ITAT allows Deduction of Rs. 1.72 crore for Reversal of Obsolete Inventory provision due to Double Taxation Concerns [Read Order]

In a recent ruling, the Bangalore Bench of the Income Tax Appellate Tribunal ( ITAT ) allowed a deduction of Rs. 1.72 crore claimed by the assessee for the reversal of a provision for obsolete inventory due to double taxation.

In this case, the assessee, Essilor, is engaged in the trade of ophthalmic lenses.

The appeal was filed by the assessee against the order of the Commissioner of Income Tax (  Appeals ), [ CIT( A ) ], National Faceless Appeal Centre, Delhi dated 11.07.2024 for Assessment Year (AY) 2017-18.

 The case revolves around a claim for a deduction of Rs. 1,72,98,009, which was disallowed by the Assessing Officer ( AO ). The company had initially created a provision of Rs. 8,78,53,132 in the financial year relevant to the 2015-16 assessment year to account for inventory deemed obsolete or bad. They chose not to claim a deduction for this amount at that time, adding it to their taxable income to ensure compliance.

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In subsequent years, from 2016-17 to 2018-19, the company began reversing this provision, each time seeking a deduction for the amounts reversed. It was so since the company had already subjected the entire provision to tax in 2015-16, taxing the reversed amounts again would result in an unfair situation of double taxation.

 The counsel on behalf of the assessee relied on previous decisions by the ITAT, which had ruled favorably on similar claims in their own case for the 2018-19 assessment year.

The counsel argued that the company's deduction claim was justified, as it was intended solely to prevent double taxation, emphasizing that it had previously fulfilled its tax obligations by including the full provision amount in its taxable income in 2015-16.

The ITAT found merit in the argument by the assessee, considering the company’s initial decision to disallow the provision as a deduction reflected its commitment to tax compliance.

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The ITAT bench, comprising of George George K. ( Vice President ) and Padmavathy S. ( Accountant Member ), held that the claim of the assessee against the reversal of provision to the tune of Rs. 1,72,98,009, as the same stands offered to tax in the year in which the provision was created.

The assessee was represented by Manasa Ananathan and the revenue by Mr. R.N. Siddappaji.

To Read the full text of the Order CLICK HERE

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