2023 (11) TMI 924 - AT - Income Tax

Reassessment notice upheld but inventory provision addition deleted as revenue-neutral change prevents double taxation under Section 145

ITAT Indore upheld HC's rejection of assessee's challenge to reassessment notice validity, finding no failure to disclose material facts and notice served ... Validity of initiation of reassessment proceedings - notice issued after expiry of four years - notice issued if four years, but not more than six years - case was selected for scrutiny through CASS and assessment order u/s 143(3) was passed - provision made by the assessee for the year under consideration for slow/non-moving inventory - HELD THAT:- In response to notice u/s 148 the assessee filed objections to the reopening of the assessment which were disposed of by the assessing officer against which the assessee filed which was dismissed by the Hon’ble High Court [2016 (12) TMI 1294 - MADHYA PRADESH HIGH COURT] and declined to admit the writ petition on the issue of validity of reopening of the assessment as there was failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and consequently declined to admit writ petition filed by the assessee stating stating notice has been served within six years from the end of the relevant assessment year and the tax effect is in crores of rupees and therefore, the Assessing Officer was justified in initiating proceedings and in rejecting the objections raised by the petitioner. Therefore, the objection of the assessee against validity of reopening on the ground that there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment has been considered by the Hon’ble jurisdictional High Court and decided against the assessee. Hence, we are of the considered opinion that this issue is covered by the judgment of Hon’ble High Court in assessee’s own case whereby the objection raised by the assessee against reopening of the assessment has been rejected. Decided against assessee. Addition on account of slow and non-moving inventory - assessee has changed the method during the year which has resulted in reduction of profit before tax - inventory written off by the assessee on the basis of net realization value worked out by following consumption pattern of the stock from 0 to 50 weeks, 51 to 100 weeks, 101 to above weeks taking percentage of provisions up to 50 weeks 0%, 51 to 100, 50% and 101 to above, 100% provision - HELD THAT:- It is pertinent to note that there is no change of accounting policy of the assessee for the year under consideration so as the valuation of the closing stock is concerned as the assessee is following consistent policy of valuation of the closing stock at cost or net realization value whichever is less in accordance with accounting standard accepted u/s 145A. The only change for the year under consideration is shifting the basis of net realization value from the age of the stock to consumption pattern. In any cases the reduction in the value of the closing shall have consequential effect of reduction in the opening stock of the subsequent year and therefore, this exercise is revenue neutral when the assessee has been paying the tax at the maximum marginal rate. There is increase of more than three times in the total income reported by the assessee in the subsequent assessment year and the AO has passed scrutiny assessment u/s 143(3) on 28.02.2014 whereby the total income of the assessee was assessed at Rs. 70,77,31,246/-. There is no adjustment made on account of this enhanced value of closing stock for the year under consideration to the opening stock of the subsequent year i.e. A.Y. 2010-11. Thus, this addition made by the AO for the year under consideration has resulted double taxation of the said income. Therefore, when the assessee is paying tax at the same rate as in the year under consideration and rather declared more than three times of income to tax in the subsequent year then this issue is revenue neutral and is entirely academic in nature. Accordingly in the facts and circumstances of the case when the assessee has explained the reasons for change in the basis of making the provision from age of non-moving inventory to consumption pattern which is more realistic so far as the realization value is concerned and this change has no revenue effect as the reduction in the closing stock of inventory shall have consequential effect of reduction the opening stock of the subsequent year then the addition made by the AO is not justified. As relying on Excel Industries Ltd. [2013 (10) TMI 324 - SUPREME COURT] the addition made by the AO is deleted. Appeal of assessee is partly allowed. Issues Involved:1. Validity of the impugned re-assessment order and/or the additions made therein.2. Validity of re-assessment proceedings under Section 148 of the Income-tax Act, 1961.3. Addition on account of slow and non-moving inventory.Summary:1. Validity of the Impugned Re-assessment Order and/or the Additions Made Therein:The assessee argued that the Commissioner of Income-tax (Appeals) erred in upholding the addition made by the Assessing Officer (AO). It was contended that the order passed by the Commissioner and/or the AO was 'bad in law' and should be struck down. The Tribunal considered the rival submissions and relevant material, ultimately dismissing the grounds raised by the assessee regarding the validity of the re-assessment order and the additions made therein.2. Validity of Re-assessment Proceedings:The assessee challenged the re-opening of the assessment under Section 148, arguing that it was in excess of jurisdiction and not in accordance with the law. The AO had reopened the assessment based on the audit report, which indicated a change in the estimate of provisions for slow/non-moving inventory. The assessee claimed there was no new material that came to the AO's knowledge post the original assessment, and thus, the re-opening after four years was not valid. The Tribunal noted that the jurisdictional High Court had already dismissed the writ petition filed by the assessee challenging the validity of the re-opening. The High Court held that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Consequently, the Tribunal found that the issue was covered by the High Court's judgment and dismissed the grounds raised by the assessee on this matter.3. Addition on Account of Slow and Non-moving Inventory:The assessee contended that the Commissioner erred in upholding the AO's addition of Rs. 2,94,03,474/- due to a change in the method of accounting for slow and non-moving inventories. The assessee argued that the change in the estimation of provision for slow/non-moving inventory from age-based to consumption pattern-based was more realistic and in accordance with accounting standards. The Tribunal observed that there was no change in the accounting policy for valuation of closing stock, but only in the estimation method. The Tribunal also noted that the addition made by the AO for the year under consideration without giving consequential effect in the subsequent year amounted to double taxation. Citing the Supreme Court's judgment in CIT vs. Excel Industries Ltd., the Tribunal found that the issue was revenue neutral and academic in nature. Consequently, the Tribunal deleted the addition made by the AO on this account.Conclusion:The appeal of the assessee was partly allowed, with the Tribunal dismissing the grounds related to the validity of the re-assessment order and proceedings, but deleting the addition made on account of slow and non-moving inventory. The order was pronounced in the open court on 25.08.2023.