2005 (9) TMI 506 - AT - Income Tax

Tribunal Allows Depreciation on Assets, Approves Provision for Obsolete Stock Loss; Dismisses Hearing Opportunity Claim.

Pepperi + Fuchs (India) Ltd. Versus Deputy Commissioner of Income-tax, Circle 14 (1)

Pepperi + Fuchs (India) Ltd. Versus Deputy Commissioner of Income-tax, Circle 14 (1) - [2006] 6 SOT 10 (DELHI) Issues Involved:1. Denial of reasonable opportunity of being heard by the Assessing Officer.2. Disallowance of depreciation on plant and machinery, generator, dies, and moulds.3. Disallowance of deduction on account of the purchase of obsolete items representing a fall in the value of the closing stock of raw materials.Issue-wise Detailed Analysis:1. Denial of Reasonable Opportunity of Being Heard by the Assessing Officer:The first ground preferred by the assessee dealing with the denial of reasonable opportunity of being heard by the Assessing Officer has not been pressed before us and is accordingly dismissed.2. Disallowance of Depreciation on Plant and Machinery, Generator, Dies, and Moulds:The assessee, engaged in the business of assembly (manufacturing) and trading of electronic items, claimed depreciation on plant and machinery, generator, dies, and moulds amounting to Rs. 1,73,732. The Assessing Officer denied the claim on the ground that the manufacturing activities had been discontinued from 1-12-1996, and thus, the assets were not put to use during the assessment year 1998-99. The assessee contended that the machinery was used for trading activities and job work related to warranties on previously sold items, and the assets were kept in ready condition for manufacturing.In appeal, the CIT(A) upheld the disallowance, agreeing with the Assessing Officer's reasoning. The assessee argued before the Tribunal that the assets were kept in running condition and ready for use, and manufacturing activities resumed in the subsequent assessment year 1999-2000, where depreciation was allowed. The assessee cited judicial precedents to support the claim that assets kept ready for use qualify for depreciation.The Tribunal noted that the assessee had temporarily discontinued manufacturing but used the assets for trading and job work. It emphasized that section 32 of the Income-tax Act requires the assets to be used for business purposes, which includes passive use (assets kept ready for use). The Tribunal referred to the Delhi High Court's decision in Capital Bus Service Ltd. and the Supreme Court's decision in State of Haryana v. Dalmia Dadri Cement Ltd., which support the interpretation that assets kept ready for use are considered used for business. Consequently, the Tribunal allowed the assessee's claim for depreciation, setting aside the CIT(A)'s order and directing the Assessing Officer to allow the depreciation claim.3. Disallowance of Deduction on Account of Purchase of Obsolete Items Representing Fall in the Value of the Closing Stock of Raw Materials:The assessee made a provision of Rs. 9,80,177 for obsolete items of stock by adjusting the closing stock value. The Assessing Officer disallowed the provision due to lack of evidence. The assessee explained that continuous research and development in the electronic items business led to certain raw materials becoming obsolete and losing value. The assessee valued the stock at the lower of cost or realizable value, resulting in a loss of Rs. 9,80,177, and demonstrated that the obsolete stock was re-exported at the said value in the subsequent year.The CIT(A) upheld the disallowance, stating that no loss was incurred as the goods were exported in the subsequent year. The assessee argued before the Tribunal that its accounting policy of valuing inventories at the lower of cost or net realizable value was consistent and supported by evidence of re-export.The Tribunal referred to the Supreme Court's decision in CIT v. British Paints India Ltd., which supports the principle of valuing closing stock at cost or market value, whichever is lower, to reflect true profits. The Tribunal emphasized that the assessee's method of valuation is consistent with commercial accounting principles and recognized the loss due to obsolescence. It noted that the revenue did not dispute the accounting policy's consistency or bona fides. The Tribunal concluded that the provision for loss on obsolete stock was allowable, setting aside the CIT(A)'s order and directing the Assessing Officer to allow the claim.Conclusion:The appeal of the assessee is partly allowed, with the Tribunal allowing the claims for depreciation on plant and machinery, generator, dies, and moulds, and the provision for loss on obsolete stock, while dismissing the ground related to the denial of reasonable opportunity of being heard.