JCIT (OSD), New Delhi v. M/s. Suzuki Motorcycle (I) Pvt. Ltd., Gurgaon

ITA 4890/DEL/2011 | 2007-2008
Pronouncement Date: 30-03-2012 | Result: Allowed

Appeal Details

RSA Number 489020114 RSA 2011
Assessee PAN AAGCS7532Q
Bench Delhi
Appeal Number ITA 4890/DEL/2011
Duration Of Justice 4 month(s) 26 day(s)
Appellant JCIT (OSD), New Delhi
Respondent M/s. Suzuki Motorcycle (I) Pvt. Ltd., Gurgaon
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Department
Order Result Allowed
Bench Allotted G
Tribunal Order Date 30-03-2012
Assessment Year 2007-2008
Appeal Filed On 04-11-2011
Judgment Text
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 MOTORCYC LE (I) PVT. LTD. (OSD) CIRCLE 9(1) NEW DELHI. VS. VILLAGE KHERKI DHAULA BADSHAHPUR LINK ROAD GURGAON. PAN: AAGCS7532Q (APPELLANT) (RESPONDEN T) APPELLANT BY: SHRI ROHIT GARG DR. RESPONDENT BY: SHRI AJAY VOHRA ADVOCATE & SHRI ROHIT JAIN CA. O R D E R 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 (APP EALS)-XII NEW DELHI. THE GROUND OF APPEAL RAISED BY THE REVENUE IS REPRO DUCED AS UNDER:- 1. THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS O F THE CASE IN DELETING THE ADDITION OF RS.1 58 70 623/- ON ACCOUN T OF `INVENTORY WRITTEN OFF MADE BY THE AO BY IGNORING THAT IT WAS CONTINGENT LIABILITY. 2. THE ONLY ISSUE FOR CONSIDERATION RELATES TO DELE TING THE ADDITION OF RS.1 58 70 623/- ON ACCOUNT OF INVENTORY WRITTEN OF F. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE DURING THE YE AR UNDER CONSIDERATION WAS I.T. A. NO.4890/DEL/2011 2 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 AUDI TED PROFIT AND LOSS ACCOUNT. THE AMOUNT OF RS.1 58 70 623/- CONSISTED OF RAW-MAT ERIALS COMPONENTS CONSUMABLES WRITTEN OFF AT RS.1 23 36 086/- AND FIN ISHED GOODS WRITTEN OFF AT RS.35 34 537/-. THE ASSESSEE IN RESPONSE A QUERY R AISED BY THE AO HAD SUBMITTED THAT THE PRICE OF CONSUMABLES VARIED FROM RS.10 TO THOUSANDS OF RUPEES. THE ASSESSEE HAD FOLLOWED CONSISTENTLY VAL UATION OF INVENTORY AT COST OR NET REALIZABLE VALUE WHICHEVER IS LESS. T O ASCERTAIN THE NET REALIZABLE VALUE THE ASSESSEE HAD MADE A SCIENTIFIC WORKING A ND 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 PRO DUCTION AND ESTIMATED COST OF SALES. IT WAS FURTHER SUBMITTED THAT IN AU TOMOBILE INDUSTRIES SUCH WRITE OFF OF CONSUMABLE WAS AN ACCEPTED PRINCIPLE. AS REGARDS FINISHED GOODS IT WAS SUBMITTED THAT THE CLOSING STOCK OF FI NISHED GOODS WAS VALUED AT RS.14 23 52 303/-. THE MATERIAL CONSUMED AND MANU FACTURING EXPENSES FORMING THE COST OF FINISHED GOODS IN THE CLOSING S TOCK OF GOODS WAS REFLECTED AT RS.14 58 86 840/-. THE DIFFERENCE BETW EEN THESE FIGURES REFLECTED THE INVENTORY WRITTEN OFF AT RS.35 34 537 /- WHICH DEBITED TO PROFIT I.T. A. NO.4890/DEL/2011 3 AND LOSS ACCOUNT. THIS REPLY OF THE ASSESSEE WAS R EJECTED BY THE AO ON THE GROUND THAT THE ASSESSEE HAD NOT SUPPLIED ANY MATER IAL WHICH COULD ESTABLISH ITS CLAIM FOR WRITE OFF OF RAW MATERIALS AND FINISH ED GOODS. THUS THE CLAIM HAD BEEN MADE ONLY ON PRESUMPTION BASIS. THE AO FU RTHER NOTED THAT THERE WAS DIFFERENCE BETWEEN ACTUAL LIABILITY IN PRAESENT I AND A LIABILITY DE FUTURO WHICH FOR THE TIME BEING WAS ONLY CONTINGENT. FO RMER WAS DEDUCTIBLE BUT NOT THE LATTER. THE ASSESSING OFFICER ALSO RELIED ON THE DECISION OF HONBLE 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 REALIZABL E 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 A T COST ON THE CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT AND DEBITED THE DIFFERENC E BETWEEN COST AND NET REALIZABLE VALUE TO THE PROFIT & LOSS ACCOUNT AS IN VENTORIES WRITTEN OFF. IT WAS FURTHER SUBMITTED THAT IN ORDER TO COMPUTE NET REALIZABLE VALUE THE ASSESSEE HAD FOLLOWED SCIENTIFIC AND RATIONAL MANNE R UNDER WHICH TOTAL COST OF PRODUCTION WAS ESTIMATED BY AGGREGATING OF THE M ANUFACTURING EXPENSES I.T. A. NO.4890/DEL/2011 4 THE COST OF RAW-MATERIALS COMPONENTS AND CONSUMABL ES BY TAKING INTO CONSIDERATION THE TOTAL OF BILLS OF MATERIAL REQUIR ED TO MANUFACTURE A PARTICULAR VEHICLE. THE TOTAL EXPECTED SALE VALUE WAS CALCULATED BY MULTIPLYING AVERAGE SALE PRICE AND EXPECTED PRODUCT ION OF THE GOODS. IT WAS SUBMITTED THAT THE ASSESSEE DETERMINED THE AGGREGAT E COST OF PRODUCTION OF VEHICLES IN THE MONTH OF APRIL AT RS.15 37 53 432.3 23 AND ESTIMATED AGGREGATED SALE VALUE OF VEHICLES IN THE MONTH OF A PRIL 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 C OST THEREOF. ACCORDINGLY AVERAGE SALE PER UNIT WAS LOWER THAN THE COST OF UN IT. THE ASSESSEE THEREAFTER WORKED OUT THE NET REALIZABLE VALUE COMPUTED AS PER CENTAGE OF COST OF PRODUCTION WHICH WAS DETERMINED AS PERCENTAGE OF SA LE PRICE AS AGAINST AVERAGE COST OF PRODUCTION AT 91.5%. TO CALCULATE THE WRITE OFF FACTOR AS DIFFERENCE OF 100% AND NET REALIZABLE VALUE CALCULA TED AS PERCENTAGE OF ESTIMATED COST OF PRODUCTION WAS REDUCED AND THE WR ITE OFF FACTOR OF 8.5% (I.E. 100% - 91.5%) WAS WORKED OUT. THE ASSESSEE A PPLIED THE WRITE OFF FACTOR OF 8.5% ON THE COST OF RAW-MATERIALS COMPON ENTS 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 VA LUATION OF FINISHED GOODS WAS MADE WHICH WAS DETERMINED AFTER EXCLUDING EXCIS E DUTY AT I.T. A. NO.4890/DEL/2011 5 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 ACCOU NTING POLICY FOR VALUATION OF CLOSING STOCK CONSISTENTLY. RELIANCE W AS ALSO PLACED ON ACCOUNTING STANDARD-2 (AS-2) FOR THE PURPOSE OF VAL UATION OF INVENTORY. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA L TD. 188 ITR 44 (SC); UNITED COMMERCIAL BANK VS. CIT 240 ITR 355(SC); CI T VS. DALMIA CEMENT (BHARAT) LTD. 215 ITR 441 (DELHI). 4. THE LEARNED CIT(A) CONSIDERED THE SUBMISSIONS MA DE BY THE ASSESSEE. HE OBSERVED THAT THE ASSESSEE WAS FOLLOWING THE ACC OUNTING STANDARD-2 FOR VALUATION OF INVENTORIES AND THE CLAIM HAS BEEN MAD E FOR WRITE OFF ON THE BASIS OF AS-2. THE LEARNED CIT(A) ACCORDINGLY DELE TED THE ADDITION. 5. BEFORE US THE LEARNED SR. DR SUBMITTED THAT THER E IS CHANGE IN METHOD OF VALUATION FOR THE FIRST TIME IN THE YEAR UNDER C ONSIDERATION. 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 I.T. A. NO.4890/DEL/2011 6 PROVISIONS AND THEREFORE THEY WILL OVER-RIDE PROVI SIONS 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. T HE ASSESSEE HAD TAKEN THE ESTIMATED SALE PRICE IN THE MONTH OF APRIL 200 7. THEREFORE THE CALCULATIONS MADE BY THE ASSESSEE ARE FAULTY AND CA NNOT BE MADE APPLICABLE FOR VALUATION OF CLOSING STOCK OF FINISHED GOODS AS WELL AS RAW-MATERIAL. LEARNED SR. DR FURTHER SUBMITTED THAT THE DETAILS O F CONSUMABLES AND IN STORES AS ON 31 ST MARCH 2007 ARE PLACED AT PAGES 14 TO 54 OF THE PA PER 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 V ALUE OF RAW MATERIALS AND FINISHED GOODS WAS NOT REDUCED AS IS EVIDENT FR OM PAGE 139 OF THE PAPER BOOK. HE ALSO SUBMITTED THAT BEFORE MAKING SALES I T WAS NOT POSSIBLE FOR THE ASSESSEE TO STIPULATE THE FALL IN SALE PRICE. IN A SSESSMENT YEAR 2006-07 THE VALUATION OF CLOSING STOCK HAS BEEN MADE AT COST PR ICE. IF THE ASSESSEE HAD SUFFERED THE LOSS ON ACCOUNT OF HIGHER PRICE OF CON SUMABLES THE ASSESSEE COULD HAVE DEMONSTRATED THE SAME WITH EVIDENCE BUT NO SUCH EXERCISE HAS BEEN PRODUCED BY THE ASSESSEE. HE FURTHER SUBMITTE D THAT IF CERTAIN ADJUSTMENTS ARE TO BE MADE IN THE CLOSING STOCK TH E SAME EXERCISE HAS TO BE I.T. A. NO.4890/DEL/2011 7 DONE WITH REFERENCE TO OPENING STOCK IN ORDER TO DE TERMINE THE TRUE PROFITS FROM THE BUSINESS. 6. ON THE OTHER HAND THE LEARNED AR OF THE ASSESSE E SUBMITTED THAT THE ASSESSEE IS FOLLOWING THE ACCOUNTING POLICY CONSIST ENTLY TO VALUE STOCK OF RAW-MATERIAL AND INVENTORIES AT MARKET PRICE OR COS T 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 F OLLOWING THE SCIENTIFIC METHOD OF VALUATION OF NET REALIZABLE VALUE. THE C LAIM OF WRITE OFF MADE BY THE ASSESSEE WAS NOT AT ALL BASED ON PRESUMPTIONS A S ALLEGED BY THE AO. THE DETAILED WORKING OF AMOUNT OF CLOSING STOCK WRITTEN OFF WAS PRODUCED BEFORE THE AO FOR VERIFICATION AND THEREFORE ALLEG ATION OF AO THAT NO INFORMATION/DETAILS WERE PROVIDED BY THE ASSESSEE I S FACTUALLY INCORRECT AND WITHOUT ANY BASIS. IT WAS FURTHER SUBMITTED THAT T HE METHOD OF VALUATION OF STOCK FOLLOWED BY THE ASSESSEE IS IN ACCORDANCE WIT H THE ACCEPTED PRINCIPLES OF ACCOUNTING PROPOUNDED BY THE INSTITUTE OF CHARTE RED ACCOUNTANTS OF INDIA AS LAID DOWN IN AS-2 VALUATION OF INVENTORY. THE ACCOUNTING POLICY PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA IS MANDATORY FOR THE COMPANIES. REFERRING TO ACCOUNTING STANDAR D-2 IT WAS SUBMITTED THAT THE INVENTORY OF FINISHED GOODS RAW-MATERIALS ETC. SHOULD BE VALUED AT I.T. A. NO.4890/DEL/2011 8 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 DETERMIN E THE NRV OF THE MATERIALS WHICH IS REQUIRED TO BE RECOGNIZED IN TH E FINANCIAL STATEMENTS. IT WAS FURTHER SUBMITTED THAT METHOD OF VALUATION OF S TOCK AT COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER IS NOT ONLY W ELL RECOGNIZED ACCOUNTING PRINCIPLE BUT ALSO HAS BEEN APPROVED BY VARIOUS COU RTS AND TRIBUNAL FROM TIME TO TIME. HE PLACED RELIANCE ON SEVERAL DECISI ONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SA MPATRAM (SUPRA); CIT VS. BRITISH PAINTS INDIA LTD. (SUPRA); AND THE DECI SION OF HONBLE DELHI HIGH COURT IN THE CASE OF DALMIA CEMENT (BHARAT) LTD. (S UPRA). THE LEARNED AR OF THE ASSESSEE RELYING ON VARIOUS JUDICIAL PRONOUN CEMENTS 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 P OLICY AS PER PROVISIONS OF SEC. 145 AND PROVISIONS OF SEC. 145A ARE NOT APP LICABLE IN THE CASE OF THE ASSESSEE. PRINCIPLE OF CONSERVATION IS CANVASSED B Y THE ACCOUNTING STANDARD. HE PLACED RELIANCE ON THE DECISION OF HO NBLE SUPREME IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. 31 2 ITR 254 FOR THE I.T. A. NO.4890/DEL/2011 9 PROPOSITION THAT ACCOUNTS REGULARLY MAINTAINED IN T HE 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 NEE DS TO DECIDE THE PROFITS AND GAINS OF ANY BUSINESS WHICH IS CARRIED ON BY THE AS SESSEE DURING THE PREVIOUS YEAR. THEREFORE ONE HAS TO TAKE INTO ACCOUNT STOC K IN TRADE FOR DETERMINATION OF PROFITS. FOR VALUING THE CLOSING STOCK AT THE END OF THE PARTICULAR YEAR THE PREVAILING RATE ON THE LAST DA TE IS RELEVANT. THIS IS BECAUSE PROFIT/LOSS IS EMBEDDED IN THE CLOSING STOC K 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 NE T 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 H AD VALUED THE CLOSING STOCK BY APPLYING THE NET REALIZABLE VALUE OF THE INVENTO RY AND FINISHED GOODS. AS REGARDS DECISIONS RELIED ON BY THE REVENUE THE LEA RNED AR OF THE ASSESSEE SUBMITTED THAT THE FACTS OF THE ASSESSEES CASE ARE DISTINGUISHABLE FROM THE FACTS OF THE CASES RELIED UPON BY THE LEARNED SR. D R. THEREFORE THE SAME CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE. HE THEREFORE SUBMITTED THAT ADDITION DELETED BY THE LEARNED CIT(A) WAS JUSTIFIE D. I.T. A. NO.4890/DEL/2011 10 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 REALIZ ABLE VALUE WAS MADE AS ON 31 ST MARCH 2006 WHICH IS EVIDENT FROM SCHEDULE-5 OF TH E 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 43 5 041 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 1 6 441 909 --------------- --------------- 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 COST S). I.T. A. NO.4890/DEL/2011 11 FROM ABOVE IT IS EVIDENT THAT THE ASSESSEE HAD VAL UED 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 IMM EDIATE PRECEDING YEAR AS IS EVIDENT FROM SCHEDULE 5 REPRODUCED ABOVE. WE HAVE ALSO GONE THROUGH THE LIST OF INVENTORIES OF CONSUMABLES AND STORES L YING AT PAGES 14 TO 54 OF THE PAPER BOOK. CONSUMABLES AND STORES ARE USED IN THE MANUFACTURE OF FINISHED PRODUCTS I.E. MOTORCYCLES. THE ASSESSE E IS NOT ENGAGED IN TRADING IN CONSUMABLES AND STORES. WHILE WORKING OUT THE W RITE OFF FACTOR THE ASSESSEE HAD NOT POINTED OUT AS TO WHAT ARE THE ITE MS WHICH HAVE UNDERGONE MATERIALLY CHANGE DUE TO PASSAGE OF TIME REDUCING T HE VALUE SUCH AS THE PARTS MADE OF RUBBER. THE SPARE PARTS WHICH ARE FREQUENT LY USED IN PRODUCTION OF VEHICLE CANNOT BE SAID THAT THE USEABLE LIFE OF SUC H CONSUMABLE PRODUCTS HAVE REDUCED AND WERE NOT USEABLE IN THE PRODUCTION . THEREFORE WITHOUT ANY EVIDENCE HAVING BEEN BROUGHT ON RECORD THE CON TENTION OF THE ASSESSEE CANNOT BE ACCEPTED THAT THE VALUE OF CONSUMABLE ITE MS HAD UNDERGONE CHANGE. NOTHING ON RECORD HAS BEEN BROUGHT BY THE ASSESSEE TO SUGGEST THAT THERE WAS FALL IN PRICES OF RAW-MATERIALS BECAUSE O F WHICH THE ASSESSEE HAD TO REDUCE THE COST OF INVENTORY. IT IS WELL KNOWN THA T PRICES OF CONSUMABLE ITEMS USED IN AUTOMOBILE INDUSTRY ARE INCREASING DA Y BY DAY. IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE TO PROVE THAT THERE WAS FALL IN THE PRICES OF I.T. A. NO.4890/DEL/2011 12 CONSUMABLE ITEMS OR DETERIORATION OF THE LIFE OF C ONSUMABLES 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 OPINI ON THE VALUATION OF CLOSING STOCK OF CONSUMABLE AND STORES CANNOT BE MA DE 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 EXP ECTED/ESTIMATED SALE PRICE OF THE FINISHED PRODUCT ACCORDING TO THE ASSE SSEE 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 TECHNOL OGY USED IN THE MANUFACTURING OF MOTOR VEHICLES WHETHER IT IS A MOT OR CAR OR MOTORCYCLE. NO DOUBT THERE ARE COMPETITORS IN THE MARKETS BUT IT I S THE TECHNOLOGY USED AND THE IMAGE OF THE COMPANY WHICH FETCHES THE CUSTOMER S AND CREATES THE MARKET SHARE OF PARTICULAR PRODUCT. WE ARE THEREF ORE UNABLE TO UNDERSTAND AS TO HOW THE SALE PRICE WILL BE ESTIMATED BELOW TH E COST OF MANUFACTURED GOODS WITH OUT BRINGING MATERIAL ON RECORD THAT THE RE WAS FALL IN PRICES OF CONSUMABLE. 9. WE WOULD ALSO LIKE TO EXAMINE THE CASE OF ASSESS EE IN THE LIGHT OF ACCOUNTING STANDARD- 2 ON WHICH THE ASSESSEE HAD PL ACED HEAVY RELIANCE. I.T. A. NO.4890/DEL/2011 13 AS PER CLAUSE 5 INVENTORIES SHOULD BE VALUED AT TH E LOWER OF COST AND NET REALIZABLE VALUE. IT IS IMPORTANT TO NOTE THAT TH E 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 IN VENTORIES MAY NOT BE RECOVERABLE IF THOSE INVENTORIES ARE DAMAGED IF TH EY HAVE BECOME WHOLLY OR PARTIALLY OBSOLETE OR IF THEIR SELLING PRICES HAVE DECLINED. THE COST OF INVENTORIES MAY ALSO NOT BE RECOVERABLE IF THE ESTI MATED COST OF COMPLETION OR THE ESTIMATED COSTS NECESSARY TO MAKE THE SALE H AVE 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 FACT S OF THE ASSESSEES CASE WE FIND THAT THE ASSESSEE HAD NOT DEMONSTRATED WITH NE CESSARY AND SUFFICIENT EVIDENCE TO PROVE THAT INVENTORIES WERE DAMAGED OR BECAME WHOLLY OR PARTIALLY OBSOLETE OR THEIR SELLING PRICES HAVE DEC LINED 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. CONSUM ABLE ITEMS BUT A MANUFACTURER OF MOTORCYCLES. THEREFORE NET REALI ZABLE VALUE DETERMINED BY THE ASSESSEE BY EXPECTED SALE VALUE CANNOT BE APPLI ED FOR VALUATION OF THE CLOSING STOCK OF RAW MATERIALS. I.T. A. NO.4890/DEL/2011 14 10. CLAUSE 24 OF AS-2 DEALS WITH THE MATERIAL AND O THER SUPPLIES HELD FOR USE IN THE PRODUCTION OF INVENTORIES. PARAGRAPH 24 READS AS UNDER:- 24. MATERIALS AND OTHER SUPPLIES HELD FOR USE IN T HE PRODUCTION OF INVENTORIES ARE NOT WRITTEN DOWN BELO W COST IF THE FINISHED PRODUCTS IN WHICH THEY WILL BE INCORPORATE D ARE EXPECTED TO BE SOLD AT OR ABOVE COST. HOWEVER WHE N THERE HAS BEEN A DECLINE IN THE PRICE OF MATERIALS AND IT IS ESTIMATED THAT THE COST OF THE FINISHED PRODUCTS WILL EXCEED NET R EALIZABLE VALUE THE MATERIALS ARE WRITTEN DOWN TO NET REALIZ ABLE VALUE. IN SUCH CIRCUMSTANCES THE REPLACEMENT COST OF THE MATERIALS MAY BE THE BEST AVAILABLE MEASURE OF THEIR NET REAL IZABLE VALUE. THUS CLAUSE 24 DEALS WITH THE SITUATION WHERE THER E 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 DOW N BELOW THE COST OF PURCHASE. THEREFORE IN OUR CONSIDERED OPINION TH E INVENTORIES WHETHER THEY ARE CONSUMABLE ITEMS OR FINISHED PRODUCTS CANNOT B E VALUED AT LOWER PRICE THAN THE PRICE AT WHICH THEY WERE ACQUIRED OR PRODU CED. 11. THE ASSESSEE HAS PLACED RELIANCE ON SEVERAL DE CISIONS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CH AINRUP SAMPATRAM (SUPRA). IN THIS CASE IT HAS BEEN OBSERVED THAT PR OFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING UNLESS OF COURSE SUCH PRINC IPLES HAVE BEEN I.T. A. NO.4890/DEL/2011 15 SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS U NREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOL D AT THE END OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING Y EARS ACCOUNT IN A BUSINESS THAT IS CONTINUING ARE NOT BROUGHT INTO TH E 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 REA LIZED. IN THE CASE BEFORE US THE ASSESSEE IN THE IMMEDIATE PRECEDING YEAR HAS NOT VALUED THE CLOSING STOCK CONSISTING OF CONSUMABLE ITEMS AND FINISHED G OODS BY DISCOUNTING WRITE OFF FACTOR OF 8.5%. THE LEARNED AR OF THE AS SESSEE COULD NOT BRING ANY MATERIAL ON RECORD TO SUGGEST THAT THE SALES MADE I N SUBSEQUENT YEAR WERE LOWER THAN THE COST OF PRODUCT AND THAT WAS BECAUSE OF FALL IN PRICE OF INVENTORIES. THEREFORE THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF CHAINRUP SAMPATRAM (SUPRA) CANNOT BE APPLIED TO THE FACTS OF THE ASSESSEES CASE. 12. ANOTHER DECISION RELIED UPON BY THE ASSESSEE IS IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (SUPRA). IN THIS C ASE THE ACCOUNTANCY METHOD FOLLOWED BY THE ASSESSEE CONTINUOUSLY FOR TH E 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 REFLEC T TRUE AND CORRECT PROFITS. I.T. A. NO.4890/DEL/2011 16 THIS DECISION OF HONBLE SUPREME COURT IS ALSO NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. IT IS THE SECOND YEAR OF ASSE SSEES BUSINESS AND THE FIRST YEAR WAS ASSESSMENT YEAR 2006-07 WHEREIN THE ASSESS EE 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 A RE OF THE CONSIDERED OPINION THAT VALUATION OF CLOSING STOCK BOTH CONSUMABLE ITE MS AND FINISHED GOODS BY APPLYING THE DISCOUNT FACTOR OF 8.5% HAS NOT BEEN S UBSTANTIATED 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 AS SESSING OFFICER. 13. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS ALLOWED. 14. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 30 TH MARCH 2012. SD/- SD/- (DIVA SINGH) (K.D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH MARCH 2012. I.T. A. NO.4890/DEL/2011 17 COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR ITAT.