Case Law Details
M/s Hero Moto Corp Ltd. Vs DCIT (ITAT Delhi)
As regards to Ground, relating to disallowance of cost of scrap material amounting to Rs.6.34 lacs, it can be seen that in the course of the business of manufacturing, the process generates some scrap on account of rejection of components, obsolescence of components, etc. In the course of manufacturing process, scrap is generated mainly on account of grinding scrap in machining process of various components. Such scrap generated in the course of manufacturing is not separately debited to the profit and loss account but is claimed as the part of cost of material consumed in the course of manufacturing. The wastage generated in the manufacturing process is negligible compared to the overall consumption of material during the year. Further, such wastage is normal and inherent in the manufacturing process and. in any case, within tolerable limits. Scrap generated in the aforesaid manner is transferred to scrap yard with proper approval of respective ‘Shop head’ and ‘Process. Planning & Control department’ in the manufacturing unit and sold after necessary processing (e.g. crushing of components), if any. The sale proceeds from sale of scrap is directly credited to the profit and loss account and shown as income. Having regard to the nature of scrap/wastage generated during the course of business i.e. empty oil drums, corrugated wooden boxes, plastic bags, etc., it is not possible to maintain scrap register at the shop floor containing item wise details of scrap generated. However, the assessee maintains record/register of each item of scrap sold during the year. The sale proceeds from sale of scrap is directly credited to the assessee’s P&L A/c and shown as income. The assessee realized Rs. 6,34,480 from sale of scrap generated in the course of: manufacturing, which was credited to the profit and loss account i and shown as income. In the assessment order, the assessing officer has observed that the assessee has erred in not estimating the value of scrap lying in the factory premises as on the last date of the previous year viz. 31.3.2012 which should have been credited to profit and loss account as part of the closing stock. The assessing officer estimated the value of such scrap at an amount of Rs. 6,34,480 (computed on the basis of average scrap sales in the last 15 days of the relevant year and first 15 days of next year, vis-a-vis, after reducing the scrap sale as on the last days of the relevant year) and made addition of the same to the closing stock and consequently to the income of the assessee.
The Ld. AR submitted that the aforesaid issue has been decided in favour of the assessee passed by the Tribunal in assessee’s own case for the assessment year 2010-11 and 2011-12, wherein the Tribunal accepted the method as followed by the assessee of accounting income on sale of scrap on a consistent basis and deleted the impugned addition on the ground that the assessee was not dealing in scrap and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal, in coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The Ld. AR pointed out that the Tribunal in assessee’s own case for the AY 2007-08 and 2008-09 had restored the matter back to the file of the assessing officer to compute the value of closing stock on consistent basis, as per method to be followed by the assessing officer in the set-aide order. The assessee had filed an appeal against the aforesaid order of the Tribunal, which was admitted by the High Court vide order dated 19.1.20 15 as involving substantial question of law. The AO in the set aside proceedings for AY 2007-08 vide order dated 31.10.2014, confirmed such disallowance on an ad- hoc basis by estimating the average of scrap lying in the closing stock as a proportion of scrap sales for the last 15 days for the ended 31.03.20007 and the first 15 days of the subsequent CIT(A) vide order dated 01.02.2018 deleted the disallowance made by the AO in the set aside order. However, the Ld. AR pointed out that the aforesaid disallowance sustained by the Tribunal in assessment years 2007-08 and 2008-09 has been categorically distinguished by the ITAT in the AY 2010-11 (referred supra), wherein the Tribunal held that the earlier orders were passed without due consideration of AS-2 and application thereof to scrap generated during manufacturing process has not been examined.
The Ld. DR relied upon the Assessment Order and Order of the TPO as well as the Tribunal decision for A.Y. 2007-08 and 2008-09.
We have heard both the parties and perused the material available on record. The Tribunal for A.Y. 2010-11 and 2011-12 held as under:
“24. We have carefully considered the rival contentions. Accounting standard 2 notified by the Ministry of corporate affairs it provides that inventory is required to be valued at the end of the year for determining the true and fair profit or loss of the financial period of an enterprise. According to that the inventory is required to be valued according to accounting standard 2 in case it is held for the sale in the ordinary course of the business. In the present case the assessee is not holding scrap as an inventory in the ordinary course of its business. It is also not the dealer in scrap. The inventory that it holds in the ordinary course of its business at the raw materials semifinished goods and they finished goods of the company. Therefore, it is incorrect to hold that assessee should have valued the scrap at the end of the year. Furthermore the accounting policy of the company also states that the scrap is accounted for at the time of its disposal. Therefore, according to us it is not mandatory for an assessee to value scrap as at the end of financial period for working out the true and fair profit or losses of the company. More so as in the previous year this accounting policy of the company has been accepted by the revenue without disturbing the profit on this count. Further, while rendering our decision in the preceding ground of appeal, following the decision of honourable High Courts and Supreme Court, we have held that adjustment should not be made in the assessment order on issues, which are revenue-neutral. The impugned addition under consideration is purely revenue-neutral in as much as addition of the estimated value of the scrap to closing stock would be debited as opening stock in the profit and loss account of immediately succeeding year. Further, the assessing officer will need to carry out the similar exercise in the last year, to estimate stock of scrap which would become opening stock of this year. There is, thus, no escapement of Revenue on the basis of the impugned addition made by the assessing officer in the assessment order. We have already held in multiple grounds supra that no adjustment should be made to returned income on issues, which are revenue neutral. Having held as above, it is difficult to take any different view for the issue under consideration, which is also purely revenue neutral, especially considering that if similar adjustment (which has not been carried out by the assessing officer) is made to the opening stock, no additional tax liability would delve upon the appellant It could also be seen that the addition of Rs. 3.02 lacs is miniscule having regard to the size of the company, which has declared turnover of Rs. 16,000 crores (approx.) during the year under consideration and net profit of Rs.2232 crores. The aforesaid renders force in the arguments taken by the Ld. Counsel that an assesse engaged in the business of manufacturing, especially that of the size of the appellant, cannot be expected to keep quantitative tally of miniscule items like nuts and bolts lying in the scrap yard. In view of the aforesaid, keeping in mind the principle of materiality, we find that there is no error in the system and regular practice followed by the appellant of not estimating the value of scrap lying in the scrap yard and accounting for sale as and when such scrap is sold and removed from the factory premises. For the aforesaid cumulative reasons we do not find any justification in sustaining the addition of Rs. 3.02 lacs made by the assessing officer in the assessment order. As regards the decision of the Tribunal in the earlier two assessment years, we draw support from the various decisions, wherein it has been held that since doctrine of res judicata is not applicable to income tax proceedings, the Tribunal can deviate from earlier orders passed in the assessee’s own case as in those earlier decisions the provisions of the accounting standard A-S to with respect to valuation of inventories were not considered and whether they apply to the scrap generated in a manufacturing process by the company. Furthermore there is no evidences brought on record by the Ld. assessing officer that the assessee has sold scrap out of the books. Furthermore the amount of addition working out by the Ld. assessing officer was also on the estimate basis without any quantitative details of the scrap. It is also not the case of the assessee that compared to the earlier years the scrap sold by the assessee is lesser during the year. In view of the above, the addition made by the Ld. Assessing officer on account of estimating the value of scrap lying in closing stock amounting to Rs. 3.02 lakhs is deleted and ground No. 5 of appeal raised by the assesse is allowed.”
In the present Assessment Year also the assessee is not dealing in scrap, and/or holding the scrap as inventory, and thus was not required to value the closing stock after taking into account the value of scrap. The Tribunal for A.Y. 2010-11 and 2011-12 while coming to the aforesaid conclusion, laid emphasis on the fact that such transaction was revenue-neutral and held that considering the size of the assessee company, it could not be expected to keep quantitative tally of miniscule items. The facts are identical in the presnt year as well. Therefore, Ground No. 6 is allowed in favour of the assessee.
