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2013 (6) TMI 431 - AT - Income TaxProvision of obsolete stock disallowed - Held that - The assessee is continuously following the policy of valuation of closing stock on the basis of net realizable value which is in accordance with accounting principle. The fact becomes clear by the tax audit report wherein it at 12(b) the auditors have written that there is no deviation from the method of valuation prescribed under section 145A of the Act. From the Notes to Accounts and Tax Audit report it can be said that valuation of inventories was being done at lower of cost or net realizable value and was in accordance with provisions of section 145A of the Act. The assessee instead of taking the net realizable value for valuation of closing stock took the cost price of obsolete item and created a provision for difference in cost price and market value and debited the same to P&L Account, the effect of which is same. Therefore keeping in view the judicial pronouncements relied upon by the assessee on CIT Versus BECTON DICKINSON INDIA PVT LTD. 2012 (12) TMI 210 - DELHI HIGH COURT appeal of assessee allowed.
Issues:
1. Disallowance of provision for obsolete stock by Ld CIT(A) 2. Method of valuation of closing stock and treatment of obsolete stock 3. Compliance with accounting principles and legal provisions Analysis: 1. The appeal was filed against the disallowance of a provision for obsolete stock by Ld CIT(A). The assessee argued that the provision was in line with consistent accounting policy of valuing inventory at cost or realizable value, whichever is lower. The Assessing Officer considered the provision adhoc and not an ascertained liability, hence disallowed it. 2. The assessee, a subsidiary of a global brand, explained that obsolete stock was written off based on unsaleable quantities, mismatched components, and un-useable items. The company's practice was to write off such stock, which was sometimes reversed in the next year and offered for taxation. The Ld CIT(A upheld the disallowance, considering the provision as adhoc and contingent, especially since the stock was eventually sold, indicating a contingent nature. 3. The assessee maintained that the valuation of closing stock at net realizable value was in accordance with accounting principles and Section 145 of the Act. The AR cited various case laws to support the contention that the provision for obsolete stock was not adhoc but based on ascertained valuation. The Ld CIT(A, however, was not convinced and upheld the disallowance based on the contingent nature of the provision. 4. During the appeal, the AR reiterated that the company's policy of valuing closing stock at net realizable value was consistent and compliant with accounting standards. The AR referred to specific case laws and judgments confirming the validity of the company's method of valuation. The DR raised objections regarding the nature of items dealt with by the company and the applicability of case laws cited. 5. The Tribunal found that the assessee's method of valuing closing stock at net realizable value was in line with accounting principles and Section 145A of the Act. Citing specific audit reports and case laws, the Tribunal concluded that the provision for obsolete stock was not adhoc but based on ascertained valuation. The appeal was allowed based on the facts and circumstances of the case, overriding the objections raised by the DR. 6. The Tribunal allowed the appeal filed by the assessee, emphasizing the consistency of the company's valuation method and compliance with accounting principles. The judgment highlighted the importance of ascertained valuation in determining provisions for obsolete stock, ultimately ruling in favor of the assessee. 7. The order was pronounced in an open court on June 7, 2013, with the Tribunal allowing the appeal filed by the assessee against the disallowance of the provision for obsolete stock.
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