2022 (12) TMI 1216 - AT - Income Tax

Disallowance of provision for slow moving obsolete stock - assessee is making provision in respect of unsold stock of cassettes and compact disc s in accordance with AS-2 - principle of resjudicata - As submitted assessee is consistently following the same method of accounting since its inception and the same has been accepted by the Department for the last two decades - HELD THAT - The assessment year under appeal is the only assessment year when disallowance has been made in respect of provision for slow moving and obsolete inventories. It is true that the principle of resjudicata does not apply in Income Tax proceedings, but at the same time rule of consistency cannot be ignored especially when the accounting method followed by assessee is in accordance with approved Accounting Standards. Revenue has not brought on record any material to show the reasons for deviation in not accepting provision for slow moving and obsolete inventories in the impugned assessment year. In the case of CIT vs. Santram Mangatram 2005 (1) TMI 57 - PUNJAB AND HARYANA HIGH COURT has held that where from the inception of its business, the assessee had continuously adopted the same method of valuation of closing stock and no objection was raised by the Department in any of the previous years, there was no valid ground to hold that method adopted by the assessee for valuation of stock was legally impermissible. In the case of United Commercial Bank 1999 (9) TMI 4 - SUPREME COURT has held that where the assessee bank was valuing stock-in-trade at cost for the purpose of statutory balance sheet and for the Income Tax purpose valuation was at cost or market value, whichever is lower and that was accepted by the Department in the preceding assessment years, there is no justifiable reason for the Revenue for not accepting same in the impugned assessment year. Thus held if the provision is accounted in accordance with the statutory requirements and the method of accounting has been consistently followed by the assessee over a period of time and accepted by the Department, the same should not be disturbed. In the instant case no contrary material has been brought on record by the Department to show that the assessee was not consistently following accounting policy and provision for slow moving and obsolete inventory in preceding or succeeding assessment years. We find no valid reason to uphold the findings of the CIT(A) confirming the addition. Consequently, findings of CIT(A) are reversed and ground No.3 of appeal is allowed. Disallowance of publicity expenses, wrongly considered as bad debts and advances written off by the Assessing Officer - A perusal of Schedule-17 shows that against bad debts and advances written off no amount is mentioned either in the year ended 31/03/2011 or for the year ended 31/03/2010. The Assessing Officer has disallowed bad debts and advances written off to the extent of Rs.5,97,35,213/-. The aforesaid amount is mentioned in Schedule -17 against the Publicity Expenses . The Assessing Officer patently erred in mentioning the amount of Publicity Expenses against Bad Debts and advances written off . Disallowance has been made by the AO on wrong appreciation of facts. We further observe that the assessee s submissions dated 20/01/2014 made before the AO had categorically mentioned Nil against Details of Bad Debts and Advances written off during the year. After examining the facts and documents on record, we find merit in ground No.4 of the appeal. Hence, the assessee succeeds on same. AO is directed to delete the disallowance made in respect of Bad Debts and Advances written off. The ground of appeal No.4 is thus, allowed.

Summary

Issues involved:
1. Disallowance of provision for slow moving obsolete stock
2. Disallowance of publicity expenses wrongly considered as bad debts and advances written off

Issue 1: Disallowance of provision for slow moving obsolete stock:
The assessee, engaged in the music industry, made a provision for slow and obsolete stock at the year-end to align closing stock with cost or net realizable value, following Accounting Standard-2. The method was consistently applied for two decades, accepted by the Department, and in line with previous assessments. The Appellate Tribunal noted the absence of any material justifying the deviation in the impugned assessment year. Referring to legal precedents, including United Commercial Bank vs. CIT and CIT vs. Santram Mangatram, the Tribunal emphasized that if a provision is accounted for as per statutory requirements and consistently followed by the assessee and accepted by the Department, it should not be disturbed. Consequently, the Tribunal reversed the findings of the CIT(A) and allowed ground No.3 of the appeal.

Issue 2: Disallowance of publicity expenses wrongly considered as bad debts and advances written off:
The Assessing Officer erroneously disallowed publicity expenses as bad debts and advances written off, amounting to Rs. 5,97,35,213. However, the Schedule-17 of the Profit and Loss Account showed no mention of bad debts or advances written off for the relevant period. The Tribunal observed that the Assessing Officer misinterpreted the details, as the submissions clearly stated "Nil" against bad debts and advances written off. After scrutinizing the facts and documents, the Tribunal found merit in ground No.4 of the appeal. Consequently, the Tribunal directed the Assessing Officer to delete the disallowance made for bad debts and advances written off, allowing ground No.4 of the appeal.

In conclusion, the Appellate Tribunal partially allowed the appeal, reversing the findings on both issues. The Tribunal emphasized the importance of consistency in accounting methods and adherence to statutory requirements, as evidenced by legal precedents. The Tribunal's decision highlighted the need for proper appreciation of facts by the Assessing Officer to avoid erroneous disallowances.