2010 (5) TMI 613 - AT - Income Tax

Tribunal remands deferred revenue, allows inventory write-off based on consistency & expert opinions

The Tribunal partially allowed the appeal, remanding the issue of deferred revenue expenditure back to the Assessing Officer for reassessment. The ... Change in method of accounting to reduce tax liability - Allowability of Deferred revenue expenditure as per the AS-26 issued by the ICAI, New Delhi. - held that:- The accounts of this year and earlier years have been considered by both the lower authorities, but the accounts for subsequent years have not been considered by any one of them for coming to a conclusion whether the change has been made with a view to reduce the tax liability of this year. - In view of Nonsuch Tea Estate Ltd. v. CIT (1974 - TMI - 6434 - SUPREME Court) matter requires to go back to the file of the Assessing Officer for deciding the issue afresh after giving the assessee a reasonable opportunity of being heard. While framing the fresh assessment, he shall consider the accounts of this year, earlier years and subsequent year; AS-26 in the light of entries of intangible assets made therein ; and the cases cited before us as aforesaid. Slow moving item- write off - accepted accounting policy followed from year to year - inventory had no market value on account old and obsolete -was allowed by Tribunal Issues Involved:1. Disallowance of deferred revenue expenditure.2. Disallowance of write-off of inventory of non/slow-moving items.3. Rejection of submissions supporting claimed deductions.4. Ignoring past history of similar disallowances being allowed in previous assessment years.Issue-wise Detailed Analysis:1. Disallowance of Deferred Revenue Expenditure:The assessee challenged the Commissioner of Income-tax (Appeals) for confirming the Assessing Officer's action of disallowing Rs. 1,62,86,000 out of the claimed Rs. 2,03,57,000 from deferred revenue expenditure. The assessee argued that this was in accordance with AS-26 issued by ICAI, New Delhi. The brief facts reveal that the assessee sold 250 solar pumps in the financial year 2000-01, with a shortfall in realization treated as deferred revenue expenditure. The company changed its accounting policy in the current year, writing off the balance amount as miscellaneous expenses. The Assessing Officer disallowed this, arguing there was no actual loss due to compensation by a soft loan from IREDA. The Commissioner of Income-tax (Appeals) upheld this disallowance, stating the loss did not qualify as an intangible asset under AS-26 and the change in accounting policy lacked justification. The Tribunal found that the Assessing Officer did not address whether the change in accounting method was bona fide. The case was remanded back to the Assessing Officer to reassess the bona fides of the accounting method change and the write-off, considering relevant documents and expert opinions.2. Disallowance of Write-off of Inventory of Non/Slow-Moving Items:The assessee contended that the disallowance of Rs. 21,09,977 for writing off non/slow-moving inventory items was covered in its favor by previous ITAT decisions for assessment years 2004-05 and 2005-06. The Tribunal had allowed the deduction, recognizing the consistent policy of the Central Government organization and annual audits by CAG. The Tribunal in the current appeal followed its previous decision, allowing the deduction for the write-off of slow-moving and obsolete items.3. Rejection of Submissions Supporting Claimed Deductions:The assessee argued that the Commissioner of Income-tax (Appeals) wrongly rejected submissions made during assessment and appeal proceedings. However, the Tribunal did not specifically address this issue separately, as it was inherently connected to the main issues of deferred revenue expenditure and inventory write-off.4. Ignoring Past History of Similar Disallowances Being Allowed:The assessee argued that the Commissioner of Income-tax (Appeals) ignored the past history where similar disallowances were allowed in previous years. The Tribunal acknowledged the need to consider the consistency of accounting policies and past practices, especially concerning the write-off of inventory, which had been previously allowed. This was implicitly addressed in the Tribunal's decision to follow its earlier ruling favoring the assessee for the write-off of non/slow-moving items.Conclusion:The Tribunal allowed the appeal partly for statistical purposes, remanding the issue of deferred revenue expenditure back to the Assessing Officer for fresh consideration. The write-off of non/slow-moving inventory items was allowed based on consistency with previous Tribunal decisions. The Tribunal emphasized the need for the Assessing Officer to consider the bona fides of the accounting method change and relevant expert opinions before making a final decision.