2015 (4) TMI 839 - HC - Income Tax

Adoption of value of closing stock - ITAT directing the Assessing Officer to adopt the value of the closing stock as declared by the assessee - Held that - The objection raised by the assessee on account of the method of accounting is not justifiable, inasmuch as Section 145A deals with the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head Profits and gains of business or profession and it requires the assessee to follow the method regularly employed by the assessee. In the present case, it is not in dispute that the method of accounting had been altered with effect from the Assessment Year 2001-02. However, the facts reveal that the write off was on account of deterioration in the condition of the non-moving stores since the assessee s plants were located in remote places and near the sea. The non-moving stores and spares were corroded over a period of time due to wear and tear. This method of accounting having been adopted in the earlier years, there was no reason for the Assessing Officer to disallow the same on the ground that the accounting method had changed. Accordingly, we are of the view that the Judgment of this Court in the case of Heredilla Chemicals 1997 (1) TMI 66 - BOMBAY High Court will not affect the write off by the assessee in the present case being distinguishable on facts. It is not merely on the basis of obsolescence of any particular equipment that the assessee has claimed write off of the slow/non-moving items. The write off claimed is essentially on the basis of deterioration of various materials, including raw-materials and in particular slow moving items of machinery. No substantial question of law arises.

Summary

Issues:
- Interpretation of Section 145A of the Income Tax Act
- Justifiability of method of accounting change
- Claiming deduction for write off of non-moving items

Interpretation of Section 145A of the Income Tax Act:
The judgment involved a common question of law regarding the interpretation of Section 145A of the Income Tax Act. The Assessing Officer questioned the method of accounting change by the assessee, specifically related to the write off of non-moving stores and spares. Section 145A requires the valuation of goods and inventory to be in accordance with the method regularly employed by the assessee. The court analyzed the provisions of Section 145A and concluded that the objection raised by the assessee regarding the method of accounting was not justifiable. The method of accounting had been altered by the assessee, but the write off was due to the deterioration of non-moving stores, which was a consistent practice adopted in earlier years.

Justifiability of method of accounting change:
The Assessing Officer contended that the assessee had changed its method of accounting in the Assessment Year 2001-02, deviating from its consistent policy followed for several decades. The officer argued that the write off claimed by the assessee was not valid as there was no specific reason mentioned for the change in accounting method. However, the court found that the write off was justified due to the deterioration of non-moving stores caused by factors like corrosion from being located in remote areas near the sea. The court held that the change in the method of accounting did not invalidate the write off in this case.

Claiming deduction for write off of non-moving items:
The case involved the issue of whether the assessee was entitled to claim a deduction for the write off of slow-moving items. The Commissioner of Income Tax (Appeals) initially supported the write offs, which led to an appeal by the Revenue before the Income Tax Appellate Tribunal. The Tribunal ruled in favor of the assessee, stating that the write off was correctly claimed. It highlighted that the Comptroller and Auditor General of India had accepted the valuation of the damaged goods, and the Revenue did not dispute this valuation. The Tribunal differentiated this case from a previous judgment involving obsolescence allowance, emphasizing that the write off in the present case was based on the deterioration of materials rather than obsolescence. The court upheld the Tribunal's decision, dismissing the appeals and concluding that no substantial question of law arose in the case.

This detailed analysis of the judgment covers the interpretation of Section 145A, the justifiability of the method of accounting change, and the claiming of deductions for the write off of non-moving items, providing a comprehensive overview of the legal issues involved in the case.