders, deleting the addition made by the AO.

2. Disallowance of Lease Commitment Charges:
The second issue involves the disallowance of lease commitment charges for assessment years 2008-09 and 2009-10. The assessee took adjacent land on lease for car parking, paying ?1 Crore as directed by the Hindu Religious and Charitable Endowments (HR&CE) Department to various temples. The assessee argued that the payment was for business purposes and did not acquire any title over the property. The AO and CIT(A) treated the payment as capital in nature. The Tribunal found that the payment was made to regularize the lease and not for acquiring any interest over the property. The Tribunal held that the donation was for business purposes and should be treated as revenue expenditure, setting aside the lower authorities' orders.

3. Addition Towards Stock Discrepancy:
The third issue concerns the addition towards stock discrepancy found during a search operation. The AO found a difference between the physical stock and the stock as per books of account, leading to an addition. The assessee explained that the difference was due to the valuation of old stock at net realizable value. The Tribunal noted that the AO could not verify the stock with specific by-numbers due to various factors. The Tribunal found that the difference in stock was due to the Revenue not taking certain items into consideration during the search. The Tribunal set aside the lower authorities' orders and directed the AO to delete the addition made on stock discrepancy.

4. Expenditure Incurred for Renovation and Repair of the Building Taken on Lease:
The final issue involves the expenditure incurred for renovation and repair of a leased building. The Revenue argued that the expenditure should be capitalized, allowing only depreciation. The CIT(A) allowed the claim as revenue expenditure, relying on the Tribunal's previous order and the Madras High Court judgment in Hari Vignesh Motors Pvt. Ltd. The Tribunal noted that the expenditure was for interior decoration, flooring, and temporary structures, which could not be retrieved after the lease term. Citing the Kerala High Court judgment in Joyallukas India Pvt. Ltd. v. ACIT, the Tribunal held that such expenditure should be treated as revenue in nature. The Tribunal confirmed the CIT(A)'s order, allowing the assessee's claim.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the valuation of closing stock, lease commitment charges, and stock discrepancy, while dismissing the Revenue's appeal concerning renovation and repair expenditure. The orders of the lower authorities were set aside, and the AO was directed to delete the additions and allow the expenditures as revenue in nature.