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

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