Income Tax Appellate Tribunal - Ahmedabad
Tonira Pharma Ltd.,(Since Amalgamated ... vs The Acit, Circle-4,, Baroda on 29 July, 2019
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER आयकर अपील सं. / I.T.A. No. 2042/Ahd/2014 ( नधा रण वष / Assessment Year : 2010-11) Tonira Pharma Ltd. बनाम/ ACIT (Since amalgamated with Vs. Circle - 4, Baroda IPCA Lab. Ltd.) 301, Yogi Complex, Sampatrao Colony, Alkapuri, Baroda - 390007 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCT0638F (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से /Appellant by : Shri S. N. Soparkar & Shri Parin Shah, A.R. यथ क ओर से / Shri Rajesh Meena, Sr.D.R. Respondent by :
सन ु वाई क तार ख / Date of 27/06/2019 Hearing घोषणा क तार ख /Date of 29/07/2019 Pronouncement आदे श/O R D E R PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-III, Baroda ('C IT(A)' in short), dated 15.05.2014 arising in the assessment order dated 26.03.2013 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2010-11.
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2. The grounds of appeal raised b y assessee read as under:
"1 Ld. CIT (A) erred in l aw and on facts in confirming action of AO i n rejecting write off of obsolete inventory to the extent of Rs. 1,00,68,057/-by the appellant. Ld. CIT (A) ought to have deleted disallowance holding write off of obsolete stock having nil realizable value in accordance with accounting principles is an allowable deduction. I t be so held now.
2 Both the lower authorities erred in law and on facts in not appreciating the fact that obsolete pharmaceutical product s hazardous for human lives were required to be destroyed by appellant under nor ms of the pharma industr y. Ld. CI T (A) ought t o have accepted write off of material due to its expiry and non usability by deleting disallowance made by AO. It be s o held now.
3 Alternatively and without prejudice to the above contention, the appellant ought to be allowed the writing off of raw materials becoming obsolete as business loss u/s 28 of the Act. Ld. CIT (A) ought to have allowed genuine business los s suffered by appellant on writing off of stock found obs olete on detection during the year under consideration. I t be so held now.
4 Ld. CIT (A) erred i n law and on facts in confirming adhoc disallowance of interest expenses estimating 10 % of WIP value u/s 36(1)(iii) of the Act. Ld. CIT (A) further er red in law and on facts in directing AO to all ow depreciation on capitalized interest in the year in which capital asset is put to use. Ld. CIT (A) ought to have allowed depreciation during the year.
5 Ld. CIT (A) erred in l aw and on facts in confirming disallowance by AO on account of bad debts of Rs. 2,68,465/- written off in respect of excise duty refund. Ld. CIT (A) ought to have deleted disallowance. It be so held now.
6 Ld. CIT (A) erred in law and on facts in restricting disallowance made by AO to Rs. 19,216/- for earning exempt income of Rs. 1134/- u/s 14A of the Act. Ld. CIT (A) ought to have deleted disallowance in absence of any expenses incurred by the appellant to earn exempt income.
7 Ld. CIT (A) erred in law and on facts in confirming action of AO making adjust ment in book profit by amount of addition made u/s 14A of the Act. Ld. CIT (A) ought to have deleted such adjustment not permissible under law. It be s o held now."
3. Ground Nos. 1 to 3 concern loss arising from write off of inventor y to the extent of Rs.1,00,68,057/- claimed to be obsolete and non-usable b y the assessee company.
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L t d . v s . AC I T ] A. Y . 2 0 1 0 - 1 1 - 3 - 4. Briefl y stated, the assessee is engaged in the business of manufacturing of bulk drugs, intermediates and fine chemicals. In the
course of assessment proceedings, the AO noted substantial fall in the gross profit ratio declared b y the assessee vis-à-vis earlier years. On further inquiry, it was noticed b y the AO that the assessee has reduced its closing stock b y sum of Rs.1,00,68,057/-. It was explained on behalf of the assessee that lowering of closing stock is on account of write off of value of certain materials because of its expiry or technical non-usabilit y as advised b y Plant Managers. The summary of non-moving stock for write off as furnished to the AO is reproduced hereunder:
P a r ticu la rs A n kle sh wa r Na n d e sa ri To ta l R a w Ma te ria l 1 7 8 0 7 7 8 .8 8 9 4 6 5 7 4 .5 1 2 7 2 7 3 5 3 .3 9 W.I .P . 1 7 1 0 4 4 .2 0 5 6 5 3 4 3 9 .2 9 5 8 2 4 4 8 3 .4 9 F in i sh ed Go o d s 1 5 1 6 2 1 9 .8 3 o .o o 1 5 1 6 2 1 9 .8 3 To ta l 3 4 6 8 0 4 2 .9 1 6 6 0 0 0 1 3 .8 0 1 0 0 6 8 0 5 6 .7 1
5. The AO however observed that the assessee has failed to furnish the supportive evidences, such as, certificate from Narcotics and Excise Authorities or some other competent authorities. The documentar y evidences showing expiry date of material under write off was also not furnished. The AO also noticed that some letters addressed to Excise Authorities were submitted where the assessee has made a request to the authorities to destroy the raw materials of Rs.4,61,078/- which letter also relates to FY 2012-13 and therefore, it is difficult to ascertain whether the destruction was of the material relatable to FY 09-10 concerning AY 2010- 11 or other period. The AO further noted that inventory was valued at full cost till last year without an y write off and therefore it was for the assessee to show that the material has turned obsolete and rendered unusable during the FY 2009-10 in question. In the absence of an y technical report or certificate from competent authorities for identification of non-moving items or obsolete items, the AO rejected the claim of loss made b y the assessee and consequent lowering of closing stock owing to such obsoletion. The taxable income was consequentl y increased to the extent of Rs.1,00,68,057/-.
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6. Aggrieved, the assessee preferred appeal before the C IT(A).
7. The CIT(A) re-visited the submissions made on behalf of the assessee as reproduced in para 4.2 of its order but found little merit in the claim of loss resulting from write off of value of inventory. The conclusion drawn b y the CIT(A) on the issue is reproduced hereunder for read y reference:
"4.3. I have considered the facts of the case, the submission made by the appellant and the AO's observations. A perusal of the Audit Report in Form No. 3CD shows t hat during the previous year 2009-10, the appellant had valued the closing stock at cost or at net realizable value whichever is lower, work in progress was valued at estimated cost and r aw material and other stock were valued at cost. Thus, this is not a case where the appellant was valuing the raw material at cost or net realizable value whichever is lower. Hence, the reliance placed by the appellant on the decision in the case of Sonic Biochem Ext ractions Pvt. Ltd. 59 SOT 4 (Mum) is not applicable. Further, in the decisions relied upon by the appellant in the case of Emersons Process Management India Pvt . Ltd. 45 SOT 157 (Mum) and Bharat Heavy Electricals Ltd. 98 TTJ (Del) 565, findings have been gi ven that there were mechanism for identifying such stock: in one case a s pecial committee had recommended the writ e off and in other case there was Auditor verification for the fact that the stocks had become non movi ng or obsolete. In the present case there is no s uch mechanism involved. Infact, the auditor's report as well as the audited accounts of the appellant are totally silent in this regard. Nowher e it has been mentioned by the auditor, either in audit report or in the audited accounts that certain parts of raw materials and finished goods 'had been treated as obsolete and had been valued at nil amount. Even when the AO asked the appellant to provide the reason for the downfall in gross profit as compared to the earlier year, in the first submission the appellant did not refer to any such stock worth ₹ 1,00,68,057/- having nil value. It was only in the second submission that the appel lant claimed so, Even, during the course of appellate proceedings, the appellant has only submitted the list of such items and have not explained the scientific basis for valuation of such stock at nil . The only evidence submitted is regar ding the destruction of the small part of such stock after taking approval from Narcotics Control Bur eau of India. This has also not happened during the FY 2009-10 but in subsequent year. Thus , the appellant has not pr oduced any evidence to subst antiate its claim that the value of such clos ing stock had become nil during the FY 2009-10 itself. It may be mentioned that majority part of such stock is raw material which was being valued at cost by the appellant. Under such circumstances, the valuation of such stock at nil means that the appellant is claiming business loss u/s 28 of the IT Act, 1961 on account of such action. Under such circumstances, the appellant has to establish that the value of such stock become nil in the year in which these were valued at nil amount and not in any preceding year or subsequent year. Thi s is, as per the rati o laid down by the Hon'ble Supreme Court of Indi a in the case of Glass Miniature Bulb Industries 204 ITR 352 (SC), Hence, the claim of the appellant is not allowable.
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Accordingly, the AO's action of making disallowance of this amount is upheld and this ground of appeal is dismissed.
8. Aggrieved b y the endorsement of the action of the AO b y the CIT(A), the assessee preferred appeal before the Tribunal.
9. The learned AR for the assessee broadl y reiterated various submissions made before the lower authorities. It was contended that material used in pharmaceutical industry are t ypical and is rendered unusable with the efflux of time. The loss arising from obsoletion o f material is a normal incidence of the business of the assessee. The learned AR submitted that the loss towards obsolete stock carrying no value has been claimed b y the assessee in accordance with Generall y Accepted Accounting Practices and Policies in India and therefore, there was no warrant for the Revenue authorities to reject the same in wholesale. The learned AR referred to the details of non-moving stock for write off at page nos. 8 to 13 of its paper book and contended that the objective details were provided to the AO while indulging in such write off. However, on a quer y from the bench regarding details of similar write off in the earlier years, the learned AR did not offer an y comments. The learned AR, however, in the same vain, insisted that the claim made b y the assessee towards such write off is also supportable b y some of the correspondences with the regulatory authorities. The learned AR also placed on record judicial precedents and submitted that the version of the assessee requires to be accepted unless there are strong reasons to disbelieve such version. It was thus urged that the bonafide claim of loss made b y the assessee towards write off of closing inventory cannot be shrugged and discredited in a summary manner.
10. The learned DR, on the other hand, relied upon the orders of the AO and C IT(A). It was further submitted that the onus was on the assessee to provide the documentary evidences and details for claiming write off of such huge amount against a meager book profit of Rs.1.34 Crores and a closing inventory of Rs.11.73 Crores. It was submitted that write off of I T A N o . 2 0 4 2 / Ah d / 1 4 [ T o n i r a P h a r m a .
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nearl y Rs.1 Crore of such closing stock is very high and is not commensurate in the context of the case and the profit declared of Rs.1.34 Crore would also indicate lack of justification of such huge obsoletion occurred in the business. The learned DR accordingl y submitted that no interference with the order of the C IT(A) is called for.
11. We have carefull y considered the rival submissions and perused the material referred to and relied upon in terms of Rule 18(6) of ITAT Rules and case laws cited. The essential question before the Tribunal is whether the Revenue authorities were justified in den ying the claim of Rs.1,00,68,057/- as loss towards obsolete and non-usable stock.
11.1 As noticed from the facts narrated in earlier paras, the assessee has claimed loss towards write off of obsolete and non-moving stock to the tune of Rs.1,00,68,057/-. The assessee has explained that the write off is mainl y on account of obsolete items identified b y the assessee to be nom- moving and unusable and having regard to the t ypical character of pharma companies. Accordingl y, the assessee has reduced the value of closing stock towards obsolete material recognized b y it. The AO held that the assessee has neither furnished the supportive documents for claiming such loss on account of obsolete items nor produced an y record to show that items were not moving. The AO accordingl y denied the loss claimed on account of such obsoletion.
11.2 We pause here to note that there can be no dispute that the assessee is entitled to value the closing stock at market value or at cost whichever is lower in tune of recognized accounting policies. However, the question arises as to whether the action of the assessee in declaring a list of certain items to be unfit and non-usable for the purpose of its ongoing business is justified and supportable. In this context, while we note that having regard to the special nature of material claimed to be used in pharmaceutical industries which are of sensitive nature, some obseletion may arise on a regular basis. It is the bounden dut y of the management to eliminate such obsolete stock from the process.
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L t d . v s . AC I T ] A. Y . 2 0 1 0 - 1 1 - 7 - 11.3 Keeping this narrative in the mind, we however note that the assessee
has totall y failed to provide an y justification for quantification of obsolete stock. As noticed from the list of slow moving stock as identified b y the assessee, some 'items code' is mentioned against the material. Therefore, the specific raw material and finished goods are objectivel y identifiable. It should not be difficult for the assessee at least provide basis for holding the stock to be obsolete on test check basis. No proof of destruction of such obsolete stock in the form of certification of competent authorit y viz. Central Excise, Narcotics etc. is available. It is also seen from the audited annual accounts of the earlier financial year concerning FY 2008-09 ( para 2 of the Annexure to the audit report) that the inventories were admittedl y verified ph ysicall y b y the management for the year ending March 2009 which represents the opening stock of this year. We do not find an ything on record to suggest that an y obsolete stock was surfaced in the preceding year and loss towards such obsolete items were recognized in the earlier year. No real time correspondence has been brought on record (which is an ordinary feature of e-governance of corporates these days) to suggest creation of non-moving and obsolete stock of such magnitude which represents nearl y 10% of the total inventory. Prima Facie, the onus is on the assessee to establish that the stocks of staggering amount have lost its usable value. The issue is factual and while there can be no denial that assessee is entitled to claim loss towards obsolete stock in a given year, it is also the corresponding dut y of the assessee to prove the existence of such obsolete material b y direct or circumstantial evidences. The assessee has totall y failed in its corresponding duties. The Auditor in the instant case while stating that, inventories have been ph ysical verified b y the management, have not pointed out such large scale recognition of obsolete item.
11.4 On conspectus of facts noted above, we find it difficult to entertain the claim of the assessee in entiret y when tested on the touchstone of evidences in this regard. However, keeping in mind the narrative of the assessee and difficulty posed in furnishing objective justification of man y items in practice, we consider it appropriate to assume loss on account of I T A N o . 2 0 4 2 / Ah d / 1 4 [ T o n i r a P h a r m a .
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obsolete item at 5% of the closing stock to be fair and plausible which works out to Rs.58,65,680/-. The assessee thus gets relief to this extent. It shall be open to the assessee to make amends in the opening stock of subsequent financial year in accordance with law. While holding so, we are not inclined to discuss various case laws cited on behalf of the assessee which are rendered in totall y different facts.
12. Consequentl y, grievance of the assessee is partl y accepted.
13. Ground Nos. 1 to 3 are thus partl y allowed.
14. Ground No. 4 concerns disallowance of interest expenses under s.36(1)(iii) of the Act amounting to Rs.5,43,456/-.
14.1 The learned AR for the assessee fairl y submitted that owing to the smallness of the amount, it does not seek to press the grievance.
14.2 Ground No.4 of the assessee's appeal is dismissed.
15. Ground No.5 concerns disallowance of bad debt written off amounting to Rs.2,68,465/- in respect of excise dut y refund. With the assistance of the learned AR for the assessee, we find merit in the claim of the assessee. The excise dut y received as refund naturall y forms part of the revenue operations of the assessee. The version of the assessee has been confirmed b y the Auditors requires to be ordinaril y believed. The action of the Revenue authorities are accordingl y reversed.
16. Ground No. 5 of the assessee is accordingly allowed.
17. Ground No.6 concerns disallowance of Rs.19,216/- under s.14A of the Act. In the light of the fact that the exempt income stands at Rs.1134/-, disallowance is restricted to the aforesaid amount in view of the decision of the Hon'ble Delhi High Court in Joint Investment 372 ITR 694 (Del). I T A N o . 2 0 4 2 / Ah d / 1 4 [ T o n i r a P h a r m a .
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18. Ground No.6 of the assessee's appeal is accordingl y partl y allowed.
19. Ground No.7 concerns adjustment to the book profit towards disallowance made under s.14A of the Act.
20. In view of the decision of the Special bench in ACIT vs. Vireet Investments Ltd. 165 ITD 27 (SB) and having regard to Clause (f) to Explanation below 115JB, the adjustment to the books profit is restricted to the extent of Rs.1134/- onl y.
21. Ground No.7 is accordingl y partl y allowed.
22. In the result, the appeal of the assessee is partl y allowed.
This Order pronounced in Open Court on 29/07/2019 Sd/- Sd/-
(RAJPAL YADAV) (PRADIP KUMAR KEDIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: Dated 29/07/2019
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं*धत आयकर आय,
ु त / Concerned CIT
4. आयकर आय,
ु त- अपील / CIT (A)
5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड9 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ*धकरण, अहमदाबाद ।