Ita/785/2016 Of Pr. Commissioner Of Income Tax-6 v. National Fertilizers Ltd

Signature Not Verified Digitally SignedBy:AMULYA CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRIORDER % 08.02.2017 1.The revenue's grievancewith respectto the order,of theIncomeTax Appellate Tribunal (ITAT) in these four appeals concerningtheAssessment Years 2006-07, 2007-08, 2008-09 & 2009-10 is that thecommon impugned order was an error in affirming the valuationadopted by the assessee for its Slow-MovingStock. The assessee,apublic sector unit engaged in manufacture and distribution offertilizers, carried inter alia stock which was reflected in its balancesheet. For AY 2004-05 the Comptroller and Auditor General (CAG)observed as follows: "2(a)Furtherto our comments in the Annexurereferred to in paragraph1 above, we report that:provisionsfor diminutionin value ofobsolete/surplus/non movingitemsofstores and spares have been am debased on Management assessment.Pending finaldetailed analysis of these stocks, consequential impartthereofifany,ontheaccountsremainsunascertained." 2.In view of the above observations, the assessee approachedanengineeringvaluer, who made an item-wise appraisal of the stock inquestion (i.e. Slow-MovingStock) and indicatedthe values thereof.The assessee, accordingly, accepted the report and based upon itvalued its Slow-Moving Stock at ? 47.76 crores.The AssessingOfficer(AO) in the courseof assessmentrejectedthe valuationand heITA 783/201 & Connected mattersPage 2 of 6 made a correspondingaddition.Whilst the AO acknowledged thataccounting standard changed could be resorted to; in the present casethe assessee had urged that it followed AS-2, in his opinion thevaluation made i.e. at 5% of the original cost, was not on a scientificbasis. He, therefore, rejected it. 2.In view of the above observations, the assessee approachedanengineeringvaluer, who made an item-wise appraisal of the stock inquestion (i.e. Slow-MovingStock) and indicatedthe values thereof.The assessee, accordingly, accepted the report and based upon itvalued its Slow-Moving Stock at ? 47.76 crores.The AssessingOfficer(AO) in the courseof assessmentrejectedthe valuationand heITA 783/201 & Connected mattersPage 2 of 6 made a correspondingaddition.Whilst the AO acknowledged thataccounting standard changed could be resorted to; in the present casethe assessee had urged that it followed AS-2, in his opinion thevaluation made i.e. at 5% of the original cost, was not on a scientificbasis. He, therefore, rejected it. 3.The CIT(A) confirmedthe AO's order.On appeal, the ITATaccepted the assessee's contention and held inter alia as follows:"... 9.1 On perusal and careful considerationof theaccepted the assessee's contention and held inter alia as follows:"... 9.1 On perusal and careful considerationof thematter, we are of the view that, having regard to theprocedureof valuationadoptedbytheassessee,genuinenessand bona fide of the claimcannotbedoubted.The observation of CAG reproduced at page96 of thePaperBookreferredtohereinabove,indicated that the assessee had changed the method ofvaluation from Assessment Year 2006-07, which wasbased on the valuation report submitted by M/s K.D.KohliAssociate,NewDelhi,anindependentEngineeringValuer, engaged by the company to carryout the valuation of inventory of stores and spares inthebackgroundof AS-2relatedtovaluationof'inventory', which has been issued by ICAI, New Delhi.procedureof valuationadoptedbytheassessee,genuinenessand bona fide of the claimcannotbedoubted.The observation of CAG reproduced at page96 of thePaperBookreferredtohereinabove,indicated that the assessee had changed the method ofvaluation from Assessment Year 2006-07, which wasbased on the valuation report submitted by M/s K.D.KohliAssociate,NewDelhi,anindependentEngineeringValuer, engaged by the company to carryout the valuation of inventory of stores and spares inthebackgroundof AS-2relatedtovaluationof'inventory', which has been issued by ICAI, New Delhi.9.2 In the present case, the assessee had to adhere toAS-2 due to the remarks by CAG in the annual reportAS-2 due to the remarks by CAG in the annual reportfor immediate previous year i.e. F.Y. 2004-05.Thischangewas done on the basis of the remarksbyAuditors which was supportedby opinion of highlyreputed engineer valuer, after proper on the spot dutyof nature of plant & machineryand associatednonmoving stocks of stores and spares held in inventory.Thus, there was no mala fidein valuing the slowmoving/ surplus/ obsolete Stores and Spare parts asper the valuationreportreceived fromengineeringvaluer.changewas done on the basis of the remarksbyAuditors which was supportedby opinion of highlyreputed engineer valuer, after proper on the spot dutyof nature of plant & machineryand associatednonmoving stocks of stores and spares held in inventory.Thus, there was no mala fidein valuing the slowmoving/ surplus/ obsolete Stores and Spare parts asper the valuationreportreceived fromengineeringvaluer. 9.3 In the instant case, the valuation of slow-moving/surplus/obsoletestores, spares was made on the basisof the reportof the approvedvaluer, and it can be saidthat the amount written off was not an arbitrary oneand claim ofloss on this account was actual. Assesseehas followed this policy consistently in subsequentyears.It is an establishedprinciple in context ofsection 145, that 'Regular' does not mean 'Permanent'for system of accounting. The statutestipulatesthatthe income shall be computed on the system ofaccounting'regularly' followedby the assessee.However, the provision u/s 145 cannot be interpretedto mean that once a systemofaccounting is adopted, itcan never be changed. It has not beenpointed out withreference toany provision thatachange isimpermissibleor barred even when it is warrantedbyan existing situation...." 4.The ITAT also took note of the judgment of the Bombay HighCourt in CIT vs India Rare Earth Ltd. (2015) 375 ITR 276. In thatdecisionthe BombayHigh Courthad interpretedSectionMSA in thefollowing terms: "....8. In our view, the objection raised by the assesseeon account of the method of accountingis notjustifiable, inasmuch as Section 145A deals with thevaluation ofpurchase and sale ofgoods and inventoryfor theoft he incomepurposesdeterminingchargeableunder the head "Profits and gains of business orprofession" and it requires the assesseeto follow themethod the assessee. In the regularly employed bypresent case, it is not in dispute that the method ofaccounting had been altered with effect from theAssessment Year 2001-02.However, the facts revealthat the write offwas on account ofdeterioration in theconditionofthe non-movingstores since the assessee'sITA783/201& Connectedmatters4 of6 plants were located in remote places and near the sea.The non-moving stores and spares were corroded overa period of time due to wear and tear. This method ofaccounting having been adopted in the earlier years,there was no reason forthe AssessingOfficer todisallow the same on the ground that the accountingmethod had changed. 9. Accordingly, we are ofthe view that thejudgment ofthis Court in the case of Heredilla Chemicals will notaffect the write off by the assessee in the present casebeing distinguishable on facts.It is not merely on thebasis of obsolescence ofany particular equipment thatthe assessee has claimed write off of the slow/ non-moving items. The write off claimed is essentially onthebasisof deteriorationof variousmaterials,including raw-materials and in particular slow movingitems of machinery. In the circumstances, we are ofthe view, that no substantial question of law arises inthese Appeals and the same are accordingly dismissed.There will be no order as to costs...." 5.This Court is of the opinion that the Revenue's contentions areunmerited.The assessee was all along reflecting the full value of thestock; for the year i.e. AY 2004-05 the CAG had made an observationthat Slow-Moving Stock had to be realistically valued. This resultedin a fresh valuation by an engineering expert.Based upon thisexercise the valuation was reduced to ^47.76 crores. 6.Having regard to these circumstances, the Revenue's contentionthat the acceptance of 5% as the basis for valuing the Slow MovingStock being unscientific,is baseless in our opinion.Once theengineering expert examined all the heads of stock and valued them,ITA 783/201 & Connected mattersPage 5 of 6 to the best of his judgment, and in the absence of any finding that the5%wasnotrelatabletosuchvaluationwithoutanalternativevaluation or that it is a flawed method of valuation, the AO could nothave rejected what was offered as the reduced value of the Slow-Moving Stock. In other words, there is nothing on the record to doubtthe bonafides of the valuation.In the event of likelihood of the stocksrealising a higher amount than the value shown, the same would bereflected in the subsequent year in the income or profit of theassessee, the Revenue's contention is without any merit. 7.Nor do we find any reason to subscribe and uphold the AO'sadverse observations that the change in method of valuation waswithout basis.In fact the observationsof the CAG in this case led tothe change and adoption of AS-2, which was not previously resortedto. 8.For the above reasons, no substantial questions, of law arise inthe appeals. They are, accordingly, dismissed. S. RAVINDRA BHAT, J FEBRUARY 08, 2017/kk NAJMIWAZIRI,J ITA783/201& Connectedmatters