2020 (1) TMI 122 - AT - Income Tax

Tribunal decision on income tax appeal: reassessment ordered, slow-moving stock provision dismissed, debts added back.

M/s. L’Oreal India Pvt. Ltd. Versus The Commissioner of Income Tax-6, Mumbai

The Tribunal partially allowed the appeal, upholding the Commissioner of Income Tax's revisionary jurisdiction in part and directing reassessment of ... Revision u/s 263 by CIT - Write-Off of capital work in progress claimed as deduction by the assessee while computing income under normal provisions of the Act - HELD THAT:- All the expenditure incurred relating to import in counter components were written-off by debiting to profit and loss account and crediting capital work in progress in the books of accounts of the assessee company. Accordingly, deduction was claimed for the same in the return of income under normal provisions of the Act. From the list of expenses incurred it could be seen that some items would certainly carry enduring benefit to the assessee in the capital field in as much as those items could be certainly utilised by the assessee in its regular course of business or in the alternative would have clear saleable value thereon. Hence, it cannot be said that since the advertisement campaign plan was dropped by the assessee after import of certain items as listed above, the items do not have any value at all for the assessee company warranting its write-off. But at the same time some of the items listed would also have to be absorbed as revenue expenditure as one time cost in respect of abondoned project which requires to be charged off as revenue. Hence, we hold that the finding of the ld. CIT that the entire expenditure would be treated as capital loss is incorrect. We hold that some part of these expenses would be capital in nature and part would be revenue in nature. Since the ld. AO has been directed to frame the assessment afresh pursuant to the directions of the 263 order by the ld. CIT, the assessee would be at liberty to make out its case before the ld. AO in the light of the aforesaid directions. Provision for Doubtful Debts - HELD THAT:- We find from the schedule-14 of the financial statements as on 31/03/2007 of the assessee company, which is enclosed in page 8 of the paper book, the assessee has debited a sum of ₹ 16,07,000/- towards provision for doubtful debts (net) and sum of ₹ 4,70,000/- towards bad debts and advances written off. This clearly goes to prove that a sum of ₹ 16,07,149/- purely represents only provision for doubtful debts and not write-off of bad debts in the books of accounts of the assessee by corresponding credit to concerned debtor’s account. We also find that the very same sum (i.e provision for doubtful debts) has already been added back by the assessee voluntarily in the return of income while computing income under normal provisions of the Act which goes to strengthen our finding that this sum represents only provision for doubtful debts and not bad debts actually written off in the books. Hence, the applicability of provision of Clause (i) of Explanation – 1 to Section 115JB(2) of the Act would directly come into operation wherein this amount requires to be added back while computing book profits u/s.115JB of the Act. Hence, we do not find any infirmity in the action of the ld. CIT invoking revisionary jurisdiction in respect of this issue. Provision for obsolescence / Slow Moving Stock - HELD THAT:- We find that assessee had reduced the value of inventories by using the accounting terminology “provision towards obsolescence / slow moving stock”. In other words, we find that the value of closing stock of inventories had been duly reduced by the provision amount of obsolescence / slow moving stock to the extent of ₹ 3,42,82,000/- in the books itself. It is not mere provision for obsolescence as understood by the ld. CIT. It is effectively reducing the value of stock which tantamount to write off of the same. Hence, the same would not fall within the ambit of Clause (i) of Explanation -1 to Section 115JB(2) of the Act. It is also pertinent to note that very same sum of ₹ 3,42,82,000/- has been allowed as deduction i.e in the form of reduced value of closing stock of inventories by the ld. AO while computing income under normal provisions of the Act. Hence, the action of the ld. CIT in invoking revisionary jurisdiction u/s.263 of the Act in respect of this issue is dismissed. Issues Involved:1. Validity of the Commissioner of Income Tax (CIT) invoking revisionary jurisdiction under Section 263 of the Act.2. Deduction of Rs. 31,25,000/- written off as capital work in progress.3. Addition of Rs. 16,07,149/- provision for doubtful debts to book profits under Section 115JB.4. Addition of Rs. 3,42,82,000/- provision for slow-moving stock to book profits under Section 115JB.Issue-wise Detailed Analysis:1. Validity of CIT Invoking Revisionary Jurisdiction under Section 263:The assessee challenged the CIT's action of invoking revisionary jurisdiction under Section 263 of the Act. The CIT issued a show-cause notice citing the failure of the Assessing Officer (AO) to conduct necessary inquiries regarding certain items during the assessment. The CIT found the AO's order to be erroneous and prejudicial to the interest of the revenue due to the lack of inquiry. The Tribunal noted that the CIT had provided detailed findings and that the assessee had agreed that the details were not called for by the AO during the assessment proceedings but were submitted during the Section 263 proceedings. Thus, the Tribunal upheld the CIT’s invocation of revisionary jurisdiction.2. Write-Off of Capital Work in Progress of Rs. 31,25,000/-:The assessee claimed a deduction for the write-off of capital work in progress related to an abandoned advertisement project. The CIT contended that this should be treated as a capital loss. The Tribunal found that the items listed for the advertisement counter included furniture, fixtures, customs duty, and freight charges, some of which could have enduring benefits and saleable value. The Tribunal held that part of the expenditure should be capitalized and part treated as revenue expenditure. The Tribunal directed the AO to reassess these items, allowing the assessee to present its case afresh.3. Provision for Doubtful Debts of Rs. 16,07,149/-:The CIT argued that the provision for doubtful debts should be added back to book profits under Section 115JB as it represents amounts set aside for diminution in the value of assets. The assessee contended that this amount was a write-off of actual debts. The Tribunal examined the financial statements and found that the Rs. 16,07,149/- was indeed a provision for doubtful debts and not an actual write-off. The Tribunal confirmed that this amount should be added back to book profits under Clause (i) of Explanation – 1 to Section 115JB(2).4. Provision for Slow-Moving Stock of Rs. 3,42,82,000/-:The CIT contended that the provision for slow-moving stock should be added back to book profits under Section 115JB. The assessee argued that the valuation of inventories was in line with Accounting Standard – 2 (AS-2) and relevant case law, and that the provision effectively reduced the value of closing stock. The Tribunal agreed with the assessee, noting that the provision reduced the inventory value and was not merely a provision for obsolescence. The Tribunal found that this did not fall under Clause (i) of Explanation – 1 to Section 115JB(2) and dismissed the CIT’s action on this issue.Conclusion:The Tribunal partially allowed the appeal, upholding the CIT's revisionary jurisdiction in part and directing reassessment of certain items while dismissing the addition of the provision for slow-moving stock to book profits.