2019 (3) TMI 395 - HC - Income Tax

Devaluation of stocks and spares - revaluation of certain old inventories which were obsolete and non moving items of spares - After audit of C & AG one committee was formed, on technical evaluation which resulted in a recommendation to devalue 313 items by 50% and the 14 items at 100% which was claimed in return- AO disallow the claim - CIT(A) allowed 80% of the appellant s claim finding 20% to be the scrap value of those items following its earlier year order - ITAT permitted 80% of the claim with respect to 100% devaluation claimed items, again, apportioning 20% as the scrap value of such items. However, with respect to the items in which 50% devaluation was claimed, the Tribunal found that the committee had not spoken of the utility value or about the physical condition and the 50% devaluation was recommended by the committee without doing any realistic appraisal of each of the items included in the list of 313 items. - HELD THAT - Tribunal s findings that the committee s recommendations were without any basis cannot hence be accepted. The Committee of officers based on the technical evaluation had recommended devaluation at 50% finding the 313 items of stocks and spares to be of some use in the business of the Company or possible of earning 50% of the cost price in the market being second hand stores and spares. When the devaluation of 100% obsolete items were allowed to the extent of 80%, we do not find any plausible reason for declining the devaluation to an extent of 50% claimed on the basis of a technical evaluation and recommendation made by a committee of officers appointed by the Board. In such circumstances, we reverse the order of the Tribunal and allow the claim made of 50% devaluation with respect to the 313 items. The questions of law are answered in favour of the assessee and against the Revenue. When the stores and spares were put to use, their written off value was debited to the profit & loss account. However, here the stores and spares were never used and hence a valuation was attempted as per accounting principles itself to revalue the obsolete stores and spares. This works out to the prejudice of the revenue, but that sole reason cannot result in it being disallowed. The valuation was an accepted practise and it was necessitated as the situation warranted a revaluation of obsolete stores and spares. The method of revaluation cannot be faulted for reason of it having been accepted by accounting principle AS-2.

Summary

Issues:
1. Revaluation of obsolete inventories
2. Entitlement for deduction of written-off value of spares and stores

Analysis:

Issue 1: Revaluation of obsolete inventories
The case involved a public sector undertaking that revalued its assets due to audit objections raised by the Comptroller and Auditor General (C&AG). An expert committee identified obsolete items of stores and spares, recommending devaluation by 50% and 100%. The Assessing Officer (AO) disallowed the claim, citing a change in accounting practices and the non-trading nature of the items. The first appellate authority supported the claim, noting past approvals for similar claims. However, the Tribunal reversed this decision, allowing 80% devaluation for 100% claims and questioning the basis for 50% devaluation. The High Court, considering past decisions and accounting principles, reversed the Tribunal's decision, allowing the 50% devaluation based on technical evaluation and committee recommendations.

Issue 2: Entitlement for deduction of written-off value
The AO rejected the claim for deduction of written-off spares, citing method alteration, incorrect profit/loss statement, and notional claim. The first appellate authority supported the claim, referencing past approvals and consistent accounting practices. The Tribunal allowed 80% devaluation for 100% claims but questioned the basis for 50% devaluation. The High Court, considering accounting principles and past approvals, reversed the Tribunal's decision, allowing the 50% devaluation based on technical evaluation and committee recommendations.

In conclusion, the High Court ruled in favor of the appellant, allowing the 50% devaluation of obsolete inventories and the deduction of written-off values based on technical evaluation and consistent accounting practices. The judgment emphasized adherence to accounting principles and past approvals in similar cases, overturning the Tribunal's decision and resolving the issues raised by the appellant.