2022 (2) TMI 284 - AT - Income Tax

Disallowance on account of write off of obsolete inventory - appellant has consistently followed the method of valuation of stock at cost or net realizable value whichever is lower as prescribed under Accounting Standard 2 Valuation of inventories prescribed by the institute of Chartered Accountants of India - whether the impugned materials have become obsolete as on 31.3.2002 or not? - HELD THAT - As rightly observed by the AO, these authorization obtained from parent company may enable the assessee to write off the materials in the books of account, but it will not prove that the quality of the raw materials and finished goods have fully deteriorated as on 31.3.2002, particularly in view of the fact that there was a time gap of more than six months between the closure of the accounting year and the authorization. Further, the assessee itself has submitted before Ld CIT(A), some of the products were re-processed and exported in the succeeding year. This submission, in fact, would support the case of the revenue. Hence, we are of the view that the assessee has failed to bring any material to show that these materials got deteriorated by 31.3.2002 itself. The condition for invoking AS-4 is that there should exist a contingency as on the Balance Sheet date and the result of contingency, if known before the finalization of balance sheet, then the loss arising there from should be accounted for. In the instant case, it is not shown that the write off was related to the contingency that existed as on 31.3.2002. On the contrary, in the facts of the present case, there cannot be any contingency with regard to the raw material or finished goods. We therefore, based on our discussions made above, are in agreement with the stand taken by the CIT(A) in disallowing the claim of inventory in the assessment year 2002-03. Foreign exchange fluctuation loss disallowance - HELD THAT - In the written submissions made before Ld CIT(A), the assessee has stated that the exchange difference does not pertain to any capital items. This fact was not disputed before us. Hence the loss arising on restatement of outstanding liabilities is on revenue items and the same is allowable as deduction as per the decision rendered by the co-ordinate bench in the assessee s own case in an earlier year - Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the loss arising on account of restatement of liabilities of revenue items. Claim towards Advance written off excise duty on exports - additional ground urged by the assessee - HELD THAT - Since the assessee is making a new claim in respect of excise duty paid by it for the first time before us, we are of the view that this issue requires examination at the end of AO. Accordingly, we restore this issue to the file of the AO for examining the same afresh. After affording adequate opportunity of being heard, the AO may take appropriate decision in accordance with law.

Summary

Issues Involved:
1. Disallowance of ?12,54,31,371 claimed on account of write-off of obsolete inventory.
2. Disallowance of foreign exchange loss.
3. Initiating penalty proceedings u/s. 271(1)(c).
4. Additional ground regarding deduction for excise duty on exports of ?1,20,16,395.

Issue-wise Detailed Analysis:

1. Disallowance of ?12,54,31,371 claimed on account of write-off of obsolete inventory:
The assessee claimed a deduction for inventory write-off due to obsolescence and adjustment to net realizable value. The breakdown included finished goods and raw materials with converters. The AO disallowed the claim, questioning the timing and authenticity of the write-off, suggesting it was a provision rather than an actual write-off. The CIT(A) upheld the AO's decision, noting that the authorization for disposal was dated after the financial year-end and lacked contemporaneous evidence of obsolescence as of 31.03.2002. The Tribunal agreed with the CIT(A), emphasizing that the decision to write off was made in October 2002, indicating the inventory had not deteriorated by the end of the financial year.

2. Disallowance of foreign exchange loss:
The assessee claimed a foreign exchange loss of ?68,40,528, which included both realized and unrealized losses. The AO disallowed the entire claim, stating that only actual losses at the time of payment were deductible. The CIT(A), relying on the Supreme Court's judgment in CIT Vs. Woodward Governors India Pvt. Ltd., directed the AO to allow only the realized loss. The Tribunal, referencing its own earlier decision in the assessee's case, allowed the entire claim, including the unrealized loss, as it pertained to revenue items and was consistent with the assessee's accounting practices.

3. Initiating penalty proceedings u/s. 271(1)(c):
The Tribunal did not provide a detailed analysis of this issue within the summarized judgment. It appears to have been a procedural matter upheld by the CIT(A) without further elaboration.

4. Additional ground regarding deduction for excise duty on exports of ?1,20,16,395:
The assessee claimed that it was eligible for a deduction for excise duty paid on exports, initially recorded as receivable due to duty drawback eligibility, which was later rejected. The AO and CIT(A) did not grant the deduction. The Tribunal, acknowledging the new claim, remanded the issue to the AO for fresh examination. The Tribunal instructed the AO to consider the claim independently of the developments in AY 2007-08, where the claim was previously disallowed.

Conclusion:
The Tribunal partly allowed the assessee's appeal, supporting the claim for foreign exchange loss and remanding the issue of excise duty deduction for further examination, while upholding the disallowance of the inventory write-off.