Facts of the Case

The assessee, Bharat Pumps & Compressors Ltd., a Government of India Public Sector Enterprise, filed its return of income for Assessment Year 2007-08.

During assessment under Section 143(3), the Assessing Officer made additions relating to depreciation written back in the books of account and valuation of closing stock of finished goods.

The assessee had written back depreciation amounting to ₹292.92 lakhs in its books for earlier years (1979-80 to 2005-06) to align book values with correct depreciation under the Companies Act. The Assessing Officer added 15% of this amount (₹43.95 lakhs) to income. The Commissioner (Appeals) enhanced the addition to the entire write-back amount.

Further, the assessee had not included excise duty payable on closing stock of finished goods lying in its factory warehouse. The Assessing Officer added ₹16.40 lakhs under Section 145A, which was enhanced by the CIT(A) to ₹64.73 lakhs.

In earlier appellate proceedings, the Tribunal granted partial relief but did not fully adjudicate certain grounds. Upon Miscellaneous Application, those grounds were restored for fresh consideration.

Issues Involved

  1. Whether write-back of depreciation of earlier years in the books affects computation of taxable income under the Income-tax Act.
  2. Whether excise duty on finished goods lying in factory premises must be included in valuation of closing stock under Section 145A.

Petitioner’s Arguments (Assessee)

  • The depreciation write-back was merely an accounting adjustment under the Companies Act to correct excess depreciation charged in earlier years.
  • The written down value (WDV) for income-tax purposes had not been altered; hence, depreciation computation under the Income-tax Act remained unaffected.
  • In earlier years, book depreciation had always been added back and depreciation under the Income-tax Act claimed separately, which is a recognized practice.
  • Excise duty on finished goods becomes payable only upon removal from the factory, not merely upon manufacture when goods remain in the warehouse.
  • Therefore, inclusion of such duty in closing stock valuation was unwarranted.

Respondent’s Arguments (Revenue)

  • The Revenue contended that the assessee had incorrectly computed brought-forward losses and unabsorbed depreciation.
  • It was argued that depreciation had been claimed on assets not in use and that write-back impacted taxable income.
  • Regarding closing stock, the Revenue asserted that Section 145A mandates inclusion of excise duty in inventory valuation irrespective of payment status.

Court Order / Findings (ITAT Allahabad)

  • The issues required detailed factual verification, including examination of depreciation claimed in earlier years and impact of reversal on tax liability.
  • Accounting adjustments in books do not automatically determine tax computation; the effect under the Income-tax Act must be independently examined.
  • The assessee must demonstrate that the depreciation reversal is tax-neutral and that correct WDV and depreciation were claimed under the Act.
  • On valuation of closing stock, applicability of Section 145A depends on facts such as location of goods and accrual of excise liability.
  • Since proper verification had not been undertaken, the matter was remanded to the Assessing Officer for fresh adjudication after providing adequate opportunity of hearing.

Important Clarification

The Tribunal did not finally decide the taxability of depreciation write-back or excise duty inclusion. The decision emphasizes that such matters are fact-intensive and must be adjudicated after proper verification in accordance with law and principles of natural justice.

Link to download the order -.

https://itat.gov.in/public/files/upload/1618308152-ITA_NO.117_Bharat%20Pumps%20&%20Compressors%20Ltd.%20-%20Copy.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.