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2014 (12) TMI 248 - AT - Income TaxDisallowance on claim of expenses on payment of service charges u/s 40A(2)(b) deleted Held that - The assessee-company is a Government company which had made payment of service charges to another Government company - A part of the expenses was disallowed by the AO by invoking provisions of Section 40A(2)(b) of the Act - there is no allegation of any evasion of tax - service charges has been paid in pursuance of an agreement dated 25.04.2003 at the rate fixed vide the agreement - Such service charges at the same rate were also paid by the assessee-company to the same company in the AYs 2004-05 and 2005-06 - In the assessment completed u/s 143(3), the Department has not made any disallowance out of the said expenses - the Department in the earlier years accepted the same rate at which service charges were paid during the years under appeal as reasonable - though res judicata is not applicable in the income-tax proceedings but the rule of consistency needs to be adhered to and when the facts remains the same in different years, the Revenue cannot be permitted to draw different inferences in the different years there was no material to show that the service charges paid by the assessee-company to another Government company were in excess of the fair market value of services thus, the order of the CIT(A) is upheld Decided against revenue. Value of inventories written off as obsolete disallowed Held that - The assessee debited ₹ 9,45,000/- in the profit and loss account under the head of obsolete inventory - The assessee explained that these inventories became obsolete and therefore, the value of the same was claimed at Nil - the inventories were sold in subsequent years for ₹ 5,00,000/-, therefore, the claim of the assessee that these inventories had Nil value as at the end of the year under appeal cannot be accepted - as no material was brought on record by the Revenue to show that the market value of the inventory was more than ₹ 5,00,000/- as at the end of the relevant previous year, the disallowance to the extent of market value as at the end of the relevant year i.e. ₹ 5,00,000/- and is upheld and the balance amount of disallowance of ₹ 4,45,000/- is set aside Decided partly in favour of assessee.
Issues Involved:
1. Disallowance of service charges under Section 40A(2)(b) of the Income Tax Act. 2. Disallowance of inventory write-off as obsolete. Detailed Analysis: 1. Disallowance of Service Charges under Section 40A(2)(b): Background: The cross-appeals filed by the assessee and the Revenue pertain to the disallowance of service charges paid to Gujarat Gas Company Limited (GGCL) under Section 40A(2)(b) of the Income Tax Act for Assessment Years 2006-07 to 2009-10. The Assessing Officer (AO) disallowed significant amounts, reasoning that the payments were excessive and lacked free consent due to the relationship between the companies. Arguments: - Departmental Representative: Argued that the AO found the service charges excessive and not justified by the services rendered. The AO estimated a reasonable cost for the use of GGCL's infrastructure and disallowed the excess amount. - Assessee's Representative: Contended that the payments were based on a valid agreement and consistent with previous years where no disallowance was made. Emphasized that both companies paid taxes at the maximum marginal rate, making the disallowance revenue-neutral. Findings: - The Tribunal noted that the assessee had been paying service charges to GGCL as per an agreement dated 25.04.2003, and similar payments were accepted in earlier assessments under Section 143(3) without disallowance. - The Tribunal emphasized the principle of consistency, citing Supreme Court rulings that the Revenue should not deviate from accepted positions in identical circumstances unless there are compelling reasons. - It was observed that the AO did not provide evidence to show that the service charges were excessive compared to the fair market value of the services. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the disallowance, stating that the AO failed to demonstrate that the payments were excessive or unreasonable. The appeals filed by the Revenue for all the years under consideration were dismissed. 2. Disallowance of Inventory Write-off as Obsolete: Background: The assessee claimed a write-off of Rs. 9,45,000 for obsolete inventory. The AO disallowed this claim, arguing that the inventory still had value and was not obsolete. Arguments: - Assessee's Representative: Argued that the write-off was justified due to technological obsolescence and that a portion of the inventory was sold in subsequent years for Rs. 5,00,000. - Departmental Representative: Supported the AO's view that the inventory had residual value and the write-off was not justified. Findings: - The Tribunal noted that the assessee had realized Rs. 5,00,000 from the sale of the inventory in subsequent years, contradicting the claim that the inventory had no value. - The CIT(A) had confirmed the AO's disallowance, reasoning that the recovery of Rs. 5,00,000 indicated that the inventory was not entirely obsolete. Conclusion: The Tribunal partially upheld the disallowance, confirming the write-off to the extent of Rs. 5,00,000 (the amount realized from the sale) and allowing the remaining Rs. 4,45,000 as a legitimate write-off. Thus, the appeal by the assessee was partly allowed. Final Order: - The appeals filed by the Revenue for all the four years under appeal were dismissed. - The appeal filed by the assessee was partly allowed, reducing the disallowance of the inventory write-off to Rs. 5,00,000. Order pronounced on 5th December 2014 at Ahmedabad.
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