Full Judgment Text
* HIGH COURT OF DELHI : NEW DELHI
ITA No.599 of 2007
th
% Judgment reserved on: 4 January, 2008
th
Judgment delivered on: 11 January, 2008
COMMISSIONER OF INCOME TAX
DELHI -IV, NEW DELHI ..... Appellant
Through: Ms. Prem Lata Bansal,
Advocate
Vs.
E. I. DUPONT INDIA LTD.
DLF CYBER GREENS, TOWER-C,
7TH FLOOR, SECTOR-25A, DLF CITY PH-3
GURGAON ..... Respondent
Through: Mr. Satyen Sethi and
Mr.JohnsonBara,Advocates
Coram:
HON'BLE MR. JUSTICE MADAN B. LOKUR
HON'BLE MR. JUSTICE V.B. GUPTA
1. Whether the Reporters of local papers may
be allowed to see the judgment? yes
2. To be referred to Reporter or not? yes
3. Whether the judgment should be reported yes
in the Digest?
V.B. GUPTA, J.
The Revenue being aggrieved against an order dated
nd
22 September, 2006 passed by the Income Tax Appellate
ITA No.599 of 2007 Page 1 of 8
Tribunal, Bench C, Delhi ('ITAT' in short) has filed the
present appeal under Section 260A of the Income Tax Act,
1961 (in short 'the Act') in Case ITA No. 3962(Del)/2002 for
the assessment year 1999-2000 vide which ITAT deleted
addition of Rs.4,00,178/- being provision for doubtful debts
and addition of Rs.41, 73,107 being provision for damaged
stock made by the Assessing Officer to the book profits
holding that both the provisions were related to the assets
and not any liability and therefore, there was no question
of these amounts representing any unascertained liability.
2. Brief facts of this case are that the Assessee filed
return of income declaring loss at Rs.5,21,75,080/- though
declaring income at Rs.2, 62,30,750/- under Section 115JA
of the Act. During the assessment proceedings, it was
noticed by the Assessing Officer that while computing book
profits under Section 115JA of the Act, the Assessee had
not added back provisions relating to bad and doubtful
debts (Rs.4,00,178/-) and provision for damaged stock
(Rs.41,73,107/-) to the profit which were clearly to be
added back as per Explanation (c) of Section 115JA (2),
which contemplates that “the amount or amounts set aside
ITA No.599 of 2007 Page 2 of 8
to provisions made for meeting liabilities, other than the
ascertained liabilities” Accordingly, the Assessing Officer
added these provisions to the net profit and computed book
profits at Rs.3,36,82,201/- as against Rs. 2,62,13,750/- as
declared by the Assessee.
3. Against the order of Assessing Officer, the Assessee
filed an appeal before the Commissioner of Income Tax Act
(Appeals) (in short CIT(A)) who deleted the addition
holding that in view of the judgment of the Apex Court in
the case of Apollo Tyres Ltd. vs. Commissioner of
Income-Tax (2002) 255 ITR 273 , the Assessing Officer is
not empowered to make any adjustment, if the accounts
are prepared in accordance with Part-II and III of the
Schedule-VI of the Companies Act unless the same are
provided in the Explanation. The CIT(A) further held that
the provisions for these amounts were ascertained
liabilities. Provision for damaged stock was made on
account of leakage of stock during transportation and
storages and for obsolete/useless stock. As such, the CIT(A)
directed the Assessing Officer to work out the book profit
as shown by the Assessee.
ITA No.599 of 2007 Page 3 of 8
4. The Revenue filed appeal against the order of CIT(A)
before the ITAT and the ITAT deleted addition of
Rs.4,00,171/- being provision for doubtful debts and
addition of Rs.41,73,107/- being provision for damaged
stock made by the Assessing Officer to the book profits
holding that both the provisions were related to the assets
and not any liability and, therefore, there was no question
of these amounts representing any unascertained liability.
5. In this appeal, it is the case of the Revenue that the
Assessee could not determine the amount of expired stock
before it being expired and the Assessee had not explained
as to on what basis provision for bad and doubtful debt was
created. The provision for bad and doubtful debt could not
be allowed to the Assessee unless the amount is actually
written off and the Assessee had not shown as to which
specific debt had actually become bad and irrecoverable
and, therefore, had written off in the book accounts.
6. In support of her contentions, learned counsel for the
Revenue has cited decisions of this Court reported as
Commissioner of Income Tax vs. Eicher Ltd (2006)
287 ITR 170 and that of the Apex Court in State Bank of
ITA No.599 of 2007 Page 4 of 8
Patiala vs. Commissioner of Income Tax (1996) 219
ITR 706 .
7. As per the order of CIT(A), the Assessee company is
engaged mainly in the manufacture/formulation of various
types of agricultural chemicals namely insecticides and
pesticides etc. The formulation and sale of the products are
governed by the Insecticides Act and the Central
Insecticides Board Act as Regulatory Authority. The said
Act and Board have prescribed detailed guidelines on the
purchase, storage, formulation and distribution of
insecticides and pesticides to which the Assessee company
is bound to adhere. The stock written off during the year
amounting to Rs.41,73,107/- consists of stocks of these
agricultural chemicals which have become
obsolete/useless. There are three reasons for writing off
such stocks namely shortage of receipt of goods as
reported by the distributors when compared to actual
qunatities sold to them, leakage of stock during
transportation and storage being a common occurrence in
the industry given the nature of the products and thirdly
the stock which has exceeded their expiry date as
ITA No.599 of 2007 Page 5 of 8
prescribed by the Central Insecticides Board and remain
unsold as such. These stocks cannot be sold to the
distributors after expiry date and have to be incinerated.
The details of stock expired, leaked and received as a
shortage which has to be written off have been filed and
gone through. These amounts have been written off in the
books of accounts which have been prepared as per Part-II
and III of Schedule-VI of the Computation of book profit
under Section 115JA of the Act and, therefore, the same
are to be reduced from the computation under Section
115JA of the Act.
8. The ITAT in the impugned order has held that the
Assessing Officer has simply added back these amounts as
they were described as provision and in the opinion of the
Assessing Officer, the same were required to be added
back as per Clause (c) of the Explanation to Section 115
JA(2) and thus, the Assessing Officer has proceeded on an
entirely incorrect basis because, both the provisions
related to the assets and not any liabilities incurred by the
Assessee. Therefore, there is no question of these amounts
representing any unascertained liability. It was further
ITA No.599 of 2007 Page 6 of 8
held by the ITAT that the Assessing Officer other wise did
not enquire into the matter and there is no material to hold
that these amounts have been arbitrarily provided for by
the Assessee.
9. Admittedly, the Assessee was engaged in the business
of insecticides and these products have a limited self life.
The provision of Rs. 41,73,107/- comprised of
useless/obsolete stock and besides there were certain
shortages on account of leakage of stock during the
transportation and storage. Under these circumstances,
these amounts related to ascertained liability and moreover
the accounts of the Assessee have been prepared in
accordance with Part-II and III of Schedule-VI of the
Companies Act, as envisaged under Section 115JA of the
Act.
10. Hence, we do not find any illegality or infirmity in the
order passed by the Tribunal and the case law cited by the
learned counsel for the Revenue, are not applicable to the
facts of the present case.
11. Under these circumstances, no substantial question of
law arises for our consideration and the present appeal
ITA No.599 of 2007 Page 7 of 8
filed by the Revenue is not maintainable and the same is
hereby dismissed with cost of Rs.5,000/-.
12. The Revenue is directed to deposit the cost with the
Delhi High Court Legal Services Committee within one
month from today.
13. List the matter on 15.2.2008 for compliance.
(V. B. GUPTA)
JUDGE
January 11, 2008 (MADAN B. LOKUR)
raj JUDGE
ITA No.599 of 2007 Page 8 of 8
ITA No.599 of 2007
th
% Judgment reserved on: 4 January, 2008
th
Judgment delivered on: 11 January, 2008
COMMISSIONER OF INCOME TAX
DELHI -IV, NEW DELHI ..... Appellant
Through: Ms. Prem Lata Bansal,
Advocate
Vs.
E. I. DUPONT INDIA LTD.
DLF CYBER GREENS, TOWER-C,
7TH FLOOR, SECTOR-25A, DLF CITY PH-3
GURGAON ..... Respondent
Through: Mr. Satyen Sethi and
Mr.JohnsonBara,Advocates
Coram:
HON'BLE MR. JUSTICE MADAN B. LOKUR
HON'BLE MR. JUSTICE V.B. GUPTA
1. Whether the Reporters of local papers may
be allowed to see the judgment? yes
2. To be referred to Reporter or not? yes
3. Whether the judgment should be reported yes
in the Digest?
V.B. GUPTA, J.
The Revenue being aggrieved against an order dated
nd
22 September, 2006 passed by the Income Tax Appellate
ITA No.599 of 2007 Page 1 of 8
Tribunal, Bench C, Delhi ('ITAT' in short) has filed the
present appeal under Section 260A of the Income Tax Act,
1961 (in short 'the Act') in Case ITA No. 3962(Del)/2002 for
the assessment year 1999-2000 vide which ITAT deleted
addition of Rs.4,00,178/- being provision for doubtful debts
and addition of Rs.41, 73,107 being provision for damaged
stock made by the Assessing Officer to the book profits
holding that both the provisions were related to the assets
and not any liability and therefore, there was no question
of these amounts representing any unascertained liability.
2. Brief facts of this case are that the Assessee filed
return of income declaring loss at Rs.5,21,75,080/- though
declaring income at Rs.2, 62,30,750/- under Section 115JA
of the Act. During the assessment proceedings, it was
noticed by the Assessing Officer that while computing book
profits under Section 115JA of the Act, the Assessee had
not added back provisions relating to bad and doubtful
debts (Rs.4,00,178/-) and provision for damaged stock
(Rs.41,73,107/-) to the profit which were clearly to be
added back as per Explanation (c) of Section 115JA (2),
which contemplates that “the amount or amounts set aside
ITA No.599 of 2007 Page 2 of 8
to provisions made for meeting liabilities, other than the
ascertained liabilities” Accordingly, the Assessing Officer
added these provisions to the net profit and computed book
profits at Rs.3,36,82,201/- as against Rs. 2,62,13,750/- as
declared by the Assessee.
3. Against the order of Assessing Officer, the Assessee
filed an appeal before the Commissioner of Income Tax Act
(Appeals) (in short CIT(A)) who deleted the addition
holding that in view of the judgment of the Apex Court in
the case of Apollo Tyres Ltd. vs. Commissioner of
Income-Tax (2002) 255 ITR 273 , the Assessing Officer is
not empowered to make any adjustment, if the accounts
are prepared in accordance with Part-II and III of the
Schedule-VI of the Companies Act unless the same are
provided in the Explanation. The CIT(A) further held that
the provisions for these amounts were ascertained
liabilities. Provision for damaged stock was made on
account of leakage of stock during transportation and
storages and for obsolete/useless stock. As such, the CIT(A)
directed the Assessing Officer to work out the book profit
as shown by the Assessee.
ITA No.599 of 2007 Page 3 of 8
4. The Revenue filed appeal against the order of CIT(A)
before the ITAT and the ITAT deleted addition of
Rs.4,00,171/- being provision for doubtful debts and
addition of Rs.41,73,107/- being provision for damaged
stock made by the Assessing Officer to the book profits
holding that both the provisions were related to the assets
and not any liability and, therefore, there was no question
of these amounts representing any unascertained liability.
5. In this appeal, it is the case of the Revenue that the
Assessee could not determine the amount of expired stock
before it being expired and the Assessee had not explained
as to on what basis provision for bad and doubtful debt was
created. The provision for bad and doubtful debt could not
be allowed to the Assessee unless the amount is actually
written off and the Assessee had not shown as to which
specific debt had actually become bad and irrecoverable
and, therefore, had written off in the book accounts.
6. In support of her contentions, learned counsel for the
Revenue has cited decisions of this Court reported as
Commissioner of Income Tax vs. Eicher Ltd (2006)
287 ITR 170 and that of the Apex Court in State Bank of
ITA No.599 of 2007 Page 4 of 8
Patiala vs. Commissioner of Income Tax (1996) 219
ITR 706 .
7. As per the order of CIT(A), the Assessee company is
engaged mainly in the manufacture/formulation of various
types of agricultural chemicals namely insecticides and
pesticides etc. The formulation and sale of the products are
governed by the Insecticides Act and the Central
Insecticides Board Act as Regulatory Authority. The said
Act and Board have prescribed detailed guidelines on the
purchase, storage, formulation and distribution of
insecticides and pesticides to which the Assessee company
is bound to adhere. The stock written off during the year
amounting to Rs.41,73,107/- consists of stocks of these
agricultural chemicals which have become
obsolete/useless. There are three reasons for writing off
such stocks namely shortage of receipt of goods as
reported by the distributors when compared to actual
qunatities sold to them, leakage of stock during
transportation and storage being a common occurrence in
the industry given the nature of the products and thirdly
the stock which has exceeded their expiry date as
ITA No.599 of 2007 Page 5 of 8
prescribed by the Central Insecticides Board and remain
unsold as such. These stocks cannot be sold to the
distributors after expiry date and have to be incinerated.
The details of stock expired, leaked and received as a
shortage which has to be written off have been filed and
gone through. These amounts have been written off in the
books of accounts which have been prepared as per Part-II
and III of Schedule-VI of the Computation of book profit
under Section 115JA of the Act and, therefore, the same
are to be reduced from the computation under Section
115JA of the Act.
8. The ITAT in the impugned order has held that the
Assessing Officer has simply added back these amounts as
they were described as provision and in the opinion of the
Assessing Officer, the same were required to be added
back as per Clause (c) of the Explanation to Section 115
JA(2) and thus, the Assessing Officer has proceeded on an
entirely incorrect basis because, both the provisions
related to the assets and not any liabilities incurred by the
Assessee. Therefore, there is no question of these amounts
representing any unascertained liability. It was further
ITA No.599 of 2007 Page 6 of 8
held by the ITAT that the Assessing Officer other wise did
not enquire into the matter and there is no material to hold
that these amounts have been arbitrarily provided for by
the Assessee.
9. Admittedly, the Assessee was engaged in the business
of insecticides and these products have a limited self life.
The provision of Rs. 41,73,107/- comprised of
useless/obsolete stock and besides there were certain
shortages on account of leakage of stock during the
transportation and storage. Under these circumstances,
these amounts related to ascertained liability and moreover
the accounts of the Assessee have been prepared in
accordance with Part-II and III of Schedule-VI of the
Companies Act, as envisaged under Section 115JA of the
Act.
10. Hence, we do not find any illegality or infirmity in the
order passed by the Tribunal and the case law cited by the
learned counsel for the Revenue, are not applicable to the
facts of the present case.
11. Under these circumstances, no substantial question of
law arises for our consideration and the present appeal
ITA No.599 of 2007 Page 7 of 8
filed by the Revenue is not maintainable and the same is
hereby dismissed with cost of Rs.5,000/-.
12. The Revenue is directed to deposit the cost with the
Delhi High Court Legal Services Committee within one
month from today.
13. List the matter on 15.2.2008 for compliance.
(V. B. GUPTA)
JUDGE
January 11, 2008 (MADAN B. LOKUR)
raj JUDGE
ITA No.599 of 2007 Page 8 of 8