AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 882
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....O erred in disregarding method of valuation of inventory at lower of cost or net realizable value and thereby erred in not allowing deduction of Rs. 14,40.81,661/- being difference between cost and net realizable value of certain inventory items. The learned AO further erred in considering adding the said amount to the book profits u/s 115JB by wrongly concluding it as provision for diminution in value of asset. 2. On the facts and circumstances of the case and in law, the learned A.O erred in disallowing expenses u/14A to the tune of Rs. 7,17,832/- comprising of Rs. 6,60,623/- out of interest expenses and Rs. 57,209/- out of other expenses by applying Rule 8D and wrongly attributing to earning of exempt income. The learned AO further erred in adding the said amount to book profits u/s 115JB. 3. On the facts and circumstance of the case and in law, the learned A.O erred in not allowing carry forward and set off of business loss and unabsorbed depreciation to the tune of Rs. 9,02,66,242/- pertaining the amalgamated company in terms of section 72A. Your appellant reserves the right to add to, alter or amend the above ground if necessary." The revenue on the other hand had ....
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....ing and writing off the value of certain dead, non-moving and obsolete inventory of the amalgamating company, revised its return of income. 4. The A.O during the course of the assessment proceedings called upon the assessee to explain as to on what basis the inventories were written off by an amount of Rs. 14,40,81,661/- in the revised return of income. The assessee in its reply submitted before the A.O that though it was following the conventional method of valuation of inventory at 'Cost or net realizable value, whichever is lower', however, due to paucity of time and in the backdrop of the fact that it was occupied with completing merger formalities including preparation of combined accounts of the two entities, compiling tax audit report of the consolidated accounts and filing of return of income before the due date, i.e 30.09.2009, therefore, in the return of income had taken over and recorded the assets and liabilities of the amalgamating company at their carrying values appearing in the books of account of the amalgamating company. It was submitted by the assessee that after filing the return of income it had analysed and tested each item of inventory of the amalgamating co....
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....tin - Rs. 24,84,024/-, etc.). Similarly, the stock which is not older than even 2 years has also been identified as obsolete stock for filing the revised return. These also raise the question as to the appl ication of the accounting policies by the assessee over the years in respect of inventories. v. Though the assessee in it submission contended that they have str ingent FDA norms and the company is prohibi ted to sold the expires stock either in the market or as a scrap, however, the assessee failed to bring on record anything about the FDA norms and how the company has been prohibited to do so about the obsolete stock. Importantly, how the said obsolete stock has been destroyed after taking necessary approvals from the authorities, certificates if any issued in this behalf, etc. In absence of any evidences, the contention of the assessee that it has followed the FDA norms is not maintainable. vi. As per the AS-2, if the inventory are damaged or partly or wholly obsolete or if the selling price is declined then the cost of the inventory may not be recovered and therefore the practice of writing down inventory is consistent with the view that it should not be carried in exc....
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....either obsolete or non-moving; (iv) that during the course of the assessment proceedings the certificate of physical verification by the management of the amalgamating company was placed on record, therefore, now when the said amalgamating company was also valuing its inventory at the lower of the cost or net realizable value, therefore, there was no justification for the assessee to have valued the inventory at Rs. Nil; (v) that now when a perusal of the notes to accounts of the stand alone financials of the assessee company revealed that the amalgamating company even prior to amalgamation was under the control of the same management, therefore, it was beyond understanding as to why the management on one hand had physically certified the inventories at a specific value in the case of the amalgamating company, while for on the other hand had decided to write it off as obsolete and nonmoving items; (vi) that as the accounting policies followed by the amalgamating company and the assessee company revealed that both of them were recording the value of inventory as per the same method, as well as were under the same management even before the amalgamation, therefore, the valuation of i....
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....of the top 10 items of the value of Rs. 12,00,67,368/-, which accounted for 83% of total inventory written off, but however, was not persuaded to subscribe to the claim of the assessee as regards writing off the inventories of less than one year of age of a value aggregating to Rs. 1,85,37,248/-. The CIT(A) while partly allowing the claim of the assessee, observed as under: 7.8 I have considered the A.O‟s order as well as the appellant‟s A/R submission and also the documents placed on record. I find that the claim of the appellant is that inventories whose values are written down to „nil‟ are old/obsolete/non-usable/non-salable items. Therefore as per the provisions of the Accounting Standard 2 „valuation of inventories‟, it had written down inventory to its net realizable value. The appellant has also given aging analysis of the product, which were written off to make the justification of its claim, which clearly suggests that 87% of inventory written off is more than 1 year old. The appellant's such analysis is also extracted in its submission as referred above. The perusal of the aforesaid analysis of the inventory clearly denotes that t....
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....sue the party in the court on whose order such product was manufactured, if the said customer has not complied with terms and conditions of business agreement. Besides this, the appellant cannot write off its stock without even ascertaining its marketability and usefulness with some prospective customer. Further to that even in respect of Quent- 19 and ACITRETIN, the appellant cannot merely write off stock without ascertaining and examining the possibility of realization of such product in the market even if such product were made with customer specification. The following AS-2 does not mean that the appellant will not take note of normal business expediency as well as its business interest. Thus, I consider it proper and appropriate to hold that the inventory in respect of product, which is less than 1 year of age, the A.O.'s action is completely justified and correct in denying claim of wr i te of f of the appel lant. Accordingly the addi t ion to the extent of Rs. 1,85,37,248/- is confirmed. However for the remaining inventory, which is of the value of Rs. 12,55,44,413/-, the appellant has given a detailed justification for making such claim. I find that the appellant compan....
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....on. Even if the inventory had been written off in the books of SSL-E before amalgamation, it would form part of carry forward losses of SSL-E. The appellant company submitted valuation report for determining share exchange ratio in the amalgamation. Enterprise value of both the companies is computed on Discounted Cash Flow basis which takes into account future cash flows. Thus, inventory write off has no impact of share exchange ratio. The appellant submitted that claiming inventory write off would only affect the resultant goodwill arising on amalgamation for which no tax benefits were claimed by the appellant company. Therefore, the AO's observation that the whole arrangement is to reduce taxable income is not tenable. I find that the AO has raised a doubt as to how the same management can certify the stock in the standalone accounts of SSL-E and later on write off. The AO has stated that how the physically verified and confirmed stocks can be written off by filing the revised return. However, I agree with the submissions of the appellant that it had carried out detailed study and considering the commercial viability had concluded that the inventories would not fetch any valu....
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.... assessee. The ld. A.R submitted that no infirmity did emerge from such writing off the inventories, which was duly substantiated in the course of the assessment proceedings before the A.O. The ld. A.R in support of his contention relied on the order of the coordinate bench of the Tribunal, viz. M/s Kopran Drugs Ltd. vs. ACIT (2010) 35 DTR 380 (Mum). The ld. A.R further placed reliance on the order of the ITAT, Mumbai in the case of DCIT Vs. Beck India Ltd. (2010) 127 TTJ 410 (Mum). That as regards the disallowance made by the A.O under Sec. 14A of the Act, it was submitted by the ld. A.R that as the assessee had substantial self owned funds which were sufficient enough to explain the source of the investments made in the exempt income yielding investments, therefore, no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) in respect of the interest expenditure was called for in the hands of the assessee. The ld. A.R further submitted that as during the year under consideration the assessee had not received any dividend income, therefore, in the absence of there being any exempt income the issue of making any disallowance under Sec. 14A did not arise. The ld. A.R in support of his conte....
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....igh Court dated 16.06.2009 was delivered to the assessee only as on 14.09.2009. The ld. A.R in order to support his aforesaid claim drew our attention to the copy of the order of the Hon'ble High Court at Page 122 of 'APB', which revealed the fact as was averred by the assessee before us. The ld. A.R submitted that despite the fact that the assessee had explained the reason for writing off each and every item of the inventory, however, the CIT(A) had without assigning any cogent reason sustained the disallowance as regards the inventory with an age of less than one year and had wrongly upheld the addition to the extent of Rs. 1,85,37,248/-. The revenue on the other hand had assailed the order of the CIT(A) as regards the deletion of an addition of Rs. 12,55,44,413/- by partly accepting the writing off the inventory of an age of more than one year by the assessee. 10. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeals is sought for adjudicating two issues, viz. (i) that as to whether the writing off the inventory acquired by the assess....
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.... same at lower of cost or net realizable value, carries substantial force and could not have been summarily rejected. We find that the claim of the assessee that non-moving, unusable and expired stocks forming part of the inventory of the amalgamating company were written down to its net realizable value while filing the revised return of income was rejected by the lower authorities without placing on record any irrefutable material which could go to conclusively disprove the veracity of the said claim. We have deliberated on the facts and find that the assessee had claimed that the primary reason for writing off the top 10 items of the value of Rs. 12,00,67,369/- which accounted for 83.33% of the total stock written off, was that either the item was not produced/procured as per the required quality or had lost its shelf life due to non-usability for a considerable period, as under: Sr. No. CATG Product Name Written off stock details value Year of Many/year of procurement Justification for write Off 1 WIP OSELTAMIVIR PHOSPHATE CRUDE 36,280,604 2006 This drug was meant for Tamilflu (Bird flu.) We have procured material in 2005 and converted into crude anticipating order ....
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....uthorities, as well as before us, that as the said items were proprietary products that had lost their shelf life, therefore, they had become completely obsolete and could not be sold even as scrap, which thus left the assessee with no other alternative but to value the said stock at nil value. 11. We have given a thoughtful consideration to the contentions of the ld. A.R and find substantial force in the same. We are of the considered view that before adverting to the issue under consideration, it would be relevant to observe that the assessee during the year under consideration was engaged in the business of manufacturing of bulk drugs, speciality chemicals and formulations, as a result whereof the mode and manner as per which the obsolete and damaged materials were to be disposed off at the prescribed disposal facility was strictly regulated by the stringent rules and regulations regarding handling and disposing of the products and raw materials under the statutory enactments, viz. Hazardous Wastes (Management and handling) Amendment Rule, 2000. We find that the assessee had during the course of the assessment proceedings furnished complete details of its inventory which was wr....
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....ssee had furnished a plausible explanation as regards writing off the said three items, as under:- Sr. No. Item Particular Amount 1. Triazine Stagek-3 The assessee explaining the writing off the stock of the aforesaid item, viz. Triazine stage-3, submitted that the amalgamating company, viz. Sequent Scientific Ltd, had purchased the said polymer additive to cater to the specific requirements of a customer. The assessee had submitted before the lower authorities that as the aforesaid customer had cancelled the order of the product which were purchased to meet out the specific requirement of the aforesaid customer, therefore, the said item which was specific to the requirement of the aforesaid customer could not be sold to any other party. It was thus submitted by the assessee that in the backdrop of the aforesaid compelling circumstances the value of the aforesaid item which was found to be nonsaleable was written off by the assessee. Rs.90,64,548/- 2. Quent 19 The assessee submitted before the lower authorities that the aforesaid product which was an antioxidant meant for polymerization and anti coresive reaction, was found not meeting the specifications of the customer,....
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....s. 90,65,548/-; (ii) Quent 19 of Rs. 47,14,488/- and Acit Retin of Rs. 24,84,024/- aggregating to an amount of Rs. 1,62,64,060/- accounted for 11% of the total stock written off. 13. We have deliberated at length on the orders of the lower authorities and the material available on record and find that the assessee had demonstrated at length the specific reasons for writing off each and every item of the inventory forming part of the aggregate alue of Rs. 14,40,81,661/- during the year under consideration. We are of the considered view that as the assessee company had carried the value of the assets and liability as appearing in the books of the amalgamating company, viz. Sequent Scientific Company while filing its return of income, but however, the value of the said assets and liabilities were thereafter reassessed and the fixed assets were valued as per the valuation report, while for the inventory was valued at lower of cost or net realisable value, as per the accounting policy which was followed by the assessee. We are of the considered view that the lower authorities had dislodged the claim of the assessee as regards the writing off the inventories of the amalgamating company,....
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.... return of income. The AO has doubted about the valuation of obsolete items on the ground that Kopran Ltd. could not have reflected the obsolete items in its books of account as on 1st Jan., 1998 and hence the assessee, as a prudent businessman, would not have accepted these obsolete items of stock at their full value. We observe from cl. 3.3 of the agreement that all the assets and liabilities of the bulk drugs division were to be transferred on the basis of the value as reflected in the books of account of Kopran Ltd. The AO has not disputed the fact that Kopran Ltd. had recorded the inventory at the higher value by considering it as a good stock and not an obsolete one. This brings us to the position that the assessee received inventory of this division w.e.f. 1st Jan., 1998 which was not a good stock but also consisted of the obsolete items. Only pursuant to the approval granted by the Hon‟ble Bombay High Court in December, 1998 the assessee took the physical possession of the assets including inventory and started the process of identifying the obsolete items in 1999. The learned CIT(A) has not controverted the valuation of the obsolete items. He has sustained the additi....
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.... be shown „at net realizable value‟ as on the close of the financial year, which was less than the actual cost. We, therefore, do not find any reason for the sustenance of this addition and order for its deletion." 14. We thus not finding any infirmity in the order of the CIT(A), to the extent he had deleted the addition of Rs. 12,55,44,413/-, therefore, uphold the order of the CIT(A) to the said extent. The Ground of appeal No. 1 raised by the revenue before us is dismissed. 15. We are further unable to persuade ourselves to subscribe to the view of the CIT(A) that the claim of the assessee as regards the writing off the inventories of Rs. 1,85,37,248/- was not to be accepted, for the reason that the items falling under the said bracket had less than one year of age. We are of the considered view that the CIT(A) while arriving at the aforesaid view had lost sight of the fact that the assessee who is engaged in the business of manufacturing of bulk drugs, speciality chemicals and formulations, had specifically explained the reason for having written off the said inventories. We are persuaded to be in agreement with the claim of the assessee that certain items being i....
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.... the year under consideration made investments of Rs. 6,08,36,459/- in exempt income yielding investments. We find that the A.O observing that the assessee had not offered any voluntary disallowance under Sec. 14A in its return of income, had made a disallowance of Rs. 7,17,832/- in the hands of the assessee. Before us, the ld. A.R had averred that no such disallowance under Sec.14A r.w. Rule 8D(2)(ii) in respect of interest expenditure was called for in the hands of the assessee, for the reason that the assessee had substantial own funds of Rs. 96.55 crore consisting of share capital of Rs. 21.23 crore and reserves and surplus of Rs. 75.31 crores, which sufficiently explained the source of making of investment of Rs. 6,88,36,409/- in the exempt income yielding investments by the assessee during the year under consideration. 17. We find substantial force in the contention of the ld. A.R that now when the assessee had sufficient own funds of Rs. 96.55 crores available with it, therefore, it could safely be presumed that the said amount was utilized for making investment in the exempt income yielding investments of Rs. 6,08,36,459/- by the assessee during the year. We find that our ....