Glaxosmithkline Asia Pvt. Ltd. Vs D.C.I.T. (ITAT Chandigarh)
Conclusion: Since the major write off claim evidently pertained to vaccines which assessee consistently claimed had been nearing expiry and thus had no realizable value and nothing had been pointed out regarding the insufficiency of evidences filed by assessee, therefore, the claim of assessee was fully justified for write off of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter.
Held: Assessee company was in the business of manufacturing and trading of drugs and oral health care products. During the year it claimed deduction of Rs. 50,79,000/- on account of write off stocks on the ground that it had discontinued dealing in one of its products i.e. Aquafresh Tooth Brush and vaccine stocks nearing expiry were not capable of being sold in the market. AO disallowed the same stating that assessee was unable to substantiate its claim. CIT(A) upheld the disallowance. Assessee pointed out that write off of Rs.50.79 lacs pertained to stock of aquafresh tooth brush of Rs.12.46 lacs and the balance pertained to write off of stock of vaccine. Assessee contended that major portion of the write off related to vaccines and which had been duly submitted to the authorities below that they were nearing expiry and hence not capable of being sold in the market. It was held that the major write off claim evidently pertained to vaccines which assessee consistently claimed had been nearing expiry and thus had no realizable value. Copies of emails exchanged within the assessee company seeking approval for release, write off and destruction of stock of vaccines nearing expiry mentioning specifically the stock of such vaccines, mails granting approval granting for the same, as also sample copies of stock write off sheets of the vaccines were filed to CIT(A).Therefore it was not that the claim was entirely unsubstantiated. Further despite the repeated assertion of assessee that the vaccines written off were nearing expiry, evidenced with emails so exchanged and the stock write off sheets so mentioning, the Revenue had not brought anything on record to controvert the said claim. Nothing had been pointed out regarding the insufficiency of evidences filed by assessee. Therefore, the claim of assessee was fully justified vis a vis write off of vaccines since undoubtedly such vaccines were not capable of being used beyond expiry period and had no realizable value thereafter. As for the write off of Aquafresh tooth brush assessee had explained to CIT(A) the reasons for discontinuation of the business and the consequent withdrawal of the toothbrushes, from the market, being commercially unviable and had as evidence filed copy of the Board resolution dated 25-11-2003 to this effect. Thus, assessee had been able to establish documentarily the fact of write off of the said product and the Revenue had not proved anything to the contrary. The claim of assessee to write off of toothbrush also was therefore allowed.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
The above appeals relate to the same assessee and pertain to different assessment years. The appeal in ITA No.2453/Del/2016 relates to assessment year(A.Y) 2005-06 and is directed against the order passed by the Commissioner of Income Tax (Appeals)-2, Chandigarh (in short referred to as CIT(A) dated 29.02.2016 , u/s 250(6) of the Income Tax Act,1961, (hereinafter referred to as ‘Act’) . The appeal in ITA No.532/Chd/2014, relates to assessment year 2006-07 and is directed against the order of the Assessing Officer dated 31-03-2014, passed u/s 143(3) r.w.s. 144C(5) & 254/153(2A) of the Act, passed in accordance with the directions of the Dispute Resolution Panel(DRP in short), in second round, on the directions of the ITAT.
It was common ground that the issues involved in both the appeals were identical, they were therefore heard together and are being disposed off by a common consolidated order.
Ld. Counsel for the assessee contended that A.Y 2005-06 was the base year and the additions/adjustments made therein had been reiterated in the succeeding year ,i.e A.Y 2006-07.The appeal for A.Y 2005-06 was therefore first taken up for hearing.
ITA No.2453/Del/2016 A.Y 2005-06.
2. Ground No.1 raised by the assessee reads as under:
“1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in sustaining the disallowance of stock written-off of Rs. 50,79,000 allegedly holding that the appellant failed to produce evidence of (i) informing the excise authorities or other regulatory authorities for destruction of such goods and (ii) intimating the dealers/ stockiest for not selling Aquafresh toothpaste, to substantiate the claim.”
3. Brief facts relating to the issue are that the assessee company is in the business of manufacturing and trading of drugs and oral health care products. During the year it claimed deduction of Rs. 50,79,000/- on account of write off stocks on the ground that it had discontinued dealing in one of its products i.e. Aquafresh Tooth Brush and vaccine stocks nearing expiry were not capable of being sold in the market. The Assessing officer disallowed the same stating that the assessee was unable to substantiate its claim. The Ld.CIT(A) upheld the disallowance at para 6.3 of his order as under:
“6.3 The submission of the appellant have been considered. The Assessing Officer asked the precise evidence related to destruction of stock, reconciliation of unsold goods lying at depot, how it was destroyed and evidence related to closer of business. However, no definite findings of the AO on the disallowance of write off stocks is available in the assessment order. It is seen, that similar disallowances were made by the AO in the case of the appellant company in assessment year 2004-05 on the ground that no evidence that these goods were destroyed were submitted by the assessee to substantiate its claim. I have carefully considered the submission of the assessee and various evidence on record. There is no evidence to substantiate the claim, that the appellant company informed the excise authorities and other regulatory authorities with regard to the destruction of stock of Rs. 59,79,000/-. There is also no evidence to suggest that the appellant intimated the dealers/ stockiest not to sale Aquafresh Toothpaste w.e.f. the date of discontinuation of business of Aqua Toothpaste. Therefore, in the absence of any evidence to support the claim of the assessee for write off stock, the disallowance is sustained. Ground of appeal No.2 is dismissed.”
4. Before us the Ld. Counsel for the assessee contended that identical disallowance made in assessment year 2003-04 in the case of the assessee had been deleted by the ITAT. Our attention was drawn to the relevant findings of the ITAT in its order passed in the said case in ITA No. 1323/Chd/2012 dated 28-09-18, at para 10-11, as under:
“10. We have gone through the entire history of the case and the facts on record. On the issue of whether the expenditure incurred on destruction of the goods be treated as capital expenditure as held by the Revenue, we are not in agreement with any of the points taken up by the Revenue mentioned above. While the issue before us is destruction of the stock and claiming consequently the expenditure as revenue expenditure, the Revenue’s submission that it is an item of disbursement and hence may be regarded as capital in nature cannot be accepted. Similarly this expenditure as pointed out in point no. 3 of the Revenue’s submission cannot be considered as relates to any frame work of business or as mentioned in the point no. 1 doesn’t bring out any new asset. The Revenue’s reliance that this write off be treated as capital expenditure based on the contention that the action of recalling of the product amounts to termination of agency and purely voluntary for obtaining substantial benefit cannot be accepted in the facts of the case. Based on the settled position of law as to what constitutes a capital expenditure, this write off of stock cannot be treated as capital expenditure. We are also not in agreement with the contention of the Ld. DR that these expenditures were not related with particular previous year but were related to many earlier years cannot be accepted as these products constitute a part of the closing stock for the instant year.
11. Now coming to the issue whether this expenditure has been incurred by the assessee indeed or not, the matter was referred back to the Assessing Officer to examine this specific issue in the first round of appeal by this Tribunal. The assessee could establish documentarily the fact of destruction of the off shelved products and the Assessing Officer has absolutely not discussed this issue to prove anything contra, we hereby allow the appeal of the assessee on the issue that the value of the goods destructed be treated as Revenue expenditure for the year in appeal. The Assessing Officer is hereby directed to determine the “actual cost” incurred in manufacturing of the product and allow the amount accordingly.”
5. The Ld. Counsel for the assessee further pointed out that write off of Rs.50.79 lacs pertained to stock of aquafresh tooth brush of Rs.12.46 lacs and the balance pertained to write off of stock of vaccine. The Ld. Counsel for the assessee contended that major portion of the write off related to vaccines and which had been duly submitted to the authorities below that they were nearing expiry and hence not capable of being sold in the market.
The Ld. Counsel for the assessee contended that this fact has not been controverted by the Revenue and, therefore, when the vaccines itself were not capable of being used, they had no realizable value and the write off therefore of the same was justified. With regard to the claim of write off of toothbrush the Ld. Counsel for the assessee pointed out that it had been explained that the assessee company had decided to discontinue this line of business finding it commercially unviable and hence the stock was withdrawn from the market. He pointed out that evidence in the form of write off sheets approving the write off of the products, and copy of Board Resolution dated 11-03-2004 approving the write off had been filed. That therefore, it was incorrect on the part of the Revenue Authorities to hold that the write off was unsubstantiated. The Ld. Counsel for the assessee further pointed out that the D.R.P. in assessee’s own case had held the claim of the assessee on impairment of the stock as allowable revenue expenditure. A brief submission of its arguments in this regard was filed before us and are being reproduced hereunder:
“The appellant is engaged in the business of manufacture and sale of OTC products, viz., Eno. Crocin and oral healthcare products, etc. The appellant is also engaged in resale / distribution of vaccine. The appellant has in the relevant previous year written off in the profit and loss account stock amounting to Rs. 50.79.000 comprising of the following:
(a) During the relevant previous year, the appellant has written off the stock of following vaccine aggregating to Rs.38.33 lacs, which were nearing expiry:
(Rs. in lacs)
