Income Tax Appellate Tribunal - Delhi
Suzuki Motorcycle (I) Pvt. Ltd., New ... vs Department Of Income Tax on 30 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `G': NEW DELHI
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
I.T. A. No.4890/Del/2011
Assessment Year : 2007-08
Jt. Commissioner of Income-tax M/s. Suzuki Motorcycle (I) Pvt. Ltd.,
(OSD), Circle 9(1), New Delhi. Vs. Village Kherki Dhaula, Badshahpur
Link Road, Gurgaon.
PAN: AAGCS7532Q
(Appellant) (Respondent)
Appellant by: Shri Rohit Garg, DR.
Respondent by: Shri Ajay Vohra, Advocate &
Shri Rohit Jain, CA.
ORDER
PER K.D. RANJAN, ACCOUNTAT MEMBER:
This appeal by the Revenue for Assessment Year 2007-08 arises out of the order of the Commissioner of Income-tax (Appeals)-XII, New Delhi.
The ground of appeal raised by the Revenue is reproduced as under:-
"1. The Ld. CIT(A) erred, in law and on the facts of the case in deleting the addition of Rs.1,58,70,623/- on account of `inventory written off' made by the AO by ignoring that it was contingent liability."
2. The only issue for consideration relates to deleting the addition of Rs.1,58,70,623/- on account of inventory written off. The facts of the case stated in brief are that the assessee during the year under consideration was 2 I.T. A. No.4890/Del/2011 engaged in the business of manufacture and sale of motorcycles. During the relevant previous year the assessee debited Rs.1,58,70,623/- as inventory written off in Schedule 8, forming part of the audited profit and loss account. The amount of Rs.1,58,70,623/- consisted of raw-materials, components, consumables written off at Rs.1,23,36,086/- and finished goods written off at Rs.35,34,537/-. The assessee in response a query raised by the AO had submitted that the price of consumables varied from Rs.10 to thousands of rupees. The assessee had followed consistently valuation of inventory at cost or net realizable value whichever is less. To ascertain the net realizable value, the assessee had made a scientific working and arrived at a net realizable value of 91.50% i.e. the net realizable value of consumables has been worked out by applying 8.50% as the write off factor. The working of write off factor was based on estimated cost of production and estimated cost of sales. It was further submitted that in automobile industries such write off of consumable was an accepted principle. As regards finished goods it was submitted that the closing stock of finished goods was valued at Rs.14,23,52,303/-. The material consumed and manufacturing expenses forming the cost of finished goods in the closing stock of goods was reflected at Rs.14,58,86,840/-. The difference between these figures reflected the inventory written off at Rs.35,34,537/- which debited to profit 3 I.T. A. No.4890/Del/2011 and loss account. This reply of the assessee was rejected by the AO on the ground that the assessee had not supplied any material which could establish its claim for write off of raw materials and finished goods. Thus the claim had been made only on presumption basis. The AO further noted that there was difference between actual liability in praesenti and a liability de futuro which, for the time being, was only contingent. Former was deductible but not the latter. The Assessing Officer also relied on the decision of Hon'ble Supreme Court in the case of CIT vs. Gemini Cashew Sales Corpn. while disallowing the claim of the assessee.
3. On appeal before the CIT(A) it was submitted by the assessee that the method of accounting was regularly followed by the assessee. The assessee valued those items of inventory whose Net Realizable Value (NRV) was lower than cost at net realizable value. The same was reflected in the profit & loss account by taking the value of inventories at cost on the credit side of the profit & loss account and debited the difference between cost and net realizable value to the profit & loss account as inventories written off. It was further submitted that in order to compute net realizable value the assessee had followed scientific and rational manner, under which total cost of production was estimated by aggregating of the manufacturing expenses, 4 I.T. A. No.4890/Del/2011 the cost of raw-materials, components and consumables, by taking into consideration the total of bills of material required to manufacture a particular vehicle. The total expected sale value was calculated by multiplying average sale price and expected production of the goods. It was submitted that the assessee determined the aggregate cost of production of vehicles in the month of April at Rs.15,37,53,432.323 and estimated aggregated sale value of vehicles in the month of April at Rs.14,08,42,194.19. From these facts it was clear that the realizable value of the final product was likely to be lower than the cost thereof. Accordingly, average sale per unit was lower than the cost of unit. The assessee thereafter worked out the net realizable value computed as percentage of cost of production which was determined as percentage of sale price as against average cost of production at 91.5%. To calculate the write off factor as difference of 100% and net realizable value calculated as percentage of estimated cost of production was reduced and the write off factor of 8.5% (i.e. 100% - 91.5%) was worked out. The assessee applied the write off factor of 8.5% on the cost of raw-materials, components and consumables and arrive at the value of closing stock less by Rs.1,15,49,536/- which was debited to the profit & loss account. Similarly valuation of finished goods was made which was determined after excluding excise duty at 5 I.T. A. No.4890/Del/2011 Rs.14,23,52,303/-. The learned AR of the assessee relying on Supreme Court decision in the case of Chainrup Sampatram vs. CIT, 24 ITR 481, submitted that valuation of closing stock has to be made at lower of cost or market price. The assessee was following the accounting policy for valuation of closing stock consistently. Reliance was also placed on Accounting Standard-2 (AS-2) for the purpose of valuation of inventory. The assessee also placed reliance on the decisions of Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd., 188 ITR 44 (SC); United Commercial Bank vs. CIT, 240 ITR 355(SC); CIT vs. Dalmia Cement (Bharat) Ltd., 215 ITR 441 (Delhi).
4. The learned CIT(A) considered the submissions made by the assessee. He observed that the assessee was following the Accounting Standard-2 for valuation of inventories and the claim has been made for write off on the basis of AS-2. The learned CIT(A) accordingly deleted the addition.
5. Before us the learned Sr. DR submitted that there is change in method of valuation for the first time in the year under consideration. As per provisions of sec. 145A the method of valuation has to be consistent. The learned Sr. DR further submitted that provisions of sec. 145A are specific 6 I.T. A. No.4890/Del/2011 provisions and therefore, they will over-ride provisions of sec. 145 of the Act. He placed reliance on the decision of ITAT in the case of Ajanta Raj Proteins Ltd. vs. DCIT (2009) 124 TTJ (Del) 914. The assessee had taken the estimated sale price in the month of April, 2007. Therefore, the calculations made by the assessee are faulty and cannot be made applicable for valuation of closing stock of finished goods as well as raw-material. Learned Sr. DR further submitted that the details of consumables and in stores as on 31st March, 2007 are placed at Pages 14 to 54 of the Paper Book. The assessee has applied write off factor of 8.5% for valuation of closing stock. Therefore, the valuation of closing stock is faulty so far as valuation of consumables and stores is concerned. The learned Sr. DR further submitted that in Assessment Year 2006-07 value of raw materials and finished goods was not reduced as is evident from Page 139 of the Paper Book. He also submitted that before making sales it was not possible for the assessee to stipulate the fall in sale price. In Assessment Year 2006-07 the valuation of closing stock has been made at cost price. If the assessee had suffered the loss on account of higher price of consumables, the assessee could have demonstrated the same with evidence but no such exercise has been produced by the assessee. He further submitted that if certain adjustments are to be made in the closing stock, the same exercise has to be 7 I.T. A. No.4890/Del/2011 done with reference to opening stock in order to determine the true profits from the business.
6. On the other hand, the learned AR of the assessee submitted that the assessee is following the accounting policy consistently to value stock of raw-material and inventories at market price or cost price which ever is low. There is no change in accounting policy as compared to last year. The amount is required to be written off consistently following the scientific method of valuation of net realizable value. The claim of write off made by the assessee was not at all based on presumptions as alleged by the AO. The detailed working of amount of closing stock written off was produced before the AO for verification and therefore, allegation of AO that no information/details were provided by the assessee is factually incorrect and without any basis. It was further submitted that the method of valuation of stock followed by the assessee is in accordance with the accepted principles of accounting propounded by the Institute of Chartered Accountants of India as laid down in AS-2 "Valuation of Inventory". The accounting policy prescribed by the Institute of Chartered Accountants of India is mandatory for the companies. Referring to Accounting Standard-2 it was submitted that the inventory of finished goods, raw-materials etc. should be valued at 8 I.T. A. No.4890/Del/2011 the lower of cost or net realizable value. It was also submitted that wherever the final realizable value of the final produce is likely to be lower than the cost of the materials, it was necessary to determine the NRV of the materials, which is required to be recognized in the financial statements. It was further submitted that method of valuation of stock at cost or net realizable value, whichever is lower, is not only well recognized accounting principle but also has been approved by various courts and Tribunal from time to time. He placed reliance on several decisions including the decision of Hon'ble Supreme Court in the case of Chainrup Sampatram (supra); CIT vs. British Paints India Ltd. (supra); and the decision of Hon'ble Delhi High Court in the case of Dalmia Cement (Bharat) Ltd. (supra). The learned AR of the assessee relying on various judicial pronouncements submitted that valuation of inventories at cost or net realizable value/market value was to be accepted being accepted principle for purpose of accounting.
7. Further, the assessee is following accounting policy as per provisions of sec. 145 and provisions of sec. 145A are not applicable in the case of the assessee. Principle of conservation is canvassed by the Accounting Standard. He placed reliance on the decision of Hon'ble Supreme in the case of CIT vs. Woodward Governor India P. Ltd., 312 ITR 254 for the 9 I.T. A. No.4890/Del/2011 proposition that accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reason to indicate that they are unreliable. Under sec. 28(i) one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock in trade for determination of profits. For valuing the closing stock at the end of the particular year, the prevailing rate on the last date is relevant. This is because profit/loss is embedded in the closing stock while anticipated loss is taken into account, anticipated profit in the shape of closing stock is not taken into account as no prudent trader would show increased profit before actual realization. In the case of the assessee net realizable value of the finished product was lower than the actual cost of production and the assessee in order to arrive at the correct profit had valued the closing stock by applying the net realizable value of the inventory and finished goods. As regards decisions relied on by the Revenue, the learned AR of the assessee submitted that the facts of the assessee's case are distinguishable from the facts of the cases relied upon by the learned Sr. DR. Therefore, the same cannot be applied in the case of the assessee. He therefore, submitted that addition deleted by the learned CIT(A) was justified.
10 I.T. A. No.4890/Del/2011
8. We have heard both the parties and gone through the material available on record. There is no dispute about the fact that in Assessment Year 2006-07 no adjustment on account of net realizable value was made as on 31st March, 2006 which is evident from Schedule-5 of the Balance-sheet reproduced below:-
"Schedules forming part of the accounts As at 31 As at 31 March 2007 March 2006 Rupees Rupees SCHEDULE 5 Current assets, loan and advances Inventories Spare parts 10,768,764 3,046,088 Consumables [Net of write down of Rs.786,550 (Previous year Rs.Nil)]* 10,602,240 6,435,041 Raw Materials and components [Net of write down of Rs.11,549,536 (Previous year Rs.Nil)]* 124,327,360 42,501,171 Finished goods [Net of write down of Rs.3,534,537 (Previous year Rs. Nil)]# 142,352,303 15,662,501 Work-in-process - 16,206,994 Goods-in-transit-Raw materials 1,721,031 16,441,909
--------------- --------------- 289,771,698 100,293,704 ======== ======== *Write-down to bring the inventories down to their net realizable values.
#Write-down of material cost to bring the finished goods to their net realizable value (below the material costs)."11 I.T. A. No.4890/Del/2011
From above, it is evident that the assessee had valued the closing stock for the year under consideration for the first time by applying the write-off factor of 8.5%. No such adjustment was made in immediate preceding year as is evident from schedule 5 reproduced above. We have also gone through the list of inventories of consumables and stores lying at Pages 14 to 54 of the Paper Book. Consumables and stores are used in the manufacture of finished products i.e. motorcycles. The assessee is not engaged in trading in consumables and stores. While working out the write off factor, the assessee had not pointed out as to what are the items which have undergone materially change due to passage of time reducing the value such as the parts made of rubber. The spare parts which are frequently used in production of vehicle cannot be said that the useable life of such consumable products have reduced and were not useable in the production. Therefore, without any evidence having been brought on record, the contention of the assessee cannot be accepted that the value of consumable items had undergone change. Nothing on record has been brought by the assessee to suggest that there was fall in prices of raw-materials because of which the assessee had to reduce the cost of inventory. It is well known that prices of consumable items used in automobile industry are increasing day by day. In the absence of any documentary evidence to prove that there was fall in the prices of 12 I.T. A. No.4890/Del/2011 consumable items or deterioration of the life of consumables, the valuation thereof cannot be made at lower than the cost price. Since the assessee is not dealing in consumable items and the consumable items are procured for the manufacturing of goods, in our considered opinion the valuation of closing stock of consumable and stores cannot be made by applying a write off factor. Moreover, the sale price in the month of April i.e. first month of the next previous year has been estimated. The expected/estimated sale price of the finished product according to the assessee has resulted in write off right factor of 8.5%. In automobile sector the sale price of the finished product is fixed depending upon input cost, technology used in the manufacturing of motor vehicles whether it is a motor car or motorcycle. No doubt there are competitors in the markets but it is the technology used and the image of the company which fetches the customers and creates the market share of particular product. We are, therefore, unable to understand as to how the sale price will be estimated below the cost of manufactured goods with out bringing material on record that there was fall in prices of consumable.
9. We would also like to examine the case of assessee in the light of Accounting Standard- 2 on which the assessee had placed heavy reliance. 13 I.T. A. No.4890/Del/2011 As per clause 5, inventories should be valued at the lower of cost and net realizable value. It is important to note that the inventories for the purpose of clause 5 are items held for sale in the ordinary course of business. In clause 20 it has been provided that "the cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated cost of completion or the estimated costs necessary to make the sale have increased. The practice of writing down inventories below cost to net realizable value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use." If the concept of net realizable value as per AS-2 is applied to the facts of the assessee's case, we find that the assessee had not demonstrated with necessary and sufficient evidence to prove that inventories were damaged or became wholly or partially obsolete or their selling prices have declined or cost of restoration in original position was not viable. As mentioned in earlier Paragraphs the assessee is not a dealer in inventories i.e. consumable items but a manufacturer of motorcycles. Therefore, net realizable value determined by the assessee by expected sale value cannot be applied for valuation of the closing stock of raw materials.
14 I.T. A. No.4890/Del/2011
10. Clause 24 of AS-2 deals with the material and other supplies held for use in the production of inventories. Paragraph 24 reads as under:-
"24. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realizable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realizable value."
Thus, clause 24 deals with the situation where there is a fall in the price of material used in the production. No case has been made out by the assessee that the prices of consumable items have fallen down below the cost of purchase. Therefore, in our considered opinion, the inventories whether they are consumable items or finished products, cannot be valued at lower price than the price at which they were acquired or produced.
11. The assessee has placed reliance on several decisions including the decision of Hon'ble Supreme Court in the case of Chainrup Sampatram (supra). In this case it has been observed that profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been 15 I.T. A. No.4890/Del/2011 superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realized. In the case before us the assessee in the immediate preceding year has not valued the closing stock consisting of consumable items and finished goods by discounting write off factor of 8.5%. The learned AR of the assessee could not bring any material on record to suggest that the sales made in subsequent year were lower than the cost of product and that was because of fall in price of inventories. Therefore, the decision of Hon'ble Supreme Court in the case of Chainrup Sampatram (supra) cannot be applied to the facts of the assessee's case.
12. Another decision relied upon by the assessee is in the case of CIT vs. Woodward Governor India P. Ltd. (supra). In this case the accountancy method followed by the assessee continuously for the given period of time has to be presumed to be correct till the AO comes to the conclusion for the reasons to be given that the system does not reflect true and correct profits. 16 I.T. A. No.4890/Del/2011 This decision of Hon'ble Supreme Court is also not applicable to the facts of the assessee's case. It is the second year of assessee's business and the first year was Assessment Year 2006-07 wherein the assessee has valued the closing stock without making any adjustment in the price though there was loss in that year also. In view of the above, we are of the considered opinion that valuation of closing stock both consumable items and finished goods by applying the discount factor of 8.5% has not been substantiated by the assessee and therefore, in our considered opinion, the learned CIT(A) was not justified in allowing relief to the assessee. We therefore, set aside the order of the CIT(A) and restore the order of the Assessing Officer.
13. In the result, the appeal filed by the Revenue is allowed.
14. This decision is pronounced in the Open Court on 30th March, 2012.
Sd/- Sd/-
(DIVA SINGH) (K.D. RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30th March, 2012.
17 I.T. A. No.4890/Del/2011
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
By Order
*mg Deputy Registrar, ITAT.