TaxTMI 
TaxTMI 
2010 (6) TMI 64
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.... Income Tax Act, 1961, by issuing a notice under Section 148 on 16 March 2009. The Assessment Year in question is 2004-05. 3. The assessee filed a return of income on 29 October 2004, disclosing nil income under the normal provisions of the Act and book profits of Rs.23.35 crores under Section 115JB. An assessment order was passed under Section 143(3) on 28 December 2006. A notice was issued under Section 148 on 16 March 2009. The reasons and the basis on which the assessment is sought to be reopened were intimated to the assessee on 18 June 2009 and are as follows: "A perusal of P & L Account reveals that company had debited provision on account of diminution in the value of the assets amounting to Rs.1,41,50,927/. This was not a pro....
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....nt of Rs.29.23 lakhs which, according to the assessee, was a "write down in the value of slow/non moving inventory valued at estimated realizable value being considered as not in the nature of capital expenditure". Therefore, a plain reading of Item 17 of the Tax Audit Report shows that the assessee disclosed that an amount of Rs.29.23 lakhs was not in the nature of capital expenditure and represented a write off on account of slow or nonmoving inventory which was valued at its estimated realizable value. The Assessing Officer has purported to reopen the assessment on the ground that the assessee had debited a provision amounting to Rs.1.41 crores on account of diminution in the value of assets. This, according to the Assessing Officer, is ....
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....apital nature was not dealt with in the order of the Assessing Officer. 6. In this back ground, Counsel appearing on behalf of the Assessee has urged five submissions for the consideration of the Court. Firstly, it has been submitted that with respect to the amount of Rs.1.12 crores, there could be no question of the Assessing Officer forming a reason to believe that income has escaped assessment, because the assessee had itself disallowed it in its computation which has been accepted in the order passed by the Assessing Officer on 22 March 2010. Secondly, on the balance of Rs.29.23 lakhs, the submission is that a write down of inventory can never be regarded as being capital in nature. Thirdly, the Assessing Officer has only made a reap....
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....r reopening had, it is urged, been made out. 8. While considering the rival submissions, it would be necessary to record that the only basis on which the assessment has been sought to be reopened is that the assessee had incorrectly made a provision on account of diminution in the value of assets amounting to Rs.1.41 crores by making a debit to the Profit and Loss Account. According to the Assessing Officer, this could not have been a charge on the profits of the Company since the amount represented a provision made for a fall in the value of capital assets. Now, as the admitted material before the Court would show, it is undisputed that of the amount of Rs.1.41 crores, an amount of Rs.1.12 crores was reflected by the assessee in Item 17....
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....atram vs. CIT, {(1953) 24 ITR 481} a Constitution Bench of the Supreme Court referred to the principle that "closing stock is to be valued at cost or market price whichever is the lower" and the Supreme Court held that this is "now generally accepted as an established rule of commercial practice and accountancy". The same principle was reiterated in a subsequent decision of the Supreme Court in CIT vs. British Paints India Ltd., {(1991) 188 ITR 44} where the Supreme Court once again considered it to be "a well recognized principle of commercial accounting to enter in the profit and loss account the value of stockintrade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower". The Assessing Off....
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....tside the fold of his jurisdiction. 11. In the present case, it would also be necessary to note that the reasons of the Assessing Officer were recorded before the provisions of Section 115JB were amended by Finance Act No.2 of 2009 though with effect from 2001. As a result of the amendment, clause (i) has been inserted in explanation (1) to the Section which defines the meaning of the expression "book profits". By the amendment, the amount or amounts set aside as provision for diminution in the value of the assets is to be added to the net profit as shown in the Profit and Loss Account for the relevant previous year, prepared under subsection (2). When the reasons were recorded by the Assessing Officer, this provision was not on the stat....