2017 (6) TMI 869 - AT - Income Tax

Valuation of closing stock - non-moving items in closing stock - Held that - A perusal of the assessment orders placed on record shows that in the preceding assessment years and in the succeeding assessment years the Assessing Officer has not raised any objection in excluding the value of raw material which is more than 6 months old. Although, the assessee has been consistently following the same method of valuation of closing stock i.e. excluding the value of raw material which is more than 6 months old while determining the value of closing stock, the Commissioner of Income Tax (Appeals) has correctly restricted the addition to ₹ 3,64,990/- by following the ratio laid down in the case of Alfa Laval India Ltd. Vs. DCIT(2003 (9) TMI 43 - BOMBAY High Court) wherein approved the method of valuation of closing stock of obsolete item at 10% of the cost. Dissallowance of amount contributed by the assessee towards unapproved gratuity fund - Held that - Vide rectification order dated 09-11-2015 passed u/s. 154 of the Act, the Commissioner of Income Tax (Appeals) rejected the claim of the assessee with respect to contribution towards unapproved gratuity fund. Thus, in view of the subsequent order passed u/s. 154 of the Act, ground have become infructuous. Disallowance of legal and professional charges - Held that - The expenditure has been incurred by the assessee for the efficient conduct of its present business with more awareness of the competitors, new markets and the source of procurement of product in which the assessee is already dealing. The expenditure was not incurred for opening any new line of business hence, the expenditure incurred is not capital in nature. Disallowance of contribution made towards payments of premium of group gratuity fund with Life Insurance Corporation of India - Held that - As in the case of Commissioner of Income Tax Vs. Jaipur Thar Gramin Bank (2016 (11) TMI 794 - RAJASTHAN HIGH COURT ) has held that once the assessee fulfills the condition laid down for approval after having created a trust with Life Insurance of India and the assessee has been regularly contributing towards the said fund, the claim of the assessee cannot be rejected on the ground that the Commissioner of Income Tax (Appeals) has not approved the fund. The assessee should not suffer for inaction of the revenue authorities. Thus, as now the Commissioner of Income Tax has approved the fund, the contribution made by the assessee towards group gratuity fund is allowable u/s. 36(1)(v) of the Act

Summary

Issues Involved:
1. Restriction of addition in valuation of closing stock.
2. Contribution towards unapproved gratuity fund.
3. Disallowance of legal and professional charges.

Detailed Analysis:

1. Restriction of Addition in Valuation of Closing Stock:
The Department challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to restrict the addition in valuation of closing stock to ?3,64,990/- instead of ?1,77,88,184/- as initially assessed by the Assessing Officer (AO). The AO had made the addition because the assessee did not include the value of non-moving items in the stock. The assessee, dealing in chemicals like yellow phosphorous, argued that stock older than six months becomes unusable and thus excluded it from the closing stock value. This method was consistently followed in previous years and accepted by the AO in scrutiny assessments for those years. The CIT(A) restricted the addition by following the precedent set by the Bombay High Court in the case of Alfa Laval India Ltd., which approved the valuation of obsolete stock at 10% of the cost. The Tribunal found no infirmity in the CIT(A)’s method and reasoning, dismissing the Department's ground for remittance to the AO for further examination.

2. Contribution Towards Unapproved Gratuity Fund:
The CIT(A) initially deleted the addition related to the contribution towards an unapproved gratuity fund but later upheld the AO's disallowance in a rectification order under Section 154 of the Income Tax Act. The Department's grounds on this issue became infructuous due to the subsequent order. The assessee argued that despite applying for approval of the gratuity scheme with LIC in 2000, no communication was received from the Commissioner of Income Tax. The Tribunal noted that the assessee had fulfilled all conditions for approval and had consistently contributed to the fund, which was previously allowed in assessments. The Tribunal referenced the Rajasthan High Court’s decision in Commissioner of Income Tax Vs. Jaipur Thar Gramin Bank, which held that the assessee should not suffer due to the inaction of revenue authorities. Given the subsequent approval of the fund, the Tribunal allowed the assessee’s appeal, permitting the deduction under Section 36(1)(v).

3. Disallowance of Legal and Professional Charges:
The Department contested the deletion of disallowance of ?41,74,500/- paid to SRG Consultant Pvt. Ltd., arguing that the expenditure was capital in nature as it related to the acquisition of new assets and new business lines. The CIT(A) had accepted the assessee's claim that the expenditure was for improving profitability and growth of the existing business, not for establishing a new line of business. The Tribunal concurred with the CIT(A), noting that the expenditure aimed at enhancing the current business operations and market knowledge, thus qualifying as revenue expenditure. The Tribunal dismissed the Department’s ground, upholding the CIT(A)’s decision.

Conclusion:
The Tribunal dismissed the Department’s appeal and allowed the assessee’s appeal, confirming the CIT(A)’s decisions on the valuation of closing stock, the contribution towards the gratuity fund, and the legal and professional charges.