2021 (10) TMI 729 - AT - Income Tax

Loss arising from Inventory write off - disallowance of shortage in the value of inventory - shortfall in inventory - CIT-A deleted the addition - assessee explained that the shortfall in inventory has occurred for the reason that the inventory was overvalued in the past years and the same was found out only when the management carried out physical verification of stock in July, 2010. Hence, it was treated as an exceptional item of loss and accordingly shown separately in the profit and loss account - HELD THAT - AO has expressed the view that the assessee has failed to explain the reasons for such huge write off and the assessee has not given any evidence as to the nature and reason for the difference. The above said observation of the AO is contrary to the facts available on record. The discussions made in the earlier paragraphs would show that there was shortage in the value of stock due to manipulation done by an earlier employee and the same has resulted in declaration of higher value of stock over the years. Hence, the assessee has engaged the services of a leading professional, who has investigated the matter, found out the methodology adopted for inflating the stock and finally quantified the difference in the value of stock. Hence, we are of the view that the shortage in the value of stock has been ascertained by the assessee in a systematic manner. Whether the treatment given by the assessee in the accounts is justified or not? - In the instant case, the special auditors have reported that the manipulation in the value of stock has happened from FY 2004- 05 onwards. Hence the shortage of stock quantified relate to the conditions existing as on 31.3.2010 and it materially affects the determination of value of assets as on Balance Sheet date. Accordingly, as per AS-4, the effect of the same needs to be given as on 31.3.2010, even though the report of special auditors has been received only in July, 2010. Hence, it cannot be considered as a prior period expenditure as opined by the AO. It should be considered as current year loss only, since effect of shortage could be given in this year only. Accordingly, the assessee was justified in accounting the shortage during the year ending 31.3.2010. Assessee has split the opening stock as on 1.4.2009 into two items, viz., opening stock and exceptional expenditure, i.e., the shortage has not been separately accounted for in the books of accounts. It has been duly disclosed in the Profit and Loss account by making corresponding reduction in the Opening stock value. There should not be any dispute that the closing stock of the preceding year is carried forward as opening stock of the current year. Having accepted the closing stock of preceding year, the opening stock value of current year also requires to be accepted. As relevant for this issue is the valuation of closing stock as on 31.3.2010. As noticed earlier, the assessee has split the opening stock brought forward from 31.3.2009 and disclosed one portion as Opening stock and the remaining portion as exceptional item . It is an undisputed fact that the assessing officer has accepted the value of closing stock as on 31.3.2010 . Even if the above said exercise has not been carried out, the assessee is required to value the actual physical stock at lower of cost or net realisable value , which is the accounting policy followed by the assessee as reported in clause (j) of Note 2 given under Schedule Q Notes to Accounts in its Annual report. In that case, the shortage in the value of stock shall get subsumed itself, which has actually happened in this case. Hence, the AO, having accepted the value of closing stock, could not have questioned the exceptional item , which was split up figure of opening stock value. Disallowance u/s 36(1)(iii) - assessee contended that the disallowance contemplated under proviso to 36(1)(iii) of the Act is in respect of acquisition of asset for extension of existing business - CIT(A) partially sustaining this disallowance - HELD THAT - As in order to invoke the proviso, there should be a finding that the acquisition of asset has resulted in extension of business. We have noticed that the Ld CIT(A) has given a finding that the additions made to the capital asset has not resulted in any extension of business. As per cash flow statement furnished in the Annual report, the assessee has generated net cash of ₹ 28.33 crores, while the net investment made in acquisition of capital asset was only ₹ 1.48 crores. Hence, as per the decision rendered by the decision rendered in the case of Micro labs Ltd 2016 (4) TMI 219 - KARNATAKA HIGH COURT it can safely be presumed that the acquisition of fixed assets has been funded out of own funds only - we set aside the order passed by Ld CIT(A) and direct the AO to delete entire disallowance. Disallowance of interest expenditure as relatable to interest free loans given to associate concerns - CIT(A) deleted the disallowance - HELD THAT - As noticed earlier that the own funds available with the assessee as on 31.3.2010 was ₹ 91.30 crores and the interest free loans given to sister concerns was around ₹ 6.43 crores. We notice that the co-ordinate bench has already deleted an identical addition made in AY 2008-09 following the decision rendered in the case of M/S RELIANCE INDUSTRIES LTD 2019 (1) TMI 757 - SUPREME COURT - M/S MICROLABS LTD. - In any case, the binding decision rendered in the case of Micro Labs Ltd 2016 (4) TMI 219 - KARNATAKA HIGH COURT also holds that no interest disallowance is called for when the own funds available with the assessee is more the amount of interest free advances given. Under these set of facts, we find no reason to interfere with the decision rendered by Ld CIT(A) on this issue. Disallowance of expenditure claimed on loose tools - As submitted that the loose tools, grinding wheels and cutting wheels purchased by the assessee are written off over a period of 2 years, i.e., 50% of the cost is written off in the year of purchase and the remaining 50% is written off in the succeeding year - HELD THAT - As decided in own case 2012 (12) TMI 1215 - ITAT BANGALORE Revenue has not disputed the incurring of expenditure by the assessee in purchase of the tools. The only reason for the disallowance is that it is not revenue in nature but is of capital in nature. It is also not disputed that the assessee is following the said method of accounting for the past 14 years and no disallowance has been made in the previous years. As rightly pointed out by the learned counsel for the assessee, the Revenue effect would be very minimal whether the expenditure is treated as revenue in nature or treated as capital in nature and depreciation allowed thereon. Therefore, taking the totality of the facts into consideration, we hold that revenue ought to have allowed the revenue expenditure claimed by the assessee. Disallowance of claim made u/s 35(2AB) - AO took the view that the assessee has not complied with the conditions prescribed in Rule 6(7A) of I T Rules, i.e., it did not furnish the approval to DG (Exemptions) in Form 3CL and audited accounts - HELD THAT - The assessment year under consideration is AY 2010-11 and hence the decision rendered by the co-ordinate bench in the case of Kumar Organic Products Ltd 2019 (7) TMI 1214 - ITAT BANGALORE shall apply to the assessee for AY 2010-11. Following the same, we hold that Form No.3CL is not mandatory for the year under consideration and hence the weighted deduction claimed by the assessee cannot be rejected. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to allow weighted deduction as claimed by the assessee. Disallowance of provision made for erection and commissioning work - HELD THAT - As assessee has furnished the details of machineries whose erection and commissioning is pending on 31.03.2010. The assessee has also submitted that the provision for erection and commissioning is made @ 1% to 3% of the value of machinery, depending upon estimated expenditure. According to Ld A.R, the above percentages were arrived on the basis of past experience. In our view, the above said details furnished by the assessee distinguishes the case of the current year from that of the case prevailed in AY 2009-10. In our view, the terms and conditions of sale of machineries would show that the liability for erection and commissioning is placed upon the shoulders of the assessee - as submitted that the provision rate of 1% to 3% has been determined on the basis of past experience - this claim of the assessee may be allowed after examining relevant sale bills and the computation of provision so created. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of the AO for examining the claim of the assessee by duly considering relevant sales invoices and computation of quantum of provision so made. TDS u/s 195 - Disallowance voluntarily made by the assessee in respect of Exhibition charges u/s 40(a)(i) of the Act for failure to deduct tax at source from the payment - AO initiated proceedings u/s 201(1) of the Act for failure of the assessee to deduct tax at source from the above said payments and held that the assessee is an assessee in default - HELD THAT - We notice that the Ld CIT(A) has held in the proceedings initiated u/s 201(1) of the Act that the assessee is not liable to deduct tax at source from the payments made towards exhibition charges. In that case, there is no necessity to invoke provisions of sec.40(a)(i) of the Act. Accordingly, we direct the AO to delete the disallowance made by the assessee voluntarily u/s 40(a)(i) of the Act in respect of exhibition charges.

Summary

Issues Involved:
1. Disallowance of claim of loss arising from inventory write-off.
2. Partial relief in respect of interest disallowance made under section 36(1)(iii).
3. Disallowance of interest expenditure related to interest-free loans to associate concerns.
4. Disallowance of expenditure claimed on loose tools.
5. Disallowance of deduction claimed under section 35(2AB).
6. Disallowance of provision made towards erection and commissioning expenses.
7. Non-adjudication of ground relating to capital gains.
8. Disallowance of warranty provision.
9. Disallowance of exhibition charges under section 40(a)(i).
10. Claim of set-off of short-term capital loss brought forward from earlier years.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Loss Arising from Inventory Write-off:
The revenue appealed against the deletion of a disallowance of ?22.49 crores related to inventory write-off. The AO noted discrepancies between the stock value declared to the bank and the balance sheet, attributing the difference to overvaluation in previous years. The AO disallowed the claim, considering it a prior period expense. The CIT(A) allowed the claim, considering it a current year loss as the discrepancy was discovered in July 2010 but pertained to earlier years. The Tribunal upheld the CIT(A)'s decision, citing compliance with Accounting Standard-4 and the scientific ascertainment of the loss by a special auditor.

2. Partial Relief in Respect of Interest Disallowance Made Under Section 36(1)(iii):
The AO disallowed ?36,21,236/- of interest expenses, attributing it to the purchase of fixed assets, which should have been capitalized. The CIT(A) partially upheld the disallowance, restricting it to the net addition of ?1.48 crores to fixed assets. The Tribunal, however, deleted the entire disallowance, noting that the assessee had sufficient own funds to cover the fixed asset purchases and followed the Karnataka High Court's decision in Micro Labs Ltd.

3. Disallowance of Interest Expenditure Related to Interest-Free Loans to Associate Concerns:
The AO disallowed interest expenses related to interest-free loans given to associate concerns. The CIT(A) deleted the disallowance, noting that the assessee had sufficient own funds. The Tribunal upheld the CIT(A)'s decision, applying the principle that interest-free loans are presumed to be given out of own funds, as held in Micro Labs Ltd.

4. Disallowance of Expenditure Claimed on Loose Tools:
The AO disallowed the claim of ?1,99,96,112/- towards loose tools, suggesting a systematic method of inventory management for actual consumption. The CIT(A) deleted the disallowance, following the Tribunal's decision in AY 2008-09. The Tribunal upheld the CIT(A)'s decision, noting the consistent accounting method followed by the assessee for years.

5. Disallowance of Deduction Claimed Under Section 35(2AB):
The AO disallowed the weighted deduction claimed under section 35(2AB), citing non-furnishing of Form 3CL. The CIT(A) upheld the disallowance, referencing the Karnataka High Court's decision in Tejas Network Ltd. The Tribunal reversed the decision, following its own precedents that Form 3CL was not mandatory for the year under consideration.

6. Disallowance of Provision Made Towards Erection and Commissioning Expenses:
The AO disallowed the provision for erection and commissioning expenses, considering it contingent. The CIT(A) upheld the disallowance, following the Tribunal's decision in AY 2009-10. The Tribunal restored the issue to the AO, directing a re-examination based on detailed invoices and the scientific basis of the provision.

7. Non-adjudication of Ground Relating to Capital Gains:
The Tribunal noted that the CIT(A) did not adjudicate the ground relating to capital gains. The issue was restored to the CIT(A) for adjudication after providing an opportunity to the assessee.

8. Disallowance of Warranty Provision:
The AO disallowed the provision for warranty expenses, questioning the scientific basis. The CIT(A) deleted the disallowance, referencing the Supreme Court's decision in Rotork Controls and noting the consistent provisioning by the assessee. The Tribunal upheld the CIT(A)'s decision, finding the provision reasonable and scientifically based.

9. Disallowance of Exhibition Charges Under Section 40(a)(i):
The assessee voluntarily disallowed exhibition charges for non-deduction of TDS. The CIT(A), in a separate proceeding, held that the payment was not taxable in India due to the absence of a PE, thus no TDS was required. The Tribunal admitted the fresh claim and directed the AO to delete the voluntary disallowance.

10. Claim of Set-off of Short-term Capital Loss Brought Forward from Earlier Years:
The Tribunal restored this issue to the AO for factual verification, as it required examination of records.

Conclusion:
The Tribunal allowed all appeals of the assessee and dismissed all appeals of the revenue, providing detailed directions and justifications for each issue. The judgment emphasized adherence to accounting standards, proper ascertainment of losses, and the sufficiency of own funds in determining the legitimacy of claims and disallowances.