1992 (2) TMI 128 - AT - Income Tax

Tribunal Upheld Disallowance of Export Provision & Stock Undervaluation

Universal Fertiliser Co. Pvt. Limited. Versus Inspecting Assistant Commissioner.

Universal Fertiliser Co. Pvt. Limited. Versus Inspecting Assistant Commissioner. - ITD 041, 427, TTJ 044, Issues Involved:1. Disallowance of a provision of Rs. 64,65,084 for unfulfilled export obligations.2. Loss claimed on account of valuation at Rs. 77,46,668.Issue-Wise Detailed Analysis:1. Disallowance of a Provision of Rs. 64,65,084 for Unfulfilled Export Obligations:The assessee, a company, was granted an industrial license to manufacture 45,000 metric tons of ferro manganese/silico manganese per annum with an obligation to export the entire production during the first ten years. This obligation was later reduced to 50% of the production. By the end of the previous year, the assessee had a cumulative shortfall of 10,358 metric tons in its export obligations. The assessee debited Rs. 64,65,084 to its profit and loss account as a liability for this unfulfilled obligation, valuing the shortfall based on international prices and the cost of production.The Assessing Officer (AO) rejected this provision, deeming the liability as contingent due to uncertainties such as potential future modifications of the export obligation by the Government of India, possible changes in international market prices, and the lack of strict enforcement of the obligation by the government up to February 1987. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the liability was dependent on the company being called upon by the Chief Controller of Imports and Exports to hand over the shortfall or pay liquidated damages, which had not yet occurred.The Tribunal agreed with the AO and CIT(A), emphasizing that the liability had not crystallized by the end of the relevant accounting period and was contingent upon future events, including the outcome of the assessee's appeal to the licensing authorities. The Tribunal concluded that the provision for Rs. 64,65,084 was not allowable as a deduction.2. Loss Claimed on Account of Valuation at Rs. 77,46,668:The assessee had a closing stock of 5,646.259 metric tons at the end of the previous year, which it valued at the international price of Rs. 2,846 per metric ton. The AO rejected this valuation, insisting that the closing stock should be valued at the cost price of Rs. 4,218 per metric ton, as the assessee had previously valued its closing stock at cost or market price, whichever was lower, based on local market rates. The AO considered the assessee's valuation as a change in the method of stock valuation, resulting in an addition of Rs. 77,46,668.The CIT(A) upheld the AO's decision, stating that the change in the method of stock valuation was not warranted since the assessee had consciously chosen not to export the goods due to unfavorable international prices and had sold most of its production in the local market. The Tribunal concurred, noting that the valuation of closing stock should reflect the market in which the assessee operates. The Tribunal emphasized that the market value should be relevant to the assessee's business conditions and not arbitrarily based on international prices.The Tribunal rejected the assessee's contention that the valuation at international market prices was justified due to the export obligation, stating that the valuation should be consistent with ordinary principles of commercial accounting and reflect the true results of the business. The Tribunal concluded that the addition of Rs. 77,46,668 was reasonable and proper, and the assessee's claim for deduction under section 28 was not merited as the liability was contingent.Conclusion:The Tribunal dismissed the assessee's appeal, upholding the disallowance of the provision for unfulfilled export obligations and the addition made due to the undervaluation of closing stock. The Tribunal agreed with the tax authorities that the liabilities were contingent and the valuation method adopted by the assessee was arbitrary and not in accordance with recognized accounting principles.