2022 (5) TMI 156 - AT - Income Tax

Addition on account of Repair and Maintenance of Plant and Machinery on estimate basis - sale of scrap - HELD THAT - The assessee is a Society registered under the U.P. Cooperative Society Act. Therefore, it has to act within the parameters laid down therein. Before the Ld. AO the assessee explained that it has to take permission of the Administrator of the Society for the sale of scrap. The case of the assessee has all along been that the assessee is adopting the method of accounting on cash basis meaning thereby that as and when the sale of scrap is held in two-three years the same is accounted for. Before the Ld. CIT(A) also it was explained by the assessee that when the scrap is generated out of stores consumption the same is sold with the permission of District Magistrate after inviting tenders and sale of scrap is shown in the year of sale of scrap in the accounts. CIT(A) has accepted it as a matter of fact that the practice of not showing the amount of scrap in its books in the year of generation but accounts for the same as sale in the year scrap generated is sold, is being followed by the assessee since long. The assessee brought on record a chart of sale made of scrap in last years and subsequent year which revealed that during the financial year 2014-15 it accounted for sale of scrap in its books of account. We are, therefore, of the view that there is no valid justification for estimating the value of scrap and making the impugned addition by discarding the method of accounting regularly employed by the assessee - Decided in favour of assessee.

Summary

Issues: Disallowance of repair and maintenance expenses on estimate basis

Analysis:
The case involved an appeal by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals) concerning the disallowance of a specific amount out of the total repair and maintenance expenses claimed by the assessee for the Assessment Year 2013-14. The Ld. AO had estimated the value of scrap generated from the repair and maintenance expenses and added it to the assessee's income. The assessee, a Co-operative Society engaged in sugar manufacturing, argued before the Ld. CIT(A) that the estimation of scrap value at 10% of repair expenses was unreasonable. The assessee explained that scrap generated from store consumption is sold in subsequent years after obtaining necessary permissions. The Ld. CIT(A) partially allowed the appeal by restricting the addition to 10% of the value of store consumption, considering the mandatory valuation of inventory for correct profit computation. The Tribunal referred to previous decisions emphasizing the valuation of inventory, including by-products, and upheld the Ld. CIT(A)'s decision to estimate scrap value at 10% of store consumption.

The Tribunal, after hearing the arguments and examining the facts, concluded that the assessee's method of accounting for scrap sales in subsequent years with necessary approvals was valid. The Tribunal noted that the assessee, being a Cooperative Society, followed a cash basis accounting method and accounted for scrap sales when they occurred, as evidenced by past records. The Tribunal found no justification for estimating the scrap value and making the disputed addition, considering the consistent accounting practice followed by the assessee. Consequently, the Tribunal allowed the appeal, thereby deleting the added amount from the assessee's income.

In summary, the Tribunal ruled in favor of the assessee, highlighting the validity of the accounting method employed by the Cooperative Society for scrap sales and rejecting the estimation of scrap value based on repair and maintenance expenses. The decision emphasized the importance of maintaining consistent accounting practices and upheld the assessee's appeal against the disputed addition to income.