2021 (6) TMI 54 - AT - Income Tax

Addition made on account of revaluation of stock - method of valuation adopted by assessee - HELD THAT - The closing stock of raw materials and finished goods was reflected at the reduced value which had resulted in increase in loss for the year. We find that the assessee had pleaded that the method of valuation adopted by it was in consonance with Indian Accounting Standard 2 on Inventories issued by the Institute of Chartered Accountants of India (ICAI) which is mandatorily to be followed by the assessee. As brought to the notice of the ld. CIT(A) by the assessee that the same issue had cropped up in assessee s own case for A.Y.2014-15 and the ld. AO had not made any disallowance on account of stock in A.Y.2014-15. We find that assessee has been consistently following the same method of accounting for valuation of inventories in earlier as well as subsequent years. We find that the lower authorities had grossly erred in not understanding the accounting practice followed by the assessee for valuation of inventories which is normally accepting accounting practice prevailing in India. No infirmity in the valuation method adopted by the assessee which has resulted in claim of expenses due to valuation of stock at lower of cost or net realizable value. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues:
Revaluation of stock leading to addition in assessment.

Analysis:
The appeal in ITA No.5170/Mum/2019 for A.Y.2012-13 was filed against the order of assessment passed by the ld. Commissioner of Income Tax (Appeals)-10, Mumbai. The main issue to be decided was whether the addition made on account of revaluation of stock in the sum of ?32,42,105/- was justified. The assessee, a manufacturer of low count cotton yarn and cotton waste, had discontinued its business activities due to non-viability. The ld. AO observed a revaluation of stock amounting to ?32,42,105/- in the profit and loss account of the assessee. The assessee had valued its closing stock of raw materials and finished goods at the lower of cost or net realizable value, resulting in a reduction in stock value and an increase in loss for the year. The assessee claimed this reduction as expenses. The assessee argued that the valuation method followed was in line with Indian Accounting Standard - 2 on "Inventories" issued by the Institute of Chartered Accountants of India (ICAI) and had been consistently followed in previous and subsequent years. The lower authorities were criticized for not understanding the accounting practice followed by the assessee, which is a widely accepted practice in India. The Tribunal found no fault in the valuation method adopted by the assessee, allowing the appeal and overturning the addition made on account of stock valuation.

In conclusion, the Tribunal allowed the appeal of the assessee, stating that there was no infirmity in the valuation method adopted, which resulted in the claim of expenses due to the valuation of stock at the lower of cost or net realizable value. The order was pronounced on 21/04/2021.