Tribunal Overturns Commissioner's Order on Inventory Provision Dispute

The Tribunal set aside the Commissioner's order invoking revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, and restored the assessment order dated 28.02.2014 concerning the provision for slow-moving inventories. The Tribunal found the Commissioner's objection to the provision baseless and lacking merit, emphasizing the failure to provide the assessee with a proper opportunity to contest the grounds for revision. The appeal was allowed, and the original assessment order was upheld, with the decision pronounced on 10th November 2017.

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Issues Involved:
1. Validity of the assumption of jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Merits of the issue regarding the provision for slow-moving inventories of spares.
3. Adequacy of the opportunity provided to the assessee to contest the grounds for revision.

Issue-wise Detailed Analysis:

1. Validity of the Assumption of Jurisdiction under Section 263:
The Commissioner of Income Tax (CIT) invoked revisionary jurisdiction under Section 263 of the Income Tax Act, 1961, asserting that the assessment order dated 28.02.2014 was erroneous and prejudicial to the interests of the Revenue due to the incorrect allowance of a provision for slow-moving inventories of spares amounting to Rs. 52.80 crores. The CIT argued that this provision was capital in nature and thus should not have been allowed as a deduction. The assessee contested the CIT's assumption of jurisdiction, arguing that the basis of the CIT's final order differed from the grounds stated in the show cause notice, thereby making the order untenable in law. The Tribunal noted that the CIT's final order was based on the absence of a scientific basis for the provision, a point not raised in the show cause notice, thus violating the principle of natural justice as established by the Hon'ble Supreme Court in CIT vs. Amitabh Bachchan [384 ITR 200].

2. Merits of the Issue Regarding the Provision for Slow-Moving Inventories of Spares:
The CIT directed the Assessing Officer to disallow the provision for slow-moving inventories, arguing that the assessee did not have a scientific basis for fixing the percentage of the provision. The assessee had explained that the provision was based on an aging analysis of the spares, with percentages of 30%, 50%, and 80% for items unused for more than one, two, and three years, respectively. The Tribunal found that the CIT did not provide any cogent reasoning for rejecting the assessee's basis for the provision. The Tribunal held that the CIT's objection was untenable and devoid of merit, as the aging analysis provided by the assessee was a reasonable basis for the provision.

3. Adequacy of the Opportunity Provided to the Assessee:
The Tribunal emphasized that Section 263(1) of the Act obligates the CIT to provide the assessee with an opportunity of being heard before passing an order. The Tribunal found that the CIT's final order was based on a different ground than that stated in the show cause notice, and the assessee was not given an opportunity to contest this new ground. This failure to provide an opportunity to the assessee was inconsistent with the principles laid down by the Hon'ble Supreme Court in the case of Amitabh Bachchan (supra), rendering the CIT's order untenable in law.

Conclusion:
The Tribunal set aside the order of the Commissioner and restored the assessment order dated 28.02.2014 concerning the issue of the provision for slow-moving inventories. The appeal was allowed, and the order was pronounced in the open court on 10th November 2017.

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