2012 (8) TMI 772 - HC - Income Tax

Revaluation of stock - non moving stock - deterioration in quality of the ink resulting in erosion of its value - Held that - As accepted by both the authorities i.e. CIT (A) and the Tribunal the assessee s valuation of closing stock after having reduced the amount attributable to loss on account of slow moving/ non moving stock. It is not alleged that the finding of the authorities is perverse - as it is not disputed that the valuation of the closing stock has been taken as the valuation of the opening stock in the subsequent assessment year and also that the valuation of the inks gets depreciated due to passage of time as a consequence of deterioration of quality being evident of the Chemical Engineer to support its contention that value of some chemicals in stock had eroded and consequently they had to be revalued - ITAT was correct to delete the addition - in favour of assessee.

Summary

Issues:
1. Valuation of closing stock for assessment year 2003-04.
2. Disallowance of provision for non-moving/slow-moving stock.
3. Conflict between accounting policy and law.

Issue 1: Valuation of closing stock for assessment year 2003-04
The appeal by the revenue challenged the ITAT's order regarding the assessment year 2003-04. The respondent, engaged in manufacturing and trading of inks, explained that the value of closing stock decreased due to the deterioration of chemical composition over time. The Assessing Officer disallowed the deduction claimed by the respondent on account of non-moving/slow-moving stock. The Commissioner of Income Tax (Appeals) allowed the appeal, stating that the respondent valued its stock at cost or market value, whichever was lower. The provision for non-moving/slow-moving stock was an accumulated provision, and the reduction in stock value for 2003-04 was only Rs.21.46 lacs. The Commissioner held that even this addition was not sustainable. The Tribunal upheld this decision, citing the deterioration in quality of ink as the reason for providing a lower value to non-moving stock, supported by a certificate from a Chemical Engineer. The Tribunal concluded that the Assessing Officer had not rejected the valuation method, and reducing the valuation of non-moving stock was a bonafide exercise.

Issue 2: Disallowance of provision for non-moving/slow-moving stock
The respondent's explanation for reducing the value of closing stock was based on the deterioration of chemical composition over time. The Assessing Officer did not accept this explanation and disallowed the deduction claimed by the respondent. However, the Commissioner of Income Tax (Appeals) and the Tribunal accepted the respondent's valuation after reducing the amount for loss on non-moving/slow-moving stock. The Tribunal found the reasons for providing a lower value to be valid and upheld the decision that the entire exercise was bonafide. The authorities did not find the valuation to be perverse, and evidence from a Chemical Engineer supported the erosion in value of certain chemicals in stock, justifying the revaluation.

Issue 3: Conflict between accounting policy and law
The respondent's accounting policy of valuing stock at a lower cost or market value was challenged by the revenue. The revenue argued that the valuation method was contrary to law, which mandates valuing closing stock at cost or market value, whichever is lower. The Tribunal, however, upheld the respondent's accounting policy, emphasizing that reducing the valuation of non-moving stock was a bonafide exercise. The High Court found no substantial question of law in the revenue's formulated questions, leading to the dismissal of the appeal with no costs awarded.