2023 (1) TMI 16 - AT - Income Tax

Addition of write off of inventory - AO sustained the additions made towards disallowance of loss on account of written off of inventory, on the ground that the appellant could not produce necessary evidences to prove its claim that written off of inventory is unusable and obsolete and further, there was no reporting to the authorities concerned, even though the assessee is a listed company which required to report major events to various authorities including SEBI etc - HELD THAT - The assessee is required to take necessary approvals from the Board of Directors and also required to report major events to the stock exchange and SEBI, to inform the shareholders about any adverse events which cause huge financial burden or loss. Further, although the assessee claims that inventory write off pertains to purchase of cotton made in the financial years 2004-05 2005-06, but on perusal of statement of movement of stock filed by the assessee, the closing stock of cotton as on 31.03.2006 was only at Rs. 11.34 crores, whereas, the value of stock written off for the impugned assessment year is at Rs. 16.96 crores. Therefore, the argument of the assessee that the inventory of stock written off pertains to financial years 2004-05 2005-06 is devoid of merits. Assessee has written off 100% inventory of cotton held and the value of said inventory is very high. When the assessee is taking such a drastic decisions which impacts its financial decision, it needs to report to the concerned authorities and also required to take approval from the Board of Directors and audit committee. In this case, although assessee claims that it has reported inventory write off to the shareholders in published quarterly financial report, but the CIT(A) recorded categorical findings that similar statement is absent in the final accounts submitted to shareholders in the annual general body meeting. Further, there is no iota of observations by the auditors in their auditors report submitted to the Board of Directors for the financial year 2012-13, even though, there is a requirement of law to report any adverse movement in inventory valuation. CIT(A) made further observations that the assessee could not file any evidence to prove that whether any report has been submitted to stock exchange and SEBI on this issue. We further noted that the assessee has taken an insurance coverage for loss of stock and other asset. Even though, the assessee claims stock written off became obsolete and unusable, there is no proof of claim before the insurance company. Further, when such a huge chunk of inventory was written off, obviously there will be a revenue from sale of scrap. There is no iota of evidence with the assessee to prove its claim that whether any revenue is generated from sale of scrap. The assessee also could not able to furnish any evidence whether obsolete/unusable stock is still lying with the assessee or any further action is taken to sell or disburse the stock. Therefore, we are of the considered view that the assessee could not satisfactorily explain with necessary evidence the loss claimed on account of write off inventory, but is only to offset capital gain derived from sale of property as brought out by the AO and CIT(A). AO in their order observed that during the financial year relevant to assessment year 2013-14, the assessee shows two pieces of vacant land and computed LTCG and set off LTCG against current year business loss - AO further noted that substantial portion of the current year business loss is due to alleged write off of inventory - Therefore, from the above, it is very clear that the assessee has devised a tax planning to offset capital gains derived from sale of property by claiming set off current year business loss. There is no error in the reasons given by the AO as well as the CIT(A) to make additions towards disallowance of loss on account of write off inventory of cotton. Appeal filed by the assessee is dismissed.

Issues Involved:
1. Addition towards write-off of inventory.
2. Reporting and evidence requirements for inventory write-off.
3. Depreciation claims during temporary suspension of manufacturing operations.
4. Adjustment of unabsorbed brought forward business/depreciation loss against income.

Issue-Wise Detailed Analysis:

1. Addition towards write-off of inventory:
The primary issue in this case was the addition of Rs. 16,96,24,344 towards the write-off of inventory by the assessee. The assessee claimed that the cotton stock purchased in 2004-05 and 2005-06 had become unusable and was written off as scrap. However, the Assessing Officer (AO) was not convinced by the explanation and found discrepancies in the stock movement records. The AO noted that the closing stock of cotton as of 31.03.2006 was only Rs. 11.34 crores, which contradicted the assessee's claim of writing off Rs. 16.96 crores worth of stock. The AO also pointed out the lack of expert certification, evidence of previous write-offs, and discrepancies in stock statements.

2. Reporting and evidence requirements for inventory write-off:
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] both emphasized the lack of proper reporting and evidence to support the inventory write-off. The CIT(A) noted that the inventory write-off was not reported to shareholders or regulatory authorities, including SEBI, despite the assessee being a listed company. The auditors' report did not mention the significant event of inventory write-off, which raised doubts about the genuineness of the claim. Additionally, the assessee failed to provide evidence of any insurance claims or revenue from the sale of scrap, further weakening their position.

3. Depreciation claims during temporary suspension of manufacturing operations:
The assessee argued that depreciation should be allowed as the manufacturing operations were temporarily suspended. However, this issue was not directly addressed in the judgment, as the primary focus was on the inventory write-off and its implications on the financial statements and tax liabilities.

4. Adjustment of unabsorbed brought forward business/depreciation loss against income:
The assessee contended that they had enough unabsorbed brought forward business/depreciation loss to adjust against the income. However, the AO and CIT(A) found that the substantial portion of the current year's business loss was due to the alleged inventory write-off, which was not satisfactorily proven. The AO observed that the assessee had derived Long Term Capital Gains (LTCG) from the sale of property and attempted to offset these gains by declaring a business loss through the inventory write-off. This was seen as a tax avoidance strategy, and the disallowance of the inventory write-off was upheld.

Conclusion:
The appeal filed by the assessee was dismissed, with the tribunal upholding the findings of the AO and CIT(A). The tribunal agreed that the assessee failed to provide satisfactory evidence for the inventory write-off and noted the lack of proper reporting and documentation. The decision emphasized the importance of transparency and adherence to regulatory requirements in financial reporting, especially for listed companies. The tribunal concluded that the inventory write-off was an attempt to offset capital gains and avoid tax liabilities, and thus, the addition towards the write-off of inventory was justified.

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