2019 (12) TMI 668 - AT - Income Tax

Addition of value of closing stock being diminution in the value of closing stock and claiming depreciation therein - HELD THAT - The assessee computed his income according to cash or mercantile system of accounting in term of section 145 and accounting standards notified by the Government of India from time to time. The assessee values its closing stock at lower than the cost or net reliable value and to arrive at the valuation of closing stock from the perspective of accounting standards. The assessee reduced the value of certain items from closing stock to appropriate reflect its net reasonable value which is lower than the cost. The said reduction from the cost represents the wear and tear of the stocks of the items which are lying in the inventory/showrooms. We noted that there is no factual difference in this year and any adjustment in the closing stock for the year no. 1 would consequently result in the adjustment to the opening stock of year No. 2. Further we noted that the assessee has filed complete details of valuation of closing stock in its paper book along with statements showing details of subsequent sales with regard to the items of closing stock which were revalued to net reliable value along with sample copies of invoices with respect of subsequent sales. From those details it is clear that net reasonable value adoptable by the assessee for the purpose of value of closing stock in certain cases is as per the prevailing accounting practices as accounting standards 2. Hence we find that no infirmity in the order of CIT(A) and respectfully following the Tribunals decision for AY 2012-13 we confirm the order of CIT(A) and deleting the addition. Adjustment made while computing book profit under section 115JB to the closing stock - HELD THAT - We find that this issue is answered in the first issue and the same finding will apply here also. Hence we confirm the order of CIT(A) deleting the addition. Disallowance of provision for leave encashment under section 43B - HELD THAT - Calcutta High court in the case of Exide Industries Limited And Anr. vs Union Of India (UOI) 2007 (6) TMI 175 - CALCUTTA HIGH COURT whereby the provision of section 43B(J) of the Act struck down as arbitrary but stayed and is pending before Hon ble Supreme court . Hence it was requested that the matter can be kept pending till the decision of Hon ble supreme court. On this we require the learned DR to explain the situation. He only requested that this matter can be referred back to the file of the Assessing Officer who will decide in term of the Hon ble Supreme Court decision. After hearing both the sides and going through the records we restore the matter back to the file of the Assessing Officer to decide the claim of assessee in term of the decision of Hon ble Supreme Court in the case of Excide Industries 2007 (6) TMI 175 - CALCUTTA HIGH COURT . This issue of the assessee s CO is set aside to the file of the Assessing Officer.

Summary

Issues Involved:
1. Deletion of addition of value of closing stock due to diminution and claiming depreciation.
2. Adjustment to value of current year opening stock.
3. Adjustment while computing book profit under section 115JB of the Income-tax Act.
4. Disallowance of provision for leave encashment under section 43B of the Income-tax Act.

Detailed Analysis:

1. Deletion of Addition of Value of Closing Stock:

The primary issue in both appeals by the Revenue (ITA No.5792/Mum/2018 for AY 2013-14 and ITA No. 5793/Mum/2018 for AY 2014-15) and the corresponding cross objections by the assessee (CO. No. 204/Mum/2019 and CO. No. 205/Mum/2019) pertains to the deletion of the addition of value of closing stock due to diminution and claiming depreciation. The Revenue contended that the CIT(A) erred in deleting the addition of ?7,94,91,740/- and ?5,94,98,161/- respectively, without appreciating the findings of the Assessing Officer (AO). The AO had disallowed the reduction in closing stock value based on the previous year's assessment, which was still pending before CIT(A). However, the CIT(A) deleted the disallowance, noting that the same issue had been resolved in favor of the assessee for the earlier year by CIT(A). The Tribunal upheld CIT(A)'s decision, referencing its order for AY 2012-13, where it was established that the assessee's valuation method, which accounted for depreciation, was consistent with accounting standards and did not warrant disallowance.

2. Adjustment to Value of Current Year Opening Stock:

The assessee raised grounds for corresponding adjustments to the opening stock value for the current year, arguing that the closing stock value from the previous year as computed by the AO should be taken as the opening stock for the current year. The Tribunal noted that any adjustment in the closing stock for one year would naturally result in an adjustment to the opening stock of the subsequent year. Hence, the Tribunal confirmed CIT(A)'s order and deleted the addition, ensuring consistency in stock valuation.

3. Adjustment while Computing Book Profit under Section 115JB:

The Revenue also contested the deletion of the addition of ?7,94,91,740/- and ?5,94,98,161/- respectively, in arriving at the book profit under section 115JB of the Act. The AO argued that the diminution in the value of stock in trade should be adjusted as per Clause-I inserted in Explanation-1 to sub-section 2 of section 115JB. The Tribunal, however, found that this issue was inherently linked to the first issue regarding the valuation of closing stock. Since the Tribunal upheld CIT(A)'s decision on the first issue, it similarly confirmed the deletion of the addition while computing book profit.

4. Disallowance of Provision for Leave Encashment under Section 43B:

In the cross objection for AY 2013-14, the assessee contested the disallowance of provision for leave encashment under section 43B(f) of the Act, amounting to ?12,76,830/-. The assessee argued that this provision should not fall under section 43B(f) and should be allowable as a deduction. The Tribunal noted the pending decision of the Hon'ble Supreme Court in the case of Exide Industries Limited, where the provision of section 43B(f) was struck down by the Calcutta High Court but stayed. Consequently, the Tribunal restored the matter to the AO to decide based on the forthcoming Supreme Court decision.

Conclusion:

The Tribunal dismissed the Revenue's appeals and partly allowed the assessee's cross objections for statistical purposes. The Tribunal consistently upheld the CIT(A)'s decisions regarding the valuation of closing stock and its impact on book profit computation, while also addressing the provision for leave encashment pending the Supreme Court's decision. The order was pronounced in the open court on 29.11.2019.