Cit Delhi-Iv vs Hughes Communication India Ltd.
2013 Latest Caselaw 1155 Del

       THE HIGH COURT OF DELHI AT NEW DELHI
%                                         Judgment delivered on: 7th March, 2013

+       ITA 383/2012
+       ITA 385/2012

        CIT DELHI-IV                                                  ..... Appellant

                          versus

        HUGHES COMMUNICATION INDIA LTD.                              ..... Respondent
Advocates who appeared in this case:
For the Appellant                  : Mr Sanjeev Sabharwal, Sr. Standing Counsel.
For the Respondent                 : Mr Ajay Vohra with Ms Kavita Jha, Advocates.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR

                                       JUDGMENT

R.V. EASWAR, J

These are appeals filed by the revenue under section 260A of the

Income Tax Act, 1961 and they are directed against the order dated

26.12.2011 passed by the Income Tax Appellate Tribunal („Tribunal‟, for

short) in respect of the assessment year 2004-05. The order of the

Tribunal is a common order passed in cross-appeals.

2. The following questions stated to be substantial questions of law

have been proposed by the revenue: -

"2.1 Whether learned ITAT erred in deleting the addition of `90,35,298/- made by the Assessing officer on account of provisions for impairment of stock?

2.2. Wether learned ITAT/CIT (A) erred in deleting the addition of `5,00,00,000/- made by the Assessing officer on account of Sales of VSAT equipment?"

3. We may straightaway say that so far as the second question is

concerned, the learned standing counsel for the revenue fairly stated that

the addition was made on the basis of the sales tax assessment and that

the Tribunal deleted the addition on the basis of the order passed by the

Joint Commissioner of Sales Tax (U.P.) on 22.12.2006 in appeal by the

assessee. The appellate authority by the aforesaid order had deleted the

addition. The Tribunal, therefore, held that the addition made in the

income tax assessment can no longer survive. It further noted that the

assessing officer had no case that the service charges for installation and/

or de-installation of VSATs were not declared by the assessee in its books

of accounts. In other words, it was the view of the Tribunal that the

amount of `5 crores cannot also be added as service charges. Having

regard to the stand taken by the standing counsel for the revenue and also

having regard to the fact that the findings of the Tribunal are factual we

do not think that the second question can be admitted.

4. So far as the first question is concerned, it relates to the valuation

of the closing stock. The assessee carries on the business of installation

of VSAT equipment. The stock consists of two categories; (i) old and

used stock which is categorized as defective but repairable, (ii) demo

stock. In its accounts the assessee reduced a sum of `90,35,298/- from

the value of the stock on account of impairment and defects. The claim

was made on the footing that the "net realizable value" of the stock had

fallen below even the cost price. In support of the valuation, the assessee

submitted the basis of the estimate which was prepared by its technical

department. Certain details were also submitted regarding certain items

of stock together with their realisable rate as on 31.03.2003 and

31.03.2004. The assessing officer rejected the assessee‟s claim for

reduction in the value of the closing stock made on the basis of the net

realizable value being less than the cost and made an addition of

`90,35,298/- to the business profits.

5. On appeal the CIT (Appeals) noted that though the assessee was

right that there was some diminution in the value of inventory, complete

details were not available. He, therefore, restricted the addition to 50%

i.e. `45,17,649/-.

6. Both the revenue and the assessee filed cross-appeals before the

Tribunal. The Tribunal recorded the following findings: -

(a) The claim of the assessee that the value of the stock had

diminished below the cost is supported by the report submitted by

the technical division of the assessee;

(b) The details of the valuation were placed before the assessing

officer under cover of the letter dated 27.12.2006. These details

show that the diminution in the value of the old/ unused stock of

the demonstration stock, which came to `7,93,97,719/- was dealt

with in the following manner: (a) `6,60,92,399/- was debited in the

earlier years till the year ended 31.03.2003; (b) an amount of

`42,70,022/- was claimed as consumables in the current year and;

(c) the balance of `90,35,298/- was claimed as diminution in the

valuation of the stock below the cost price for the year under

appeal.

(c) The method of valuing the closing stock at "cost or net

realisable value, whichever is lower" is a recognised and accepted

principle of accounting;

(d) The above method was consistently followed by the

assessee. In the other years in which the assessee adopted the same

method, the assessing officer has accepted the same;

(e) No defect or irregularity in the details submitted by the

assessee has been pointed out. The assessing officer has also not

been able to show that the figure of net realisable value shown by

the assessee was wrong.

In the light of the above findings the Tribunal dismissed the appeal of the

revenue and allowed the appeal of the assessee.

7. The findings recorded by the Tribunal are not challenged. In fact

the learned standing counsel fairly stated that the assessee can value the

stock at the lower of the cost or the net realisable value as it is a

recognised and accepted method. He, however, submitted that the claim

of the assessee was not supported by any details. But this submission is

contrary to the finding of the Tribunal which has referred to the

assessee‟s letter dated 27.12.2006 submitted before the assessing officer

along with the necessary details in support of the valuation. These details

have also been extracted by the Tribunal in para 11 of its order. We are,

therefore, unable to accept the contention of the revenue that the claim of

the assessee remains unsupported. It is also to be noted that on a question

of valuation of the closing stock, any alleged difference or discrepancy

tends to balance itself out over a period of years if the same method is

consistently followed. This is because the closing stock of one year

becomes the opening stock of the succeeding year and any addition made

to the valuation of the closing stock to increase the profits for that year

automatically gets neutralised when the same figure of closing stock is

taken as the opening stock of the succeeding year. What is, therefore,

more important to be seen is whether the same method of valuation of

stock is followed consistently by the assessee so that there is no distortion

of profit. There is also no finding to the effect that the true profits of the

business cannot be determined having regard to the method of valuation

of stock employed by the assessee. It may be noted that in India Motor

Parts & Accessories Pvt. Ltd. vs. CIT : (1966) 60 ITR 531 the Madras

High Court noted that the method of valuing the slow moving and

obsolescent stock at a price below the cost was a recognised method in

other countries and can be properly followed in India too.

8. In view of the foregoing discussion we do not think that any

substantial question of law arises for our consideration. The appeals are

accordingly dismissed.

R.V.EASWAR, J

BADAR DURREZ AHMED, J March 07, 2013 hs