Write off for non moving stores based on technical committee recommendation pursuant to an audit objection raised by the C&AG allowed by High Court
ABCAUS Case Law Citation:
ABCAUS 2829 (2019) (03) HC
Important Case Laws Cited/relied upon by the parties
Forest Industries Travancore Ltd. v. Commissioner of Income Tax
Commissioner of Income Tax v. British Paints India Ltd. (1991) 188 ITR 44 (SC)
Indo Commercial Bank Ltd. V. Commissioner of Income Tax
Commissioner of Income Tax, Mumbai v. Indian Rare Earths Ltd.
Commissioner of Income-tax v. IBM India Ltd
The appellant assessee was a public sector undertaking (PSU) which had been valuing its assets in the balance sheet. On a verification of the accounts by the Comptroller and Auditor General (C&AG), it was found that the assessee had been valuing assets which had become obsolete. Accordingly, an audit objection was raised insofar as the valuation as revealed from the balance sheet of the assessee.
Board of Directors directed the management to constitute a committee to review the non moving stores and spares and to carry out necessary adjustments in the accounts in accordance with the audit objections raised by the C&AG.
The expert committee found first lot of stores items as not having been used for the past five years or more, and also identified second lot of items as totally obsolete and not possible of any further use.
The findings of the committee were duly supported by technical evaluation which resulted in a recommendation to devalue the first lot by 50% and second lot at 100%.
Hence, the assessee debited their value as arrived by the expert committee, to the profit and loss account as loss on revaluation of inventory under the head repairs and maintenance.
The Assessing Officer, however, found that the assessee had been showing spares at cost in the balance sheet and then writing it off in the year of use. It was hence found that the assessee had in the present year changed its accounting practices and hence declined the claim of write off of certain spares by 100% and others by 50%.
It was also found that the items which were devalued were not trading items and that it cannot be termed as a stock in trade.
The first appellate authority, however, found favour with the assessee’s contentions. It was found that in the earlier years, the assessee had claimed 100% revaluation on such spares which were found to be totally unusable and having only scrap value. The first appellate authority in those years had allowed 80% of the appellant’s claim finding 20% to be the scrap value of those items. The Department had not filed an appeal from the said order.
On a similar reasoning, the first appellate authority found that the claim can be allowed for the instant year also.
However, the Tribunal reversed the order of the first appellate authority. The Tribunal agreed with the observations of the CIT (Appeal) in the earlier years, insofar as 20% alone having been declined as scrap value for obsolete spares revalued in those years. Adopting the very same reasoning, the assessee was permitted 80% of the claim with respect to 100% devaluation claimed items, again, apportioning 20% as the scrap value of such items. However, with respect to the items in which 50% devaluation was claimed, the Tribunal found that the committee had not spoken of the utility value or about the physical condition and the 50% devaluation was recommended by the committee without doing any realistic appraisal of each of the items included in the first list of items.
The Hon’ble High Court opined that in the present case there was no change in accounting principles. The assessee had been consistently writing off the stores and spares when it actually become obsolete after having put it to use. The stores and spares which were directed to be devalued were never used in the business and hence despite the same having been shown as stock in the profit and loss account, there was never any loss claimed; for it being not used in the business of the Company. Revaluation was necessitated also not by the assessee on its own volition but on an audit objection raised by the C&AG.
The Hon’ble High Court observed that when the stores and spares were put to use, their written off value was debited to the profit & loss account. However, here the stores and spares were never used and hence a valuation was attempted as per accounting principles itself to revalue the obsolete stores and spares. This worked out to the prejudice of the revenue, but that sole reason could not result in it being disallowed.
The Hon’ble High Court opined that the valuation was an accepted practise and it was necessitated as the situation warranted a revaluation of obsolete stores and spares. The method of revaluation could not be faulted for reason of it having been accepted by accounting principle AS-2. The assessee had also carried out a similar exercise of devaluation in the earlier years, which were allowed to the extent of 80%, the 20% being disallowed as scrap value.
The Hon’ble High Court noted that the Bombay High Court considered the issue of non-moving stores and spares which corroded over a period of time due to wear and tear and written off in the subject year. The High Court found that the objection raised on the method of accounting being changed, was not justifiable even under Section 145A of the Income Tax Act.
The Hon’ble High Court also observed that the Karnataka High Court had permitted a similar devaluation of obsolete stock and spares following Accounting Standard -2 issued by the Institute of Chartered Accountants of India (ICAI).
The Hon’ble High Court observed that in the instant case, the committee appointed by the Board consisted of Senior Executives of the Company who conducted a technical evaluation. Therefore, the Tribunal’s findings that the committee’s recommendations were without any basis were not acceptable.
The Hon’ble High Court opined that when the devaluation of 100% obsolete items were allowed to the extent of 80%, there was no plausible reason for declining the devaluation to an extent of 50% claimed on the basis of a technical evaluation and recommendation made by a committee of officers appointed by the Board.
The High Court reversed the order of the Tribunal and allowed the claim of 50% devaluation with respect to the non moving items.