2014 (5) TMI 476 - AT - Income Tax

Deletion made on account of provision for diminution in the value of closing stock Held that - The AO had made the addition in view of the fact that assessee had claimed an amount in the P&L A/c as provisions for diminution in valuing of stock whereas the fact remains that assessee has been following its policy of valuing stock at cost price or net realizable value whichever is lower which is apparent from the accounting policy being followed by the assessee the net realizable value of stock is always determined after reducing the value of damaged/un-useable stock from the gross value of stock - The assessee instead of taking the net realizable value of stock in the trading account took gross value of stock in trading account and claimed the decrease in value in its P&L A/c - Had it had claimed the net realizable value of closing stock in trading account, the debit of provision for diminution in value of stock in P&L Account under schedule 15 would not have appeared - The valuation of stock has been done on the basis of general accounting policy as regularly followed by the assessee - CIT(A) has rightly deleted the addition Decided against Revenue.

Summary

Issues:
1. Addition of Rs. 30,45,000 for provision of diminution in the value of stock.

Analysis:
1. The primary issue in this case is the appeal filed by the revenue against the order of Ld CIT(A) regarding the addition of Rs. 30,45,000 for provision of diminution in the value of stock. The revenue contended that the provision was for unascertained liabilities and contingent in nature, and the assessee failed to prove that the liability had actually arisen and incurred in the relevant previous year. The Ld CIT(A) had directed to delete this addition, which was the sole grievance of the revenue.

2. The revenue argued that the diminution in the value of stock was an unascertained liability, and the assessee did not provide sufficient details to prove otherwise. The Ld DR contended that the Ld CIT(A) should have remanded the case back to the Assessing Officer instead of accepting additional evidence without following the proper procedure. It was further argued that the Ld CIT(A) wrongly relied on the generally accepted accounting policy without considering the provisions of the Income Tax Act.

3. On the other hand, the Ld AR for the assessee argued that the claim was not related to unascertained liabilities and was in line with the consistent policy of valuing stocks at cost or net realizable value, which the revenue had previously accepted. The Ld AR provided details submitted to the Assessing Officer and highlighted the accounting policy followed by the assessee for valuing inventories. The Ld AR also referenced various case laws during the appellate proceedings to support the assessee's position.

4. After hearing both parties, the tribunal found that the assessee had been consistently valuing stocks at cost price or net realizable value, as per its accounting policy. The tribunal noted that the net realizable value of stock was determined after deducting the value of damaged/un-useable stock, and the assessee had claimed the decrease in value in its P&L account based on this valuation method. The tribunal concluded that the Ld CIT(A) rightly deleted the addition as the valuation of stock was done in accordance with the general accounting policy followed by the assessee.

5. Consequently, the tribunal dismissed the appeal filed by the revenue, upholding the order of Ld CIT(A) regarding the provision for diminution in the value of stock.