2021 (2) TMI 886 - AT - Income Tax

Disallowance on account of excess shortage/ breakage to 30% - exceptional inventory loss - disallowance of write off excess shortage of the inventory by the assessee - As argued expenditure incurred by the appellant due to pulling back of inventory from the market on account of expiry of product are normal business expenditure allowable as deduction - assessee is a company engaged in the business of trading of non-alcoholic beverage - HELD THAT - Assessee furnished the details in respect of loss of finished goods. The BDD policy necessarily applies to the finished goods only. The ld CIT (A) further accepted that possibility of having the inventory loss in the business of the appellant cannot be ruled out. He further considered annual turnover of the assessee and stated that claim of inventory loss is not significant. It was further noted that the ld AO has not brought on record any adverse evidence still he reached at a conclusion to allow only 70% of such loss. Even otherwise, the assessee has claimed such loss on account of passing of the of the expiry date of the finished product of the assessee. The value of such goods is as such Nil as having became non-marketable. It is not the case of the revenue that the assessee has derived any revenue from sale of such goods. Even otherwise, it is not possible. It is also not the case of the ld AO that such losses are claimed by the distributors. Naturally, the distributors will never make such claim on their account when they are clearly distributing stock only. Naturally, that is the risk of marketing company. Therefore, there is no reason to restrict it at an adhoc figure. In view of this, we do not find any justification to restrict allowance of such claim to the extent of 70%. According to us, it should be allowed in its entirety. Such loss is neither stated to be contingent or non-existent. In view of this, we reverse the order of the ld CIT (A) and direct the ld AO to delete the additions/ disallowances being loss on account of passing of the expiry date of the product - Decided in favour of assessee.

Summary

Issues: Disallowance of excess shortage/breakage claimed by the assessee due to pulling back of inventory from the market on account of product expiry.

Analysis:

1. Facts and Disallowance: The assessee, a trading company of non-alcoholic beverages, claimed a loss in its return due to excess breakage and shortage compared to the previous year. The company attributed this to various reasons, including destruction of cases due to floods and pulling back of cases from the market due to quality issues or product expiry. The Assessing Officer (AO) disallowed the claim of exceptional inventory loss, amounting to ?20,89,501, stating lack of evidence to prove ownership of stock risk and absence of claims made to the manufacturing company. The AO found the reasons provided unsatisfactory and added the amount to the income of the assessee.

2. Appeal Before CIT(A): The issue was appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], who observed that the appellant had made a similar claim in a previous assessment year. Referring to the appellant's own case for AY 2008-09, the CIT(A) allowed 70% of the inventory loss claimed, noting the necessity of maintaining brand value. The CIT(A) restricted the claim to 70% based on the appellant's consistent method and lack of complete details and evidence. The CIT(A) directed the AO to recompute the disallowance, partially allowing the appellant's claim.

3. Appellate Tribunal Decision: The matter was further appealed before the Appellate Tribunal. The Tribunal noted the appellant's submission that the inventory was pulled back due to product expiry, which was a risk solely borne by the assessee. The Tribunal disagreed with the CIT(A)'s decision to restrict the claim to 70%, emphasizing that the loss was genuine and not contingent. The Tribunal found no justification to limit the allowance and directed the AO to delete the addition of ?20,89,501, allowing the claim in its entirety. The Tribunal held that the loss on account of product expiry should be fully allowed as it was a real and non-marketable loss incurred by the assessee.

In conclusion, the Appellate Tribunal allowed the appeal of the assessee, directing the deletion of the disallowance of ?20,89,501 related to excess shortage/breakage due to the expiry of products. The Tribunal emphasized the genuine nature of the loss and the absence of revenue generation from the expired goods, leading to the decision to allow the claim in full.