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TMI Blog2018 (4) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is neutral effect of writing off the closing stock & WIP on the profitability of the assessee as it has consequential effect. Indeed the profit of the current year shall come down by the amount written off during the year on account of over valuation of closing stock - Decided against revenue - ITA No. 994/Kol/2015 - - - Dated:- 4-4-2018 - Shri N. V. Vasudevan, Judicial Member And Shri Waseem Ahmed, Accountant Member By Appellant Md. Usman, CIT-DR By Respondent Shri Ravi Tulsiyan, FCA ORDER Per Waseem Ahmed, Accountant Member:- This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-1, Kolkata dated 20.03.2015. Assessment was framed by ACIT, Circle-1, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide his order dated 31.08.2006 for assessment year 2004-05. The Revenue has raised the following grounds:- 1. That on the facts and in the circumstances of the case, the Ld. CIT(A) is not justified in law in deleting the addition of ₹ 15,74,43,000/- made by the AO on account of prior period expenses in respect of closing stock of raw materials and work in progress. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the assessee. 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before ld. CIT(A) submitted that the AO wrongly assumed revaluation of stock and WIP as is based on estimate. Rather the same is supported by the report of the chartered accountants and Audited financial statements and CAG audit report. Accordingly the accounts were corrected to represent the true and fair view of Financial Statements of the assessee in the year under consideration. There was no time available to file the revised return under the provisions of law as suggested by the AO to rectify the mistake. The AO failed to consider the Chartered Accountants report wherein the shortage/ valuation of Current Assets were reported. The AO has not pointed out any defect in the report of the chartered accountants. No further opportunity was given by the AO to produce the documentary evidence with regard to the valuation of stock and WIP. The Chartered Accountants report clearly highlighted that the overvaluation of stocks and WIP pertains to the prior period. Thus it is clear that the profit of prior period was overstated and the same has already suffered the tax in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk-in-progress in earlier years respectively. In addition, it has been submitted in appeal that The management of the company is liable to carry out physical verification of inventory at year end. The company carries out physical verification of stock at the time of closing of a particular site/contract. Thereafter, suitable adjustments are made in the books. This practice has been followed by the company year after year consistently. During the previous year 2002-03 a committee of senior officials of the company gave a report indicating substantial variation in the air value of stock and the value appearing in the books. However, the exact quantum could not be ascertained. Attention is invited to Accounting Standard II relating to disclosure of prior period and Extraordinary items and changes in accounting policies as notified by Central Government in exercise of the powers conferred by sub-section (2), of section 145 of the Income-tax Act,1961 to be followed by all assessee following mercantile system of accounting. Relevant extract from the standard are made as under: Accounting estimate means an estimate made for the purpose of preparation of fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red Accountants on the ground that it a prior period item. Further, since it is not a prior period item. Further, since it is not a prior period item, there arose no need for thee Appellant to have filed a revised return. The charge of ₹ 345.08 lakhs on account of adjustment of stock for earlier years disclosed as prior period expenses and ₹ 1228.66 lakhs on account of adjustment of work-in-progress for earlier years disclosed as extra-ordinary expenses is allowable in its entirety. Attention is also invited to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Incometax 82 ITR 362 wherein it was held that: Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The appellant has also relied on the decision of ITAT Cuttack Bench in the case of National Aluminium Co. Ltd. vs. DCIT, Bhubneswar in ITAT No. dt. 30-11-20005. The Appellant also relied on the Notificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to find out inter-alia in greater details the reasons of such accumulations, actual quantity of accumulation and recommend with justification the quantity required to be provided for in the accounts. It is also seen that the Chartered Accountant appointed for the above purpose had submitted their report in respect of the steel stock and WIP, a copy of which was submitted in appeal. The CBDT Notification 69(E) supra, which refers to the definition of prior period expenses as under:- (7) prior period items shall be separately disclosed in the profit and loss account in the previous year together with their nature and amount in a manner so that their impact on profit or loss in the previous year can be perceived. (8) Extraordinary items of the enterprise during the previous year shall be disclosed in the profit and loss account as part of income. The nature and amount of each such item shall be separately disclosed in a manner so that their relative significance and effect on the operating results of the previous year can be perceived. Therefore considering the above facts and the decisions of ITAT, Cuttack Bench wherein the issue of prior period expenses have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement which is placed on pages 33 of the paper book. The ld. AR also drew our attention on page 42 of the paper book where notes to accounts were placed where the discrepancy in the stock WIP was duly observed as per note no. 14 of the financial statement for the year ended 31-03-2003. The relevant extract of the note no. 14 for the financial year ending as on 31.3.2003 is reproduced below : 14. In order to ascertain true and fair value of inventories (Sch.6) Debtors (Sch.7). Other Current Assets (SCh.9) and Deposit Advances (Sch.10) the Committee comprising three senior officials was constituted and it gave a report indicating substantial variation between fir value and value appearing in Books of Accounts on these items. On a preliminary review, the Committee was of view that errors were committed over past several years in proper accounting of Inventories. Debtors, etc., which shows over-reporting of these items whose value may aggregate to around ₹ 30 crores. Accordingly, the job to ascertain true position has been entrusted on present Internal Auditors, being established Chartered Accountants Firm. After receiving their report suitable adjustment will be carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effected by the assessee was bona fide and aimed at obtaining correct business profit as such obsolete stocks/non-moving spare parts went on losing their values thereby distorting the true profits of the assessee. Considering the totality of the facts of the case, the order of the Commissioner (Appeals) was set aside on this ground and the Assessing Officer was directed to allow the claim of loss on account of value of non-moving stores and spares. The principles laid down by the Hon ble ITAT Cuttack Bench are squarely applicable to the case on hand, therefore respectfully following the same we are of the view that the loss on account of over valuation of closing stock/WIP is liable for deduction under section 37(1) of the Act. In addition to the above we also observe that there is neutral effect of writing off the closing stock WIP on the profitability of the assessee as it has consequential effect. Indeed the profit of the current year shall come down by the amount written off during the year on account of over valuation of closing stock. But the same closing stock of the current year shall become the opening stock of the next year and the profit of the next year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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