2018 (4) TMI 1528 - AT - Income Tax

Bad debts - Additions made towards sundry balances written off - as per AO the said write off is not in accordance with the provisions of Section 36(1)(vii) r.w.s. 36(2), as the assessee has failed to prove that such debits are arisen out of the sales made in the earlier year - Held that - No merit in the finding of the AO for the reason that, when the AO has accepted credit side of the Balance Sheet, there is no reason for the AO to reject the sundry balances written off appearing in the debit side of the Balance Sheet only on the ground that the assessee has failed to file necessary evidence to prove that such debts are arisen out of the sales made in the previous financial year. When the assessee has written off debit as well as credit balances, the net result of which may be debit or credit, it has to be treated either as income or expenses. The assessee has filed certain evidences to prove that such advances are outstanding for more than six years and are arisen out of normal course of business like advances for expenses and other advances which are irrecoverable. Therefore, AO was incorrect in disallowing sundry balances written off and claimed as bad debt under Section 36(1)(vii) - Decided in favour of assessee. Additions towards difference in valuation of closing stock - AO has considered the prevailing market rate in Indian market as on valuation date and then adopted cost to determine the cost or market rate whichever is less for valuing the closing stock - Held that - For valuation of closing stock the assessee has to follow cost or market rate whichever is less and such market rate has to be determined on the basis of the prevailing market rate in Indian market as on the valuation date. If the assessee has considered the prevailing rate in Indian market to arrive at cost or market rate whichever is less, then there is no reason for the AO to deviate from the said method. But, the fact remains that as per the finding of the AO the assessee has determined a different market rate by adopting GJEPC rate to arrive at market rate which in our opinion is not in accordance with the prescribed method for valuation of closing stock. Therefore we set aside the issue to the file of the AO and direct him to determine the value of closing stock by adopting the cost or market rate whichever is less method as prescribed under Accounting Standard-2 for valuation of closing stock. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of bad debts or write-offs under Section 36(1)(vii), Section 36(2)(i), and/or Section 37 of the Income Tax Act, 1961.
2. Addition on account of valuation of closing inventory using international rates instead of prevailing domestic rates.

Issue-wise Detailed Analysis:

1. Disallowance of Bad Debts or Write-offs:
The assessee claimed a deduction of ?53,43,830/- as bad debts or write-offs under Section 36(1)(vii) and Section 36(2)(i) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed this claim on the grounds that the assessee failed to provide sufficient evidence that these debts arose from sales made in previous years and were offered for taxation. The AO accepted the sundry balances written off on the credit side of the Balance Sheet but disallowed those on the debit side, arguing that the conditions under Section 36(1)(vii) read with Section 36(2) were not met.

The CIT(A) upheld the AO’s decision, stating that the assessee did not furnish necessary evidence to prove that these balances were indeed bad debts arising from earlier sales subjected to tax. The assessee contended that these balances were irrecoverable and had been outstanding for more than six years.

Upon review, it was found that the AO's acceptance of the credit side balances but rejection of the debit side balances was inconsistent. The assessee provided evidence that these advances were part of normal business operations and were irrecoverable. Therefore, the Tribunal directed the AO to delete the additions made towards sundry balances written off, allowing the assessee's claim under Section 36(1)(vii).

2. Addition on Account of Valuation of Closing Inventory:
The AO added ?54,11,304/- to the assessee's income, arguing that the assessee had not followed the prescribed method for valuing closing stock as per the Accounting Standard. The assessee valued the closing stock of gold using different market rates for imported and domestically procured gold, adopting the international rate for imported gold and the domestic rate for locally procured gold.

The CIT(A) observed that the assessee's method was inconsistent with the prescribed Accounting Standard-2 for valuing closing stock, which requires using the cost or market rate, whichever is less, based on the prevailing domestic market rate. The AO found that the cost per kg of gold as per the assessee's books was ?21,08,385/-, while the market value in the Indian market was ?21,18,000/- per kg. The assessee's valuation of imported gold at ?20,81,859/- per kg was rejected by the AO.

The Tribunal noted that while the assessee followed the cost or market rate method, the dispute lay in the market rate adopted. The Tribunal directed the AO to re-evaluate the closing stock valuation using the cost or market rate, whichever is less, as per the Accounting Standard-2. If the assessee's method was found compliant with AS-2, the AO was instructed to delete the addition. Otherwise, the AO was to use the prevailing domestic market rate for valuation.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to delete the disallowance of bad debts and re-evaluate the closing stock valuation as per the prescribed accounting standards.