2021 (6) TMI 980 - AT - Income Tax

Disallowance of claim of shortage of inventory - assessee explained before the A.O. that the shortage of inventory has been found when the physical inventory of apparels accessories was verified by the auditors with the book stock in various show rooms/warehouses located all over India - HELD THAT - As noticed there are shortages as well as excess stocks and the net amount of difference resulted in shortage of stock - We notice from the report that the physical inventory has been taken in all stores and warehouses and the difference between physical stock and book stock has been noticed meticulously in respect of each item of apparel and the accessory. Thus, it is not a single case of theft, as presumed by the AO, which may warrant filing of FIR. The shortage noticed is as low as ₹ 68/-. CIT(A) has also appreciated that the retail trade is prone to such pilferages, shoplifting etc., resulting in such kind of shortages of stock - we are of the view that there is no reason to suspect the claim of the assessee. Accordingly, we are of the view that there is no reason to restrict the disallowance to 50% as done by Ld. CIT(A). In our view, in the facts and circumstances of the case and also considering the detailed report of shortages of stock, the entire claim of the assessee should have been allowed as deduction. Accordingly, we set aside the order passed by Ld. CIT(A) and direct the A.O. to delete the disallowance relating to shortage of inventory. Disallowance of expenditure relating to exceptional items - HELD THAT - As we notice that the assessee has not furnished explanation/details before the A.O. and the ld. CIT(A) has also not admitted the explanations furnished by the assessee, meaning thereby, no tax authority has examined the details relating to the claim. Hence, in the interest of natural justice, we are of the view that the assessee should be provided with one more opportunity to properly explain its case. Accordingly, we set aside the order passed by ld. CIT(A) on this issue and restore the same to the file of the A.O. for examining it afresh by duly considering the information and explanations that may be furnished by the assessee. After affording adequate opportunity of being heard, the A.O. may take appropriate decision in accordance with law. Disallowance of franchisee fees - CIT-A deleted the addition - HELD THAT - As decided in own case 2020 (9) TMI 1190 - TMI BANGALORE that when the payment made by the assessee to a company was in the nature of license fees which constitute an item of allowable expenditure in the computation of profit and gains and it cannot be a capital expenditure. In our opinion, the findings and reasons given by the CIT(Appeals) to allow the claim of the expenses in regard to franchisee on the Agreement entered by the assessee is a revenue expenditure and it cannot be construed as a capital expenditure. Hence the appeal of revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of claim of shortage of inventory.
2. Disallowance of expenditure relating to exceptional items.
3. Deletion of disallowance of franchisee fees.

Detailed Analysis:

1. Disallowance of Claim of Shortage of Inventory:

The assessee, a private limited company engaged in retailing garments and accessories, claimed a shortage of inventory amounting to ?1,15,83,476/-. The assessee explained that the shortage was identified during physical inventory checks conducted by auditors across various showrooms and warehouses, attributing the losses to shoplifting, pilferage, theft, and internal damages. The A.O. disallowed the claim, citing the lack of specific details and absence of FIRs for theft or shoplifting. The Ld. CIT(A) acknowledged the retail industry's vulnerability to such losses but deemed the entire disallowance unreasonable, directing the A.O. to restrict it to 50%.

Upon appeal, the Tribunal noted that detailed reports of shortages and excesses were meticulously documented and submitted to the A.O., contradicting the A.O.'s claim of insufficient details. Recognizing the retail trade's susceptibility to such losses, the Tribunal found no reason to suspect the assessee's claim and directed the A.O. to allow the entire deduction for the shortage of inventory.

2. Disallowance of Expenditure Relating to Exceptional Items:

The assessee reported an expenditure of ?7,31,75,961/- on exceptional items, voluntarily disallowing ?6,44,78,566/-. The remaining ?86,97,395/- was disallowed by the A.O. due to lack of details. The Ld. CIT(A) refused to admit the explanations provided by the assessee, citing non-compliance with Rule 46A and confirming the disallowance.

The Tribunal observed that the assessee had not furnished the necessary details before the A.O., and the Ld. CIT(A) had not admitted the explanations. In the interest of natural justice, the Tribunal remanded the issue back to the A.O. for a fresh examination, allowing the assessee to present the required information and explanations.

3. Deletion of Disallowance of Franchisee Fees:

The revenue challenged the deletion of the disallowance of ?2,50,42,421/- claimed as franchisee fees by the assessee. The assessee argued that the fees were paid as a percentage of sales turnover for exclusive franchisee rights, without acquiring any enduring business or commercial rights. The Ld. CIT(A) agreed, noting that no new asset or transferable rights were obtained, and the fees were recurring and directly related to sales, thus qualifying as revenue expenditure. This decision was supported by the Hon'ble Delhi High Court's ruling in CIT Vs. Jubilant Woodwork Pvt. Ltd.

The Tribunal upheld the Ld. CIT(A)'s decision, citing consistency with a similar case in the assessee's favor for the assessment year 2008-09. The Tribunal found no infirmity in the Ld. CIT(A)'s view and dismissed the revenue's appeal.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the shortage of inventory, remanded the issue of exceptional items expenditure back to the A.O. for fresh examination, and upheld the Ld. CIT(A)'s decision on the franchisee fees, dismissing the revenue's appeal and the assessee's cross objection.