2022 (7) TMI 551 - AT - Income Tax

Tribunal rules in favor of appellant, allowing inventory obsolescence deduction and treating excise duty refund as capital.

The Tribunal allowed the appellant's appeal on both issues, permitting the deduction of the provision for inventory obsolescence and treating the excise ... Disallowance of provision for Inventory obsolescence - assessee Company has also written off the obsolete inventory on actual basis to create the provision for inventory obsolescence - HELD THAT:- The accounting standard 2 on valuation of inventory issued by the ICAI which clarified that, inventories are required to be valued at lower cost or net realizable value. As per the statement showing details of inventory obsolescence for the assessment year under consideration, the goods have been already expired and is not marketable or saleable condition. The Hon'ble High Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. [2009 (4) TMI 4 - SUPREME COURT] held that the amount to provide and loss account debited to profit and loss account in accordance with applicable accounting standard issued by ICAI should be allowed for the purpose of the Act. Also in the case of HOTLINE TELE TUBE & COMPONENTS LTD. [2008 (8) TMI 6 - HIGH COURT DELHI] held that the provisions for diminution in value of stock was allowable as deduction. The similar view has also been taken by the Jurisdictional High Court in CIT Vs. Huges Communication India Ltd. [2013 (3) TMI 352 - DELHI HIGH COURT] - Thus we are of the opinion that provision for inventory obsolescence for the year under consideration is allowable deduction. Accordingly, we allow the Grounds of Appeal No. 1, 4 & 5 of the assessee. Nature of receipt - treating the excise duty subsidy as capital receipt - HELD THAT:- The said unit due to their presence in the notified area have availed the benefit in the form of excises duty subsidy - Therefore, the Ld. A.O and the CIT (A) should have allowed the claim of the assessee by treating the excise duty, subsidy as capital receipt. The similar issue has been arose for consideration in the case of Modern Papers [2021 (6) TMI 620 - ITAT DELHI] wherein by relying on the decision of the Co-ordinate Bench in the case of Crystal Coal Protection Pvt. Ltd. [2019 (12) TMI 980 - ITAT DELHI] allowed the claim of the assessee therein by treating the excise duties subsidy as capital receipt. Appeal of assessee allowed. Issues Involved:1. Disallowance of provision for inventory obsolescence.2. Treatment of excise duty refund as capital receipt.Detailed Analysis:1. Disallowance of Provision for Inventory Obsolescence:The appellant contested the disallowance of Rs. 84,47,051/- as provision for inventory obsolescence. The CIT(A) confirmed the disallowance citing lack of documentary evidence and failure to prove the material's obsolescence as per the Income Tax Act provisions. The appellant argued that the inventory was written off due to expiry and unsaleability, supported by the ICAI's accounting standards which mandate inventory valuation at lower cost or net realizable value. The appellant also referenced the Supreme Court's judgment in CIT Vs. Woodward Governor India Pvt. Ltd. (312 ITR 254) and other relevant cases, asserting that the provision should be allowed as a deduction.The Tribunal reviewed the appellant's evidence, including statutory auditor certifications and quality control reports, and agreed that the provision for inventory obsolescence was scientifically and methodically determined. The Tribunal cited precedents from the High Court and Supreme Court, supporting the allowance of such provisions. Consequently, the Tribunal allowed the appellant's grounds of appeal on this issue, permitting the deduction of Rs. 84,47,051/-.2. Treatment of Excise Duty Refund as Capital Receipt:The appellant claimed an excise duty subsidy of Rs. 9,85,02,263/- as a capital receipt, arguing that it was entitled to this benefit due to its manufacturing unit's location in a notified area of Jammu, Kashmir & Ladakh. The CIT(A) had rejected this claim, but the appellant referenced similar cases where such subsidies were treated as capital receipts, including the Tribunal's decision in Modern Papers and Crystal Coal Protection Pvt. Ltd. Vs. DCIT.The Tribunal examined the legal precedents, including the Supreme Court's rulings in Jute Corporation of India Ltd. Vs CIT and National Thermal Power Co. Ltd. Vs CIT, which clarified that appellate authorities have the power to consider additional grounds and claims not raised before the Assessing Officer. The Tribunal emphasized the legislative intent and judicial pronouncements that support the treatment of excise duty subsidies as capital receipts when the subsidy aims to promote industrial development and employment, rather than operational incentives.The Tribunal also highlighted the Supreme Court's dismissal of the Revenue's appeal in similar cases, reinforcing the position that such subsidies are capital in nature. Additionally, the Tribunal noted that the education cess is an allowable deduction under Section 37 of the Income Tax Act, supported by CBDT Circulars and judicial pronouncements.Based on these considerations, the Tribunal allowed the appellant's grounds of appeal regarding the excise duty subsidy, treating it as a capital receipt and permitting the deduction of the education cess.Conclusion:The Tribunal allowed the appellant's appeal on both issues, permitting the deduction of the provision for inventory obsolescence and treating the excise duty refund as a capital receipt. The decision was pronounced in the open court on July 8, 2022.