2008 (8) TMI 6 - HC - Income Tax

Provision for diminution in value of stock - assessee submit that sum debited to P/L account was on account of obsolete stock which he was unable to sell AO rejected the contention on ground that such a provision can be allowed only when the material is actually sold held that, on obsolete stock burden of excise would be higher than the value it would realize on sale tribunal was justified in allowing the loss claimed by the assessee on account of diminution in the value of obsolete stock

Summary

Issues:
- Appeal filed by revenue under Section 260A of the Income Tax Act against Tribunal's judgment on provision for diminution in value of stock.

Analysis:
1. The appeal was filed by the revenue under Section 260A of the Income Tax Act against the Income Tax Appellate Tribunal's judgment regarding the provision for diminution in value of stock made by the assessee due to stock obsolescence. The Assessing Officer disallowed the provision, stating it can only be allowed when the material is actually sold. The Commissioner of Income Tax (Appeals) upheld this decision, reasoning that the loss was not a crystallized expense.

2. The Tribunal allowed the appeal of the assessee, noting that the stock had not moved for three years, had become scrap, and was incapable of further use. It also highlighted that selling the stock as scrap would incur higher excise duty than the value realized. The Tribunal concluded that the provision for diminution in value of obsolete stock was justified, emphasizing that the assessee anticipated the loss in stock value.

3. The judgment referred to the principle of valuing closing stock at cost or market price, whichever is lower, as established by the Supreme Court in various cases. The Tribunal's findings aligned with this principle, showing that the assessee's provision for diminution in stock value was based on anticipating the loss due to the obsolete nature of the stock. The Court found no substantial question of law to consider and dismissed the appeal.

This detailed analysis covers the issues involved in the judgment, providing a comprehensive understanding of the legal reasoning and conclusions reached by the High Court in this case.