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TMI Blog2022 (3) TMI 1014X X X X Extracts X X X X X X X X Extracts X X X X ..... y an assessee continuously for a given period of time needs to be presumed to be correct till AO comes to conclusion for reasons to be given that said systems does not reflect true and correct profits. Disallowance of provision made towards stock - HELD THAT:- On perusal of records and on specific query to the ld. Counsel of the assessee, we noted that provision for stock made by assessee is totally on adhoc basis, contingent in nature and that there is no historic trend explained before us. In the case of Rotork Controls India P. Ltd.[ 2009 (5) TMI 16 - SUPREME COURT] has noted the issue regarding contingent liability like warranty provision and held that the value of contingent liability, like the warranty expenses, if properly ascertained and discounted on accrual basis can be claimed as item of deduction u/s.37(1) - But, Hon ble Supreme Court stated that the principle of estimation of contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and issued in foreign currency and accounted in Indian rupees by converting the foreign currency to Indian rupees on the prevailing market rate of exchange on the date of invoice. When the export proceeds were realized on a later date, the company receives slightly higher or lower amount vis-a-via the invoice value as recorded in the books of accounts as the export value. The assessee is follows mercantile system of accounting and in compliance to the Accounting Standard applicable, it translates all the assets and liabilities at the end of the year which are receivable or payable in foreign currency convertible into Indian Rupees at the prevailing conversion rate as on 31st March of every year. The debit or credit arising on account of said reinstatement fluctuations are accounted in the profit loss account. If the exchange fluctuations arising due to reinstatement pertain to revenue account, the same is treated as business loss or business income depending upon the facts. In the present case, the ld. Counsel for the assessee stated that the assessee from the beginning is following the same method of accounting consistently in respect of accounting for the gain or loss arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 7,33,03,205/- (Loss) Particulars AY 2011-12 Actual Exchange Loss/Gain Addition made to Business Income in Computation Memo-Exchange Loss/Gain ₹ 1,79,96,287/- (Gain) Exchange Loss/Gain accounted: Deduction claimed in Business Income in Computation Memo-Exchange Loss/Gain ₹ 62,48,824/- (Gain) Particulars AY 2012-13 Actual Exchange Loss/Gain Addition made to Business Income in Computation Memo-Exchange Loss/Gain ₹ 7,85,75,524/- (Gain) Exchange Loss/Gain accounted: Deduction claimed in Business Income in Computation Memo-Exchange Loss/Gain ₹ 11,00,91,776/- (Gain) Particulars AY 2013-14 Actual Exchange Loss/Gain Addition made to Business Income in Computation Memo-Exchange Loss/Gain ₹ 6,75,12,024/- (Gain) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment of gains in certain years by the Revenue, he could not contradict that it was accepted by the Revenue as part of total income of the assessee. Thus, this factual matrix remained uncontroverted and unchallenged. In the course of hearing, a query was also raised before ld. Counsel of the assessee to demonstrate the accounting procedure adopted for the reversal of reinstatement of assets and liabilities as on 31st March of every year on account of exchange fluctuations, for which the ld. Counsel referred to the paper-book compilation submitted before us and demonstrated the accounting methodology adopted by the assessee for the same. We have also gone through the judgment of Hon ble Supreme Court in the case of Woodward Governor India P. Ltd., supra, wherein it was held that the loss suffered by assessee on account of foreign exchange difference as on the date of balance sheet is an item of expenditure allowable u/s.37(1) of the Act. Further, it was held that the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till AO comes to conclusion for reasons to be given that said systems does not reflect true and correc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of learned Commissioner of Income Tax (Appeals)-7 in ITA No.94(T)/CIT(A)- 7/2015-16, order dated 13.03.2019. The assessment was framed by DCIT, Corporate Circle 3(2), Chennai for the assessment year 2010-11 u/s.143(3) r.w.s. 147 of the Act vide order dated 20.03.2015. 10. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of provision made towards stock amounting to ₹ 25,00,000/-. For this assessee has raised various grounds, which we need not to reproduce for the sake of brevity. 11. Brief facts are that the AO during the course of assessment proceedings noticed that the assessee has made provision towards stock for an amount of ₹ 75,00,000/- out of which provision made for the impugned year was for ₹ 25,00,000/-. The AO required the assessee to explain as to why the claim of provision for stock should not be disallowed. The assessee explained that during the year under consideration, the provision for stock was made for a sum of ₹ 25,00,000/- in view of the fact that the assessee is situated in the Madras Export Processing Zone and for removal of some materials which has only negligible value fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. We noted that the Hon ble Supreme Court in the case of Rotork Controls India P. Ltd., vs. CIT, reported in [2009] 314 ITR 62 (SC) has noted the issue regarding contingent liability like warranty provision and held that the value of contingent liability, like the warranty expenses, if properly ascertained and discounted on accrual basis can be claimed as item of deduction u/s.37(1) of the Act. But, Hon ble Supreme Court stated that the principle of estimation of contingent liability is not the normal rule. It would depend on the nature of the business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting adopted by the assessee. It would also depend upon the historical trend and upon the number of articles produced. All the parameters indicated by the Hon ble Supreme Court while dealing with accounting for similar aspects like warranty provisions are not at all satisfied in the present case. 14. Further, the Hon ble Supreme Court explained that a provision is a liability which can be measured only by using a substantial degree of estimation. But a provision is recognized when - a) an enterprise has a presen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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