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2019 (7) TMI 1495 - AT - Income TaxAllowability of write off of obsolete and non-usable inventory - 10% of the total inventory - HELD THAT - No real time correspondence has been brought on record (which is an ordinary feature of e-governance of corporates these days) to suggest creation of non-moving and obsolete stock of such magnitude which represents nearly 10% of the total inventory. Prima Facie, the onus is on the assessee to establish that the stocks of staggering amount have lost its usable value. The issue is factual and while there can be no denial that assessee is entitled to claim loss towards obsolete stock in a given year, it is also the corresponding duty of the assessee to prove the existence of such obsolete material by direct or circumstantial evidences. The assessee has totally failed in its corresponding duties. The Auditor in the instant case while stating that, inventories have been physical verified by the management, have not pointed out such large scale recognition of obsolete item. On conspectus of facts noted above, we find it difficult to entertain the claim of the assessee in entirety when tested on the touchstone of evidences in this regard. However, keeping in mind the narrative of the assessee and difficulty posed in furnishing objective justification of many items in practice, we consider it appropriate to assume loss on account of obsolete item at 5% of the closing stock to be fair and plausible which works out to ₹ 58,65,680/-. The assessee thus gets relief to this extent. It shall be open to the assessee to make amends in the opening stock of subsequent financial year in accordance with law. While holding so, we are not inclined to discuss various case laws cited on behalf of the assessee which are rendered in totally different facts. Disallowance of bad debt written off in respect of excise duty refund - HELD THAT - We find merit in the claim of the assessee. The excise duty received as refund naturally forms part of the revenue operations of the assessee. The version of the assessee has been confirmed by the Auditors requires to be ordinarily believed. The action of the Revenue authorities are accordingly reversed. Disallowance u/s 14A - disallowance to extent of the exempt income - HELD THAT - Disallowance is restricted to the aforesaid amount in view of the decision of the Hon ble Delhi High Court in Joint Investment 2015 (3) TMI 155 - DELHI HIGH COURT Adjustment to the book profit towards disallowance u/s 14A - HELD THAT - In view of the decision of the Special bench in ACIT vs. Vireet Investments Ltd. 2017 (6) TMI 1124 - ITAT DELHI and having regard to Clause (f) to Explanation below 115JB, the adjustment to the books profit is restricted to the extent of ₹ 1134/- only.
Issues Involved:
1. Write-off of obsolete inventory. 2. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act. 3. Disallowance of bad debts written off in respect of excise duty refund. 4. Disallowance under Section 14A of the Income Tax Act. 5. Adjustment to book profit towards disallowance made under Section 14A of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Write-off of Obsolete Inventory: The assessee claimed a write-off of ?1,00,68,057/- for obsolete and non-usable inventory. The AO rejected this claim due to the absence of supportive evidence such as certificates from competent authorities or proof of the expiry date of the materials. The CIT(A) upheld the AO's decision, noting that the assessee did not provide a scientific basis for valuing the stock at nil, nor did the auditor's report mention such obsolescence. The Tribunal acknowledged the special nature of materials in the pharmaceutical industry but emphasized the need for evidence to substantiate the claim. Consequently, the Tribunal allowed a partial relief by assuming a loss of 5% of the closing stock, amounting to ?58,65,680/-, and directed the assessee to adjust the opening stock of the subsequent financial year accordingly. 2. Disallowance of Interest Expenses under Section 36(1)(iii): The assessee did not press this ground due to the smallness of the amount involved. Consequently, the Tribunal dismissed this ground of appeal. 3. Disallowance of Bad Debts Written Off in Respect of Excise Duty Refund: The assessee claimed a bad debt write-off of ?2,68,465/- related to excise duty refund. The Tribunal found merit in the assessee's claim, noting that the excise duty refund forms part of the revenue operations and was confirmed by the auditors. Therefore, the Tribunal reversed the actions of the Revenue authorities and allowed this ground of appeal. 4. Disallowance under Section 14A of the Income Tax Act: The AO made a disallowance of ?19,216/- under Section 14A for earning exempt income of ?1134/-. The Tribunal, in light of the decision of the Hon’ble Delhi High Court in Joint Investment 372 ITR 694 (Del), restricted the disallowance to the amount of exempt income, i.e., ?1134/-. Thus, this ground of appeal was partly allowed. 5. Adjustment to Book Profit Towards Disallowance Made under Section 14A: The Tribunal referred to the decision of the Special Bench in ACIT vs. Vireet Investments Ltd. 165 ITD 27 (SB) and Clause (f) to Explanation below Section 115JB, restricting the adjustment to the book profit to ?1134/-. Consequently, this ground of appeal was partly allowed. Conclusion: The appeal of the assessee was partly allowed, with the Tribunal providing partial relief on the write-off of obsolete inventory and disallowance under Section 14A, while dismissing the ground related to interest expenses and allowing the claim for bad debts written off in respect of excise duty refund.
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