2014 (3) TMI 725 - AT - Income Tax

Deletion on account of mould expenses - Expense or rent on moulds relate to M/s Dart India & ITL and not to the assessee company Held that - There is no change in the facts, situation or in law thus, the Revenue cannot be allowed to adopt a different stand the decision in Commissioner of Income Tax Versus M/s Excel Industries Ltd. and Mafatlal Industries P. Ltd. 2013 (10) TMI 324 - SUPREME COURT relied upon - when in earlier asstt. years the revenue accepted the order of the tribunal in favour of the assessee, then Revenue cannot be allowed to flip flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it - the expenditure on mould is allowable in the hands of the assessee - The payment of mould rental was done by the assessee under a contractual obligation with the contract manufacturer. The company had to import the molds from overseas group company on hire basis and provide the same to contract manufacturers to enable them to manufacture the products - Once the contract manufacturer completes the order placed by the assessee, the molds are returned back to the company and therefrom to the molds owners in case the particular molds, is not required for use of manufacturer the contract and molds borrowed by the assessee can by no stretch of imagination be considered as a colorable device the CIT(A) rightly the expenses as Revenue expenses the order of the CIT(A) upheld Decided against Revenue. Provision written back towards obsolete stock Held that - CIT(A) held that the appellant company has been making provisions towards obsolete stock and these provisions were claimed as expenditure in earlier years the contention of the assessee that certain provisions as detailed in written submissions were written back and hence the same are required to be taken out of the income declared for the assessment year so as to avoid double taxation of the same amount is accepted - the CIT(A) has asked the AO to make some factual verification regarding the correctness of claim of the assessee and also to take necessary undertaking from the assessee to grant assessee the desired relief there is no infirmity in the order of the CIT(A) Decided against Revenue. Prior period expenditure - Disallowance of Customs and excise Commission on contract manufacturers Held that - Even if the assessee has contended that it has taken the liability since, these manufacturers are exclusively selling the goods to it so the liability is in the nature of additional cost, the liability does not relate to this year and the same pertains to earlier years - Assessee cannot be allowed to claim such expenditure as revenue expenses which is claimed to have been incurred to safeguard the long term interest of the assessee, which remains unsubstantiated the CIT(A) held that, this expenditure cannot be treated to be a revenue nature and hence, not allowable against the taxable income Decided against Assessee.

Summary

Issues Involved:
1. Deletion of addition out of mould expenses.
2. Allowance of provision written back towards obsolete stock.
3. Disallowance of provision for obsolete stock.
4. Disallowance of excise duty and interest paid on behalf of contract manufacturers.

Issue-wise Detailed Analysis:

1. Deletion of Addition Out of Mould Expenses:
The Revenue contended that the Ld. CIT(A) erred in deleting the addition of mould expenses, arguing that these expenses were related to M/s Dart India & ITL and not the assessee company. The assessee, a wholly owned subsidiary of M/s Tupperware Asia Pacific Holdings Private Limited, claimed mould expenses of Rs. 46,632,929/- for the assessment year 2006-07. The AO disallowed these expenses, suggesting they were a colorable device to reduce tax liabilities, citing the McDowell principle. The Ld. CIT(A) allowed the expenses under section 37 of the I.T. Act, noting that the assessee had a contractual obligation to bear these costs. The ITAT upheld the Ld. CIT(A)'s decision, emphasizing the rule of consistency and noting that similar expenses had been allowed in previous years without disallowance.

2. Allowance of Provision Written Back Towards Obsolete Stock:
For the assessment year 2008-09, the Revenue challenged the Ld. CIT(A)'s direction to allow the provision written back of Rs. 65,11,174/- for AY 2005-06 and Rs. 72,77,736/- for AY 2006-07 after verification. The assessee argued that these provisions, disallowed in earlier years, should not be taxed again. The Ld. CIT(A) directed the AO to verify the claims and allow the deductions, provided the assessee undertook not to press related grounds in pending appeals. The ITAT found no infirmity in this direction and upheld the Ld. CIT(A)'s order.

3. Disallowance of Provision for Obsolete Stock:
The assessee appealed against the disallowance of a provision for obsolete stock amounting to Rs. 7,277,736/-. The AO had added this provision to the income, and the Ld. CIT(A) upheld this decision. However, the ITAT noted that for AY 2005-06, the Tribunal had decided a similar issue in favor of the assessee, acknowledging the consistent accounting policy of valuing inventory at cost or realizable value, whichever is lower. Following this precedent, the ITAT set aside the orders of the authorities below and decided in favor of the assessee.

4. Disallowance of Excise Duty and Interest Paid on Behalf of Contract Manufacturers:
The assessee claimed Rs. 49,409,120/- as a liability of Dart India and ITL for excise duty and interest, which it paid as a contractual obligation. The AO disallowed this, stating that the contract manufacturers were liable for these taxes, not the assessee. The Ld. CIT(A) affirmed this view, and the ITAT agreed, noting that the contract clearly stipulated that the manufacturers were responsible for all taxes. The ITAT also observed that the liability pertained to earlier years, making the current year's claim unjustified. The ITAT upheld the disallowance, rejecting the argument of commercial expediency as unsubstantiated.

Conclusion:
The ITAT dismissed the Revenue's appeals and partly allowed the assessee's appeal, upholding the deletion of mould expenses, allowing the provision written back, and disallowing the provision for obsolete stock and the excise duty and interest paid on behalf of contract manufacturers.