2013 (1) TMI 67 - HC - Income Tax

Method adopted in reporting the discounted value of raw material, components and consumable stores - cost or net realizable value, whichever is less - Tribunal disapproved method as adopted by assessee - Held that - There is no dispute that the principle cost or net realizable value, whichever is lower is an accepted method of valuation of inventory. There is also no dispute that AS-2 issued by the ICAI are binding on both the assessee as well as the tax authorities under Section 145. Write off factor of 8.5% has not been proved by the assessee - Held that - The figures which are set out by the assessee in Annexure G show how the assessee arrived at the write off factor. These figures have to be verified by the AO. While therefore holding that the Tribunal was not right in accepting the revenue s contention in principle, AO is directed to verify the figures furnished by the assessee in support of the write off factor of 8.50% and complete the assessment afresh on this limited issue - in favour of assessee subject to the remit order passed.

Summary

Issues: Valuation of inventory for deduction claim

The judgment revolves around the issue of whether the Tribunal erred in disapproving the method adopted by the assessee in reporting the discounted value of raw material, components, and consumable stores as of a specific date.

Analysis:

The appellant, a private limited company engaged in manufacturing and selling motorcycles, claimed a deduction on account of inventory written off for the assessment year 2007-08. The appellant justified the claim by following the principle of "cost or net realizable value, whichever is less" in valuing its inventory. The appellant arrived at a net realizable value of 91.05% and adopted a write-off factor of 8.50% based on estimated cost of production and sales value, which was a common practice in the automobile industry.

The assessing officer rejected the claim, considering it as a prudent decision of a trader rather than a justifiable deduction due to the absence of a present obligation capable of commercial valuation. Consequently, the amount claimed was disallowed and added back to the income.

The CIT(Appeals) supported the appellant's claim, citing accounting standards (AS-2) on the valuation of inventories. The CIT(Appeals) directed the Assessing Officer to verify the facts and allow the loss, emphasizing that the amount had already been taxed in a previous assessment year.

The revenue appealed the decision to the Tribunal, arguing that the claim represented a contingent liability and was not allowable as a deduction. The Tribunal sided with the revenue, stating that the write-off factor of 8.5% was not substantiated by the appellant, and thus, the relief granted by the CIT(Appeals) was unjustified.

The appellant further appealed to the High Court, asserting that the accounting standards were mandatory and consistently followed. The High Court acknowledged the accepted method of valuation and the binding nature of AS-2 but directed the Assessing Officer to verify the figures provided by the appellant to support the 8.50% write-off factor. The High Court found the Tribunal's decision flawed and remitted the matter back to the Assessing Officer for a fresh assessment solely on this limited issue.

In conclusion, the High Court allowed the appeal in favor of the assessee, subject to the reassessment directed, emphasizing the importance of verifying the figures supporting the write-off factor before making a final determination.