2007 (11) TMI 281 - SC - Income Tax

Valuation of obsolete items as certified by the auditors can not be rejected on the ground that list of obsolete items was not produced by the assessee - written back and written off of depreciation are two different terms therefore adjustment made by assessee under circular with regard to deprecation and working out of relief u/s 32AB can not be denied - Interest from customers and sales tax set off are eligible for deduction u/ s 80 HHC

Issues Involved:
1. Addition to closing stock by the Assessing Officer.
2. Exclusion of depreciation written back from book profits under section 32AB.
3. Inclusion of interest from customers and sales tax set-off in business profits for deduction under section 80HHC.

Detailed Analysis:

Issue 1: Addition to Closing Stock by the Assessing Officer
The assessee had written off Rs. 28,00,000 for obsolete items not moving for three years, valuing them at 10% of the cost. The Assessing Officer added back Rs. 15,15,656, valuing the items at 50% of the cost, citing lack of evidence. The Commissioner of Income-tax (Appeals) deleted the additions, noting actual realisation was less than 10% of the cost. The Tribunal restored the Assessing Officer's order due to lack of evidence from the assessee.

The High Court found that the auditor's report justified the valuation at 10% and noted that the closing stock value was taken as the opening stock in the subsequent year, with actual sales confirming the valuation. The court held that the Assessing Officer's valuation at 50% was arbitrary and unsupported by evidence. Therefore, the Tribunal's decision was incorrect. The High Court answered in favor of the assessee, ruling that the valuation by the assessee was proper.

Issue 2: Exclusion of Depreciation Written Back from Book Profits under Section 32AB
The assessee reworked depreciation as per a Company Law Board circular, resulting in Rs. 81,33,607 being credited to the profit and loss account. The Assessing Officer reduced this amount from book profits for section 32AB relief. The Commissioner of Income-tax (Appeals) held that the depreciation written back was not a provision for liability and should not be deducted from profits. The Tribunal upheld the Assessing Officer's decision.

The High Court ruled that the Tribunal erred in treating the amount written back as written off. The adjustment was necessitated by the Company Law Board circular and did not involve withdrawal from reserves. Hence, the amount should not be reduced from profits for section 32AB relief. The High Court answered in favor of the assessee, ruling that the increased profits due to reworking depreciation were not excludible from book profits.

Issue 3: Inclusion of Interest from Customers and Sales Tax Set-off in Business Profits for Deduction under Section 80HHC
The assessee's "other income" included interest from customers and sales tax set-off, which the Assessing Officer excluded from business profits for section 80HHC deduction. The Commissioner of Income-tax (Appeals) included these as business income. The Tribunal excluded them, citing lack of nexus with business activities.

The High Court noted that the Assessing Officer assessed these incomes under "Profits and gains of business or profession," not "Income from other sources." The court held that once assessed as business income, they could not be excluded from business profits for section 80HHC deduction. The High Court distinguished the Tribunal's cited cases and ruled that the interest from customers and sales tax set-off were part of operational income and should be included in business profits for section 80HHC deduction. The High Court answered in favor of the assessee.

Conclusion:
The Supreme Court dismissed the appeal, leaving the questions of law open, thereby upholding the High Court's decision favoring the assessee on all three issues.

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