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2023 (9) TMI 471 - AT - Income TaxValuation of closing stock - AO took the view that the assessee did not provide any basis for revaluing the stock and the revaluation has been done on the whims of the assessee - HELD THAT - Valuing the closing stock at cost or market value is a recognized accounting principle. There is one more principle, i.e., the Principle of Prudence, as per which, all known losses should be provided for, even if it is not actually incurred. In our view, the wisdom of the assessee in reducing the value of closing stock (work in progress) could be covered under the Principle of Prudence also and the said action of the assessee stands vindicated by the future events. When the arbitration award is not expected to be fully favourable to the assessee, then it is the duty of the assessee to provide for known loss and in our view, the action of the assessee in reducing the value of closing work in progress may be substantiated under this principle also. If the assessee receives any money in excess of the value of WIP, the same shall be taxable in the year of receipt. Accordingly, in the facts and circumstances of the case, we are of the view that there is no reason to disbelieve the value of closing work in progress disclosed by the assessee. We are of the view that the tax authorities are not justified in making the impugned addition - we direct the AO accept the value of closing work in progress declared by the assessee and delete the consequential addition made. Appeal filed by the assessee is allowed.
Issues involved:
The case involves challenging the addition related to the valuation of closing stock. Summary: The assessee, an individual and proprietor of a construction concern, undertook projects for Indian Railways. The dispute arose when the Railways did not approve certain projects, leading to arbitration. The assessee revalued the closing stock at a lower value due to the passage of time, following the accounting principle of "Cost or market value, whichever is lower." The AO disallowed the revaluation, resulting in an addition to the income of the assessee. The Ld CIT(A) upheld the AO's decision, citing the failure of the assessee to provide evidence justifying the value of closing stock. However, upon review, the Tribunal found that the events subsequent to the revaluation supported the assessee's case. The Tribunal noted the principle of Prudence, where known losses should be provided for, even if not actually incurred. The Tribunal concluded that the reduction in the value of closing stock by the assessee was justified under this principle. Therefore, the Tribunal set aside the Ld CIT(A)'s order, directing the AO to accept the value of closing work in progress declared by the assessee and delete the consequential addition made. As a result, the appeal filed by the assessee was allowed.
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