Ita/445/2008 Of The Commissioner Of Income Tax v. M/S Ibm India Pvt Ltd

IN THR HIGH COURT OF KARNATAKA AT BANGALOREDATED THIS THE 28[‘T]DAY OF NOVEMBER 2014 PRESENT THR HON BLE MR. JUSTICE N. KUMAR. AND THR HON’BLE MR. JUSTICE B. MANOHAR| ITA NO.445 OF 2008 BETWEEN; 1]The Commissioner of Income-tax C.R.Building, Queens Road Bangalore. 2 |The Deputy Commissioner of Income-tax Circle-11(1), C.R.Building| Queens Road Bangalore. _ APPBRLLANTS (By Shri.K.V.Aravind, Advocate) © AND: M/s.IBM India Ltd.,Ssubramanya ArcadeNo.12, Bannerghatta Main RoadBangalore - 560 O29. — RBSPONDEBENT (ByShri.Percy|Pardhiwala,SeniorAdvocateforsmt.Vani.H., Advocate). This ITA is filed under Section 260-A of IT Act,1961 arising out of order dated 30-10-2007 passed inITA No.1393/BNG/2005, for the Assessment Year 2001-O2 praying to formulate the substantial questions of lawstated therein and allow the appeal and set aside theorderpassedby theITATBangalore|in.ITA No.1393/BNG/2005 dated 30.10.2007 confirm theorders of the Appellate Commissioner and DeputyCommissioner of Income Tax, Circle-11(1), Bangalore. This ITA coming on for Hearing, this day,|N. KUMAR, J.delivered the following:- JUDGMENT The revenue has preferred this appeal against theorder passed by the Tribunal, which has upheld theorder of the first Appellate Authority, which acceptedthe case of the assessee regarding creation of provisionof obsolescence in inventories. 2.The assessee is carrying on the business inthe manufacture and trading of computer hardware. Inrespect of the assessment year 2001-02, the assesseehad filed a return of income. The assesee had debited|Profit and Loss Account of a sum of Rs.9,/79,77,000/-under|the head “Provision{fOrobsolescence.1n inventory’. The Assessing Officer rejected the saidclaim on the ground that the provision for obsolescencein inventory was a contingent claim and the samecannot be allowed as an expenditure during the currentassessment year. Aggrieved by the said order, theassessee preferred an appeal to the Commissioner of Income-tax (Appeals). The Appellate Commissioner heldthat the provision for obsolescence in inventory is anallowable deduction as the hardware manufactured bythe assessee had become obsolete due to changedtechnology. Aggrieved by the said order, the revenuepreferred an appeal to the Tribunal. The Tribunalupheld that order of the first Appellate Authority. —Agegrieved by the same, the revenue is in appeal beforethis Court. | 3.The appeal was admitted to consider the| following substantial questions of law:- a aeWhether the Appellate Authorities werecorrect in holding that the provision forobsolescence in inventory of a sum ofRs.9,79,/7,000/- is an allowable deduction|on account of the up gradation of technologyby ignoring the tact that these itemscontinued with the assessee and it would bean allowable deduction in the year whenthese items were actually disposed of? 2 |Whether the Appellate Authorities werecorrect in holding that the amount ofprovision for obsolescence in inventory of asum of Rs.5,/79,/77,000/- is also an allowabl 4 deduction when the inventory stands valuedon the basis of the principle ‘cost’ or ‘market|value’ whichever is less and thus represent|true value of the inventory as on the last dayof the accounting year?”| 4ThelearnedCounsel{Orthe|TEVEeETLassailing the impugned order contends that when oncethe items have become obsolete and the market value|has become nil, they ought to have shown the value inthe inventory and reduced the value of the inventory,instead in the inventory, value of these obsolete itemsare shown and provision for obsolescence is made andbenefit is claimed, which is not permissible in law.. 5.Per contra, the learned Counsel for theassessee supported the impugned order. 4 deduction when the inventory stands valuedon the basis of the principle ‘cost’ or ‘market|value’ whichever is less and thus represent|true value of the inventory as on the last dayof the accounting year?”| 4ThelearnedCounsel{Orthe|TEVEeETLassailing the impugned order contends that when oncethe items have become obsolete and the market value|has become nil, they ought to have shown the value inthe inventory and reduced the value of the inventory,instead in the inventory, value of these obsolete itemsare shown and provision for obsolescence is made andbenefit is claimed, which is not permissible in law.. 5.Per contra, the learned Counsel for theassessee supported the impugned order. 6.The facts are not in dispute. The assesseecarries a large number of computer parts, accessories,etc., in its inventory. Due to rapid technologicalchanges that the computer industry has been facing inthe last decade, the assessee periodically undertakesthe exercise of reviewing its inventory items. The valueof the inventory items found obsolete on such review is debited to the scrap account. The amount debited toscrap account during the year includes’ provisiontowards such obsolescence. The assessee was requiredto file computation of Rs.5,79,77,000/- being provisionfor obsolescence and explain its basis and justify itsdeductibility. In response, the assessee has givencomplete details of provision for obsolescence specifyingitems, quantity, rates/value and the percentage atwhich the provision has been made in respect of various.products/spares. The said provision is created inaccordance with the method of accounting regularlyemployed by the assessee and has been created inrespect of — -8Products which had lost their market value|on account of being obsolete;on account of being obsolete; ;8Products which are damaged and whichcould not be sold to customers andcould not be sold to customers and *8Products which were returned by customers.and could not be re-sold.,and could not be re-sold., T.The said provision is created essentially in asituation, where the market value of the stock and)Spares in hand as on the last date of the financial year,is lower than the cost of such stock and spares. The said accounting treatment is in compliance with theprovisions of Accounting Standard-2 issued by theInstitute of Chartered Accountants of India which statesthat the closing stock would need to be valued at cost ornet realizable value whichever is lower. It is also on/§record that a similar provision for obsolescenceaggregating to Rs.6,06,27,459/- has been created in theearlier years too. © 8.The grievance is, in the profit and lossaccount, net realizable value is not taken into account.On the contrary, the cost price of obsolete item is takenand in the provision made for obsolescence, netrealizable value is given which finds a place in thebalance sheet and therefore, it was contended thatthough the net result is the same, the way accounts arereflected is not proper. QOWe do not see any substance in the said contention. Accounting Standards notified undersection 145(2) in particular Accounting Standard-Icategorically states that the accounting treatment andpresentation in financial statements of transactions should be covered by a substance and not merely bylegalform.FurtherSection145(A)providesnotwithstanding anything to the contrary contained insection 145, the valuation of purchase and sale of goods_and inventory for the purposes of determining theincome chargeable under the head “Profits and gains ofbusiness or profession” shall be—(a) in accordance withthe method of accounting regularly employed by theaSSECSSEC. QOWe do not see any substance in the said contention. Accounting Standards notified undersection 145(2) in particular Accounting Standard-Icategorically states that the accounting treatment andpresentation in financial statements of transactions should be covered by a substance and not merely bylegalform.FurtherSection145(A)providesnotwithstanding anything to the contrary contained insection 145, the valuation of purchase and sale of goods_and inventory for the purposes of determining theincome chargeable under the head “Profits and gains ofbusiness or profession” shall be—(a) in accordance withthe method of accounting regularly employed by theaSSECSSEC. 10,Therefore, what is to be seen is how theassessee is maintaining the accounts regularly in thecourse of his business and the accounting treatmentand presentation of financial statement of transactionsshould be covered by the substance and not merely bythe legal form. It is the principle which is to be kept inmind by both the appellate authorities. The aforesaidmaterial clearly demonstrate instead of showing costprice as nil in the profit and loss account, cost price ofthe items are given in profit and loss account and aprovision is made for obsolescence in inventory showingthat the market value is nil and that is the mode in/which the assessee was also following even for the previous years. Under these circumstances, we do notsee any justification to interfere with the well consideredorder passed by both the authorities. Accordingly,substantial questions of law are answered in favour ofthe assessee and against the revenue. No merit. Theappeal is dismissed. Sd/-JUDGESd/-|JUDGE Prs*