2015 (2) TMI 585 - AT - Income Tax

Provision of storage and handling charges - CIT(A) deleted the addition and the adjustment of book profit on account of addition of provision for storage and handling charges - Held that - From the nature of details of provisions and the evidence of having made payments of the same in subsequent year clearly establish that the provisions were ascertained liability and therefore, Ld. CIT(A) has rightly deleted the disallowance. We find that the details were submitted to Ld. CIT(A) as an additional evidence and these were duly forwarded to A.O. From the remand report, it is found that despite given the opportunity, the A.O. has not made any comment on the additional evidences but maintained that the provisions for reimbursement of transportation and telephone expenses etc. were not allowable under the law. However, we find that these provisions were ascertained liabilities for which assessee had filed complete details and order of Ld. CIT(A) is exhaustive and we do not find any infirmity in the same. - Decided against revenue. Write off of inventory - CIT(A) deleted the addition - Held that - The Ld. A.R. though invited our attention to minutes of Board Meeting and details of inventory loss but did not bring to our notice as to how sum of total loss written off during this year and how only this amount was determined to be written off during this year, was arrived at. On the one hand, Ld. A.R. argued that total loss on account of reconciliation was about ₹ 2 crores out of which ₹ 1.51 crores was written off in the year under consideration and ₹ 49 lacs was written off in the succeeding year but the facts noted in the P & L account reveal that in earlier year also, a similar loss was written off to the extent of ₹ 2.13 crores. Therefore, the matter needs to be readjudicated by Ld. CIT(A) who on the basis of total amount of loss determined on account of reconciliation will determine the actual amount of total inventory loss to be written off in the year under consideration. The Ld. CIT(A) will also examine as to when settlement took place between the parties and when the loss was determined and was required to be written off. - Decided in favour of revenue for statistical purposes.

Issues Involved:
1. Deletion of addition on account of provision for storage and handling charges.
2. Deletion of addition on account of write-off inventory.
3. Adjustment of book profit on account of addition of provision for storage and handling charges.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Provision for Storage and Handling Charges:

The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 62,26,347/- on account of provision for storage and handling charges, arguing that the assessee failed to provide documentary proof to substantiate the claim. The Assessee Company, engaged in marketing, manufacturing, and distribution of diesel and mobile lubricants, had its case selected for scrutiny. The AO disallowed the provision for storage and handling charges, considering it adhoc in nature due to the lack of specific details and bills.

The CIT(A) allowed relief to the assessee, noting that the provision was a year-end provision based on estimates from vendors and past experience, which was rational and scientific. The CIT(A) established that the provision was made for expenses accrued during the relevant financial year, supported by detailed spreadsheets and corresponding invoices, demonstrating the genuineness of the provision. The Tribunal upheld the CIT(A)'s decision, finding that the provision was an ascertained liability, supported by evidence of payments made in the subsequent year.

2. Deletion of Addition on Account of Write-off Inventory:

The Revenue argued that the CIT(A) erred in deleting the addition of Rs. 1,51,55,300/- on account of inventory write-off, stating that the assessee failed to provide any basis of agreement or substantiate the claim. The AO disallowed the write-off due to the absence of reconciliation figures between IOCL and the assessee.

The CIT(A) found that the inventory write-off was due to a discrepancy between physical stock and book stock, resulting from a reconciliation process between the appellant and IOCL after their joint venture ended. The difference of Rs. 1.5 crores was written off as IOCL refused to compensate for the discrepancy. The CIT(A) considered the minutes of meetings and supporting documents, concluding that the write-off was based on a reasonable and adequate basis, certified by auditors.

The Tribunal noted that in a subsequent year, a similar write-off was allowed by the ITAT and confirmed by the Hon'ble Delhi High Court. However, the Tribunal found inconsistencies in the total loss claimed and the amount written off in different years, directing the CIT(A) to re-adjudicate the matter, considering the total inventory loss determined from reconciliation and the timing of the settlement between the parties.

3. Adjustment of Book Profit on Account of Addition of Provision for Storage and Handling Charges:

The Revenue contended that the CIT(A) erred in deleting the adjustment of book profit for the provision for storage and handling charges, arguing it was not an ascertained liability. The AO had disallowed the provision while computing profits under Section 115JB, treating it as an unascertained liability.

The CIT(A) held that the provision for storage and handling charges was based on rational and scientific estimates and related to expenses accrued during the financial year. Therefore, it was not required to be added back for computing book profits under Section 115JB, as it was an ascertained liability.

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the detailed and exhaustive order, which established that the provision was an ascertained liability with supporting evidence of subsequent payments.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the provision for storage and handling charges, both under normal provisions and Section 115JB, finding the provision to be an ascertained liability. However, it remanded the issue of inventory write-off to the CIT(A) for re-adjudication, directing a thorough examination of the total inventory loss determined from reconciliation and the timing of the settlement. The appeal was partly allowed for statistical purposes.

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