2023 (9) TMI 1521 - AT - Income Tax

Undervaluation of stock - assessee has disclosed closing stock of salt and closing stock of rice - AO was of the opinion that since freight expenses have separately been debited to the profit and loss account, but not included in the valuation of closing stock, the assessee has undervalued its closing stock - assessee vehemently stated that the assessee has been consistently following the system of valuing the stock of traded goods at cost or market price, whichever is lower by following FIFO method. HELD THAT - Any adjustment in the closing stock requires simultaneous adjustment in the subsequent opening stock. Thus, the entire exercise becomes tax neutral. Having said that, we find that the assessee has been consistently following the same method of valuation of closing stock, which has been accepted by the revenue in the earlier assessment years. Therefore, we do not find any reason for deviating from the same. The assessee has never included freight charges while valuing its closing stock. Therefore, we do not find any reason for doing the same during the year under consideration. The findings of the ld. CIT(A) are set aside and the AO is directed to delete the addition. Thus, ground is allowed. Addition on account of subsidy - Revenue or capital receipt - HELD THAT - This policy was introduced for promoting growth of industry in the State and since the assessee satisfied all the conditions for being eligible, it received subsidy of Rs.50 lakhs during the financial year 1998-99. The said incentive was taken to the capital reserve account and was claimed as non-taxable in the return of income for AY 1999-00, treating the same as capital receipt. The same was accepted by the AO. As during the year, the AO has taken a position that since it has been given a part of capital investment, cost of assets needs to be reduced as per Explanation 10 to section 43(1). We are of the considered view that the said section is not applicable on the facts of the case in hand in as much as the subsidy has not been granted for meeting cost of any asset but for larger public interest of industrial development of the State of Punjab. An identical issue was considered by case of P.J. Chemicals Ltd 1994 (9) TMI 1 - SUPREME COURT - In that case, the assessee had received a capital subsidy, which was claimed as capital receipt, not exigible to Income-tax. AO held that such subsidy is liable to be reduced form the cost of assets, in terms of the provisions of section 43(1) of the Act. It would not be out of place to mention that even if the action of the AO has to be accepted, then the same should have been taken in A.Y 1999-2000. However, we find that no action has been taken from A.Y 1999-2000 to A.Y 2006-07. Therefore, there being no change in the facts, it would be incorrect to take a different stand after a gap of 10 years. Considering the facts of the case in totality, we do not find any merit in the action of the AO/CIT(A). We, accordingly, direct the Assessing Officer to delete the impugned addition.

Summary

Issues Involved:
1. Undervaluation of stock
2. Treatment of capital subsidy
3. Disallowance of depreciation on "Edible Oil Brand"
4. Disallowance of royalty paid on brand "Gagan"
5. Gross profit rate adjustment

Undervaluation of Stock:
The issue revolved around the addition of Rs. 5,19,848 due to undervaluation of closing stock of salt and rice. The Assessing Officer contended that the freight expenses not included in the valuation of closing stock led to undervaluation. However, the Tribunal noted that the assessee consistently followed the FIFO method for stock valuation, which was accepted by the revenue in previous years. Therefore, the addition was deemed unjustified, and the Assessing Officer was directed to delete it.

Treatment of Capital Subsidy:
Regarding the capital subsidy received, the Assessing Officer reduced the actual cost of fixed assets, resulting in excess depreciation. The Tribunal disagreed with this approach, emphasizing that the subsidy was granted to promote industrial growth, not to meet asset costs. Citing relevant case laws, the Tribunal ruled that the subsidy should not reduce the asset's cost for depreciation purposes. The Assessing Officer was directed to delete the addition related to the subsidy.

Disallowance of Depreciation on "Edible Oil Brand" and "Gagan" Royalty:
The Revenue raised multiple grounds challenging the disallowance of depreciation on the "Edible Oil Brand" and royalty paid on the "Gagan" brand. The Tribunal found these issues to be similar to those in a previous assessment year and allowed the appeals based on the detailed discussions and decisions made in the prior case.

Gross Profit Rate Adjustment:
The Revenue's grievance regarding the gross profit rate adjustment was dismissed by the Tribunal, as the assessee's failure to provide quantitative details and physical stock registers during assessment proceedings did not warrant the disallowance. The Tribunal upheld the decision made in a previous assessment year, dismissing the Revenue's appeal on this issue.

In conclusion, the Tribunal allowed the assessee's appeal related to the undervaluation of stock and the treatment of capital subsidy, while partly allowing the Revenue's appeal concerning the disallowance of depreciation on the "Edible Oil Brand." The Tribunal's decision was based on consistent application of valuation methods, the nature of subsidies, and previous case law interpretations, ensuring fair and just tax treatment.