Bombay High Court: Revenue's Appeal Admitted on Investment Write-Off; Inventory and Bad Debt Write-Off Challenges Dismissed — PCIT Vs Maneesh Pharmaceuticals Pvt. Ltd.
Background and Overview
The Bombay High Court recently examined a pair of appeals filed by the Revenue arising from a common order of the Income Tax Appellate Tribunal (ITAT) dated 17 June 2021. The disputes pertained to Assessment Years 2011-12 and 2012-13, and both the Revenue and the assessee had earlier filed cross-appeals before the ITAT. The ITAT, through its impugned order, had ruled in favour of the assessee by allowing its appeals while simultaneously dismissing the Revenue's appeals. Dissatisfied with this outcome, the Revenue approached the Bombay High Court.
The appeals before the High Court were registered as Income Tax Appeal No. 1050 of 2024 and Income Tax Appeal No. 940 of 2024. Multiple questions of law were raised across both appeals, touching upon three distinct write-off claims made by the assessee — pertaining to inventories, bad debts, and investments in wholly owned subsidiaries. Additionally, the write-off of advances extended to M/s. Lilac Medicine Private Limited (LMPL) was also contested.
The High Court, after hearing arguments and examining the ITAT's reasoning, delivered a differentiated verdict — declining to entertain the challenges on inventory and bad debt write-offs on the ground that these were purely factual findings, while admitting the Revenue's appeal on the investment write-off and the LMPL advance write-off as they raised genuine questions of law warranting deeper examination.
Issue No. 1: Write-Off of Inventories Amounting to Rs. 94,05,01,000/-
Position Taken by the Revenue
In Income Tax Appeal No. 1050 of 2024, the Revenue's first question challenged whether the ITAT was justified in permitting the write-off of finished goods inventory worth Rs. 94,05,01,000/-. The Revenue argued that the assessee had failed to submit item-wise and quantity-wise details of non-moving or expired stock, along with the year of purchase and proper documentary support for the claim.
Findings of the ITAT
The ITAT, in its detailed order, had recorded that the assessee did in fact furnish complete item-wise particulars of the stock written off, encompassing quantity, rate, and value. The assessee's case was that these were expired goods which had been written off strictly in accordance with the norms prescribed by the Food & Drug Administration (FDA), Maharashtra. The process involved taking back expired goods from stockists, C&F agents, and other intermediaries and subsequently destroying them, with the corresponding amounts being written off in the books of accounts.
While the Assessing Officer had disallowed the claim citing insufficient documentary substantiation, both the Commissioner of Income-tax (Appeals) [CIT(A)] and the ITAT reversed this disallowance. The ITAT also placed considerable reliance on a report prepared by M/s. Grant Thornton — a reputed Chartered Accountancy firm — which had been commissioned during 2011 to evaluate the status of debtors and inventories, specifically for the purpose of verifying and assessing saleable inventories. During physical verification conducted as part of this exercise, expired stocks were identified and accordingly written off.
Observation by the CIT(A)
The CIT(A), after taking into account the Assessing Officer's remand report dated 26 March 2019, recorded a specific finding that the fact of goods having expired was not in dispute. It further noted that the inventories had been thoroughly verified during AY 2011-12 and AY 2012-13.
High Court's Decision on Inventory Write-Off
The Bombay High Court held that, given the categorical concurrent findings of two appellate fact-finding bodies — namely the CIT(A) and the ITAT — both of whom had accepted the documentary evidence and determined the write-off to be fully justified, the question raised by the Revenue was essentially one of fact and not a substantial question of law.