2020 (12) TMI 220 - AT - Income Tax

Disallowance of stock written off - assessee is engaged in the business of manufacturing of pickles, spices, pastes and chutneys declared total income of Rs. Nil - assessee during the year had written off stock worth on the ground that the said stock had become stale - Assessee had already treated the said stock as obsolete and had accordingly, reduced the same from the valuation of closing stock made at the end of the year - DR before us said that stock written off by the assessee during the year had become perishable in nature and that the same should have been written off in earlier years itself and argued that the conduct of the assessee by its decision to decide to write off the same during this year to offset the net profit earned by the assessee during the year is not appreciable - no expert committee report was made available for writing off the stock during the year under consideration - HELD THAT - Assessee had chosen to write off the said stock to present a realistic picture of its financial statements to the tune of ₹ 11.99 Crores. With regard to the argument advanced by the ld. DR about the conduct of the assessee of having decided to write off the said stock during this year is concerned, we find that no ulterior motive in any manner whatsoever could be attributed to the assessee in view of the fact that even after disallowance of stock write off to the tune of ₹ 11.99 Crores is made by the AO there was no taxable income for the assessee in view of the set off of loss brought forward from earlier years which had also been duly granted by the ld. AO in the assessment. Even if these stale stocks had been written off in any earlier years as accepted by the ld. AO in his assessment order and by the ld. DR before us, the same would have only enabled the brought forward losses to get increased. In any case it will have no impact in the computation of total income for the year under consideration. One more observation made by the AO that assessee had not offered any income in respect of these stocks. This observation is factually incorrect in as much as the stocks worth ₹ 11.99 crores was included in the closing stock valuation upto 31.3.2011 and hence income was duly offered for the same. The crucial point to be understood is there is absolutely no dispute that the stock to the tune of ₹ 11.99 Crores falls into the category of stale stock. Since this stale stock has been written off to the tune of ₹ 11.99 Crores, the assessee rightly had shown as an exceptional or extraordinary item in its profit and loss account as a separate line item in consonance with the requirement prescribed in accounting standards issued by ICAI. Even after this write off of the stock to the tune of ₹ 11.99 Crores, the assessee is still left with stock of ₹ 11.84 Crores as on 31/03/2012 as is evident from the aforesaid table. This shows the scientific basis of determination of stocks to be written off by the assessee. Books of accounts of the assessee were not rejected by AO in the instant case. It is pertinent to note that no benefit has been derived by the assessee by this write off of stocks during the year under consideration. Due to exceptional circumstances that had prevailed during this year, the Directors of the assessee company had decided to write off the stocks that were more than two years old. The details of the same are already on records and hence, not reiterated herein.Ground raised by the revenue is dismissed.

Issues Involved:
1. Justification of the disallowance of stock written off amounting to ?11,99,41,682/- by the assessee.

Issue-Wise Detailed Analysis:

1. Justification of the Disallowance of Stock Written Off:
The core issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in providing relief to the assessee concerning the disallowance of stock written off amounting to ?11,99,41,682/-.

Background and Assessee's Business:
The assessee, engaged in the manufacturing of pickles, spices, pastes, and chutneys, had filed its return for the Assessment Year (A.Y.) 2012-13 declaring a total income of Rs. Nil. The business operations were conducted through two units: one at Ratlam and another at Nasik. The Nasik unit, operated by the wholly-owned subsidiary Wisdem Machines Pvt. Ltd., faced significant labor unrest, leading to the accumulation and staleness of stock.

AO’s Observations:
During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had written off stock worth ?11,99,41,682/- as it had become stale. The AO questioned the timing of this write-off, suggesting that it was done to offset the net profit earned during the year, and proceeded to disallow the write-off.

Assessee's Submissions:
The assessee argued that the stock was perishable and had become stale due to labor unrest and other operational issues. The stock write-off was supported by detailed submissions, including stock movement details and evidence of labor disturbances. The assessee cited various judicial precedents and accounting standards (AS-2) to justify the valuation of closing stock at the lower of cost or net realizable value.

CIT(A)’s Findings:
The CIT(A) accepted the assessee's contentions, noting that the stock write-off was scientifically supported by circumstances. The CIT(A) observed that the labor unrest had significantly impacted the business, leading to the staleness of stock. The write-off was deemed justifiable, considering the perishable nature of the goods and the operational disruptions.

Tribunal’s Analysis:
The Tribunal reviewed the submissions and evidence presented. It noted that the AO's assertion that the write-off was done to offset profits was incorrect, as the assessee had incurred a loss during the year. The Tribunal emphasized that the stock write-off was a pragmatic decision in light of the closure of the factory and the perishable nature of the goods. The Tribunal found no ulterior motive in the timing of the write-off and highlighted that the stock had been included in the closing stock valuation up to 31.3.2011.

Judicial Precedents:
The Tribunal referred to several judicial decisions supporting the assessee's position, including the Supreme Court's rulings in Chainrup Sampatram vs. CIT and CIT vs. Hindustan Zinc Ltd., which upheld the principle of valuing stock at cost or net realizable value, whichever is lower. The Tribunal also cited decisions from various High Courts and Tribunals that supported the write-off of obsolete stock under exceptional circumstances.

Conclusion:
The Tribunal concluded that the assessee's decision to write off the stale stock was justified and in accordance with accepted accounting principles and judicial precedents. The Tribunal upheld the CIT(A)'s order, granting relief to the assessee and dismissing the revenue's appeal.

Final Order:
The appeal of the revenue was dismissed, affirming the CIT(A)'s decision to allow the write-off of ?11,99,41,682/- as a legitimate expense.

Pronouncement:
The order was pronounced on 03/12/2020 by way of proper mentioning in the notice board.

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