Sales Return cannot be treated as an Asset and Liability when subsequently taken into Books of Account: ITAT [Read Order]

Sales return cannot be treated as an asset and liability when subsequently taken into books of account, so was held by Income Tax Appellate Tribunal (ITAT) Hyderabad.

The assessee company, M/s. Prabhat Agri Biotech Limited, is engaged in the business of seed production, research, marketing of field and vegetable crops and wind power generation. Assessee is deriving income from their own production of seeds as well as trading of seeds. For the assessment year 2012-13, the assessment order that was originally passed was revised by the Principal Commissioner of Income Tax under section 263 of the Act and while giving effect to such an order dated 30/03/2017, the Assessing Officer followed the basis of turnover of different activities for bifurcations of the common expenses and determined the income on such basis.

 For the year 2014-15 it was noticed by the learned Assessing Officer that the assessee was debiting certain amount towards “provision for sales returns”, which the learned Assessing Officer disallowed on the basis that the said provision is not scientific in its basis, and made an addition on that score.

As a matter of fact CIT(A) noted that the distributors had to return the unsold stock after the end of the season and if such receipts are to be sold subsequently they need appropriate preservation and chemical treatment to sustain its utility; and that the stock of seeds is subsequently received in April, May, June and July; that at the time of receipt of the stock the seeds are taken into stock with appropriate adjustment to the customers/sales distributors outstanding balance and such a practice is part of the said business and is driven more by the seasonal nature of the business and also on account of short shelf life of the seeds.

 In the circumstances CIT(A) satisfied that, inasmuch as all the sales returns are subsequently taken into stock in the books of the assessee, the provision for sales return cannot be treated as an asset and liability.

The Coram consisting of Rama Kanta Panda, Accountant Member and K Narasimha Chary, Judicial Member held that “In view of the seasonal nature of the business and also the short shelf life of the seeds, it is imperative for the assessee to take into account the quantity of unsold seats at the end of the year and the need to revalidate their further utility and to take them into stock in the next season. In the circumstances it cannot be said that the provision for sales returns is unascertained or unreasonable. With this view of the matter, we uphold the findings of the CIT(A).”

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