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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 ..... seful 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 contracts, the Assessee procures raw materials and spares which are used for the production of finished goods. The cost of such inputs is included in determining the price of the contract. To maintain the uniformity in production activities and to further streamline the movement of stock, an SAP software has been implemented company wide. 2.3 The eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 debited to the Profit & Loss A/c as "Provision for Obsolescence" which is given in Note 37 to the audited financial statements as part of "Other Expenses". Such amount is arrived at after providing for obsoletion of stock of Raw Material amounting to Rs. 196.36 Lakhs and Stock of Spares amounting to Rs. 578.63 Lakhs. There was also a write back of provision for obsoles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 though the net result is the same, the way accounts are reflected is not proper. (para 8) We do not see any substance in the said contention. Accounting Standards notified under Section 145(2) in particular Accounting Standard-I categorically states that the accounting treatment and presentation in financial statements of transactions should be covered by a substance and not merely by legal form. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim 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 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 deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for deduction on this amount u/s 37 of the Act. This view of ours is fortified by the judgement of order of the Tribunal in the case of Auto Ignition Ltd. in ITA No.3248/Del/2017 dated 11.8.2021 wherein held as under: "9. Coming to the appeal of the assessee, we found that out of total expenditure incurred by the assessee of Rs. 477.39 lakhs, form 3CL computed the deduction allowable to the assessee only on sum of Rs. 468.98 lakhs. Therefore, admittedly the assessee is not eligible for weighted deduction on the sum of Rs. 8.41 lakhs. However, the assessee has been denied deduction on this sum u/s 37(1) of the Act itself also. We find that such R&D expenditure though not eligible for weighted deduction u/s 35(2AB) but is allowable as deduction u/s 37(1) of the Act to the extent of amount of expenditure incurred by the assessee. The assessee should have been allowed deduction of above sum as normal allowable expenditure u/s 37 (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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