Inventory treatment of loose tools upheld where consistent valuation policy supported write-off for loss and non-traceability.

Loose tools consistently treated as inventories under an accepted accounting policy were held to be properly valued as stock-in-trade, with write-off for items not traceable or lost allowed in profit and loss account. The Tribunal noted that the items were small-value tools used in continuous operational replacement, with short useful life and regular wear and tear, so they were not to be recharacterised as capital assets forming part of plant and machinery. On that basis, the Revenue's attempt to confine the claim to depreciation at the rate applicable to plant and machinery was rejected and the addition was not sustained.

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Issues: Whether the write-off or revaluation of loose tools treated as inventories was allowable as claimed by the assessee, or whether the amount was to be restricted as depreciation at the rate applicable to plant and machinery.

Analysis: The assessee had consistently followed a method of valuing loose tools as stock-in-trade and charging to profit and loss account the portion representing tools not traceable or lost, on the basis of their short useful life and regular wear and tear. The dispute turned on whether the loose tools were capital assets forming part of plant and machinery or inventories subject to revaluation. The Tribunal accepted the assessee's approach, holding that the loose tools were small-value items moving continuously according to operational requirements and were properly treated as stock-in-trade under a consistent accounting policy. In that view, the Revenue's attempt to characterise the claim as depreciation at 30% was not justified.

Conclusion: The claim adopted by the assessee was upheld and the addition made by the Assessing Officer was not sustained.

Final Conclusion: The Revenue's challenge failed, and the treatment of loose tools as inventory under the assessee's consistent valuation method was confirmed.

Ratio Decidendi: Where loose tools are consistently treated as inventories and valued under an accepted accounting method reflecting their short useful life and actual loss or non-traceability, the resulting write-off is allowable and cannot be recharacterised as restricted depreciation on capital assets.

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