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TMI Blog2023 (11) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... olete stock is allowable but it requires to be satisfied that the value of obsolete items of inventory is valued on the cost or market price, whichever is less. In the circumstances, we remit the matter back to the file of AO with a direction that the provision for obsolete stock be allowed as a deduction subject to satisfying himself that the valuation is done based on the principle that at cost or market price or not realizable value, whichever is less. Further, there cannot be double deduction in one assessment year when the provision is made and another time when it was actually written off in its books of accounts of assessee. Decided partly in favour of assessee for statistical purposes. Expenditure on scientific research u/s 35(2AB) - Department of Scientific Industrial Research ( DSIR ) has not quantified the same in that certificate - HELD THAT:- Admittedly, there was no dispute that the assessee has incurred capital expenditure of Rs. 7.98 crores on scientific research which is entitled for weighted deduction u/s 35(2AB) of the Act and the balance amount of Rs. 46.56 crores, which was revenue expenditure spent on scientific research. Out of this, assessee claimed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as provision for obsolescence for inventory. The facts of the issue are that the ld. A.R. submitted in the assessment year under consideration that assessee has debited an amount of Rs. 7,74,99,000/- as provision for obsolescence of stock. This amount was calculated on the basis of a scientific method based on the nature of business, age/useful life of spares and also due to technological changes. The methodology is approved by the Board of Directors and has been consistently followed by the assessee. However, the AO observed that this expenditure cannot be allowed since the assessee has not proved with the reasonable certainty as given in the provisions of section 37(1) of the Act and not provided documentary evidence in this regard. 2.1 The ld. A.R. further submitted that the Assessee is a manufacturing company engaged in manufacturing of heavy earth moving equipment and railway rolling stock having plants all over the country. It gets orders to manufacture customized large machinery like, defense vehicles, railway cars, heavy earth moving equipment, etc., at which stage the cost as well as the price for such order is determined. 2.2 In due course of completing such c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the costing and pricing of each project, it is not feasible to manually alter the value of inventory in the implemented SAP to bring them to Net realizable value. If any such alteration is made, the Cost/profit of a particular project would be at variance with the approved/agreed cost. Hence, for the convenience of accounting and to conform with the standards, the Assessee follows the second method as mentioned above. 2.9 According to ld. A.R., this provision for obsolescence is created as a certain percentage of the inventory carrying value only for slow/non-moving inventory of raw material and components and stock of spares (for resale) based on ageing of inventory. Age of an item of inventory is determined by the latest consumption date or latest purchase date whichever is later. In case it is determined at a later date that any such obsolete stock may be used for production, a reversal of such provision is made. The amount so reversed is credited to the P L A/c. This method of creating provision for obsolescence has been consistently followed in previous Assessment Years 2017-18 and 2016-17. 2.10 He submitted that in the relevant AY, an amount of Rs. 774.99 Lakhs was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Products which had lost their market value on account of being obsolete; (b) Products which are damaged and which could not be sold to customers; and (c) Products which were returned by customers and could not be re-sold. (para 6) 11 The said provision is created essentially in a situation, where the market value of the stock and spares in hand as on the last date of the financial year, is rower than the cost of such stock and spares. The said accounting treatment is in compliance with the provisions of Accounting Standard-2 issued by the Institute of Chartered Accountants of India which states that the closing stock would need to be valued at cost or net realizable value whichever is lower. It is also on record that a similar provision for obsolescence aggregating to Rs. 6,06,27,459/- has been created in the earlier years too. (para 7) The grievance is, in the profit and loss account, net realizable value is not taken into account. On the contrary, the cost price of obsolete item is taken and, in the provision, made for obsolescence, net realizable value is given which finds a place in the balance sheet and therefore, it was contended that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2017- 18 and AY 2016-17. However, the assessee chose to not to respond to the specific query and instead based its contention on legal interpretation alone. While conceding that the provisions for obsolescence created based on scientific and statistical model, it has to be allowed, the onus remains on the assessee to satisfy that the provision was indeed created in such a manner. Hence, the claim of the assessee is not allowed by NFAC and same to be confirmed. 4. We have heard the rival submissions and perused the materials available on record. The contention of ld. A.R. is that the assessee has debited the net provision for obsolescence of stock to the P L account and same has been claimed as a deduction. However, it was not demonstrated before us that there was no under- valuation of this inventory and the excess provision, if any, was written back in the succeeding year or in year of sale of obsolete stock, etc. nor was it demonstrated that obsolete stock was valued at lower of cost or net realizable value. In the circumstances, in principle, we hold that the provision for obsolete stock is allowable but it requires to be satisfied that the value of obsolete items of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, in case of revenue expenditure, out of Rs. 46.66 crores, it was certified by DSIR only to the extent of Rs. 38.62 crores and the balance amount of Rs. 7.94 crores were not certified by the DSIR. This claim was disallowed by the AO. However, the ld. CIT(A) allowed the said sum of Rs. 7.94 crores u/s 37 of the Act as it was incurred for the purpose of business. Against this revenue is in appeal before us. 6. We have heard the rival submissions and perused the materials available on record. Admittedly, there was no dispute that the assessee has incurred capital expenditure of Rs. 7.98 crores on scientific research which is entitled for weighted deduction u/s 35(2AB) of the Act and the balance amount of Rs. 46.56 crores, which was revenue expenditure spent on scientific research. Out of this, assessee claimed only a sum of Rs. 38.62 crores u/s 35(2AB) of the Act and the balance amount of Rs. 7.94 crores cannot be claimed u/s 35(2AB) of the Act on the reason that it was not certified by DSIR. However, this expenditure of Rs. 7.94 crores has been incurred by the assessee for the purpose of business and this fact is not disputed by the AO and in our opinion, assessee is entitled f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual obligation and it is not incurred for default of any infringement of law and directed the AO to allow this expenditure of Rs. 1,74,74,000/-. Against this revenue is in appeal before us. 8. We have heard the rival submissions and perused the materials available on record. As seen from the facts of the issue, the above expenditure has been incurred as a compensation for breach of contractual obligation. In our opinion, there is a difference between penalty for infraction of law and damages for breach of contract in the context of deduction u/s 37(1) of the Act and this issue was considered by Hon ble Gujarat High Court in the case of Principal CIT Vs. Mazda Ltd. reported in (2017) 86 taxmann.com 27 (Guj.), wherein held as under: 14. Full Bench of Punjab and Haryana High Court in case of Jamna Auto Industries v. CIT [2008] 299 ITR 92/167 Taxman 192 highlighted the difference between the penalty for infraction of law and damages for breach of contract in the context of deduction under section 37(1) of the Act. The Court held that whenever damages are to be paid by an assessee for a breach of contract, such damages are treated to be normal expenses of business. It was furth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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