2024 (9) TMI 353 - AT - Income Tax

Difference of valuation of stock - cost of silt constitutes capital or revenue expenditure - AO proceeded to value the silt arbitrarily at market rate by determining it to be capital expenditure and disallowed the same - Case of the revenue is that the cost of silt which was filled in the pit which was dug in earlier years was not claimed by the assessee as revenue expenditure in earlier years hence, it is capital in nature as filling of pit dug is capital expenditure and does not in any way increase the earning capacity of the concern. Whether the cost of silt would be capital expenditure or revenue expenditure? - HELD THAT - As per the business model of the assessee, whenever stone is extracted from the mines, the pits will be formed and pits will be filled with the silt. This is recurring action, therefore, the expenditure involved in this work comes under revenue expenditure and does not give any benefit to the assessee in the capital field and hence it becomes purely revenue in nature because once the stone is extracted and resultantly, it is filled with the existing silt, there cannot be any further action required. CIT(A) admits that assessee had not bought any new material to fill up the pits but had only utilized the existing silt which were already available with the assessee. Having held so, it is very clear that there was silt already available due to digging out of materials, which was only utilized for filling up the dug pits. Hence, the same would constitute the revenue expenditure. There is absolutely no malafide intention for the assessee to claim a capital expenditure to be a revenue expenditure. Effectively assessee is only trying to value the stock with raw materials left over having saleable value and raw materials not having saleable value, which is in accordance with the accepted trade practice of valuation of stock. The same is also in accordance with Accounting Standard-2 for valuation of inventories issued by Institute of Chartered Accountants of India. As relying on DALMIA CEMENT (BHARAT) LIMITED 1995 (5) TMI 22 - DELHI HIGH COURT , M/S. MODERN TERRY TOWELS LTD., 2012 (8) TMI 776 - BOMBAY HIGH COURT and M/S. DHAMPUR SUGAR MILLS PVT. LTD. 2015 (3) TMI 106 - ALLAHABAD HIGH COURT grounds raised by the assessee are here by allowed.

Summary

Issues:
Valuation of stock - Whether cost of silt constitutes capital or revenue expenditure.

Analysis:
The appeal before the Appellate Tribunal ITAT Dehradun concerned the valuation of stock and specifically focused on whether the National Faceless Appeal Centre (NFAC) was justified in confirming the addition of Rs. 1,24,14,552/- on account of the difference in the valuation of stock. The assessee, a manufacturing industry engaged in stone crushing, filed its return of income with a business loss. The dispute arose when the Assessing Officer valued the silt at market rate, considering it as capital expenditure, leading to the disallowance of Rs. 1,24,14,552/-. The revenue argued that the cost of silt, used to fill pits dug in earlier years, was capital in nature as it was not claimed as revenue expenditure previously. However, the assessee contended that the silt was a waste product of the manufacturing process and had no value unless sold in the market, thus constituting revenue expenditure.

The Tribunal analyzed the business model of the assessee, emphasizing that the silt was already available due to the extraction process and was merely utilized for filling pits, making it a revenue expenditure. The Tribunal also noted that the assessee's valuation of stock was in line with accepted trade practices and Accounting Standard-2 for "valuation of inventories." Citing the decision in CIT v. Dalmia Cement (Bharat) Ltd, the Tribunal highlighted that a change in the method of valuing stock, based on prevailing facts and practices, can be bona fide. Moreover, referencing judgments from the Hon'ble Delhi, Bombay, and Allahabad High Courts, the Tribunal concluded that the cost of silt should be treated as revenue expenditure. As a result, the Tribunal allowed the appeal of the assessee, overturning the addition made by the Assessing Officer.

In conclusion, the Tribunal determined that the cost of silt used for filling pits should be considered as revenue expenditure rather than capital expenditure, based on the recurring nature of the activity and the lack of additional benefit to the assessee in the capital field. The decision was supported by legal precedents and established accounting standards, ultimately resulting in the allowance of the assessee's appeal.