2013 (3) TMI 352 - HC - Income Tax

Valuation of the closing stock - Addition on account of provisions for impairment of stock - ITAT deleted the addition - Held that - The assessee can value the stock at the lower of the cost or the net realizable value as it is a recognized and accepted method. The finding of the Tribunal referred to the assessee s letter dated 27.12.2006 submitted before the AO along with the necessary details in support of the valuation unable to accept the contention of the revenue that the claim of the assessee remains unsupported. It is also to be noted that on a question of valuation of the closing stock, any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consistently followed. This is because the closing stock of one year becomes the opening stock of the succeeding year and any addition made to the valuation of the closing stock to increase the profits for that year automatically gets neutralised when the same figure of closing stock is taken as the opening stock of the succeeding year. There is also no finding to the effect that the true profits of the business cannot be determined having regard to the method of valuation of stock employed by the assessee. As decided in India Motor Parts & Accessories Pvt. Ltd. vs. CIT (1965 (2) TMI 84 - MADRAS HIGH COURT) the method of valuing the slow moving and obsolescent stock at a price below the cost was a recognized method in other countries and can be properly followed in India too - in favour of assessee. Addition on account of Sales of VSAT equipment - ITAT deleted the addition - Held that - The addition was made on the basis of the sales tax assessment and that the Tribunal deleted the addition on the basis of the order passed by the Joint Commissioner of Sales Tax (U.P.) on 22.12.2006 in appeal by the assessee. The appellate authority by the aforesaid order had deleted the addition. The Tribunal, therefore, held that the addition made in the income tax assessment can no longer survive. It further noted that the assessing officer had no case that the service charges for installation and/ or de-installation of VSATs were not declared by the assessee in its books of accounts. Thus it was the view of the Tribunal that the amount of Rs.5 crores cannot also be added as service charges - in favour of assessee.

Summary

Issues:
- Valuation of closing stock for assessment year 2004-05

Analysis:
1. The first issue revolves around the valuation of the closing stock for the assessment year 2004-05. The appellant, involved in the business of installation of VSAT equipment, claimed a reduction of Rs.90,35,298 from the value of the stock due to impairment and defects, stating that the net realizable value had fallen below the cost price. The assessing officer rejected this claim, resulting in an addition to the business profits. On appeal, the CIT (Appeals) acknowledged some diminution in the stock value but lacked complete details, thus limiting the addition to 50% of the claimed amount. Both the revenue and the assessee filed cross-appeals before the Tribunal.

2. The Tribunal examined the valuation details submitted by the assessee, supported by a report from the technical division, and found that the diminution in the stock value was adequately explained. The method of valuing the closing stock at the lower of cost or net realizable value was considered a recognized accounting principle, consistently followed by the assessee. The Tribunal noted that no defects or irregularities were found in the submitted details, and the assessing officer failed to challenge the net realizable value provided by the assessee.

3. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal based on the findings that the valuation method employed by the assessee was legitimate and in line with accepted accounting practices. The Tribunal's decision was not contested, and the revenue's argument that the assessee's claim lacked support was refuted by the Tribunal's reference to the details submitted by the assessee. The judgment emphasized the importance of consistent application of valuation methods to prevent profit distortion over time and cited a precedent supporting the valuation of slow-moving stock below cost as a recognized practice.

4. The judgment concluded that no substantial question of law arose for consideration, leading to the dismissal of the appeals. The analysis highlighted the significance of adhering to consistent valuation methods, the acceptance of the assessee's valuation approach, and the lack of evidence supporting the revenue's challenge to the valuation claim. The decision underscored the importance of maintaining consistency in stock valuation practices to ensure accurate profit determination over successive accounting periods.