Appeal dismissed: provision for obsolete stock allowed under lower-of-cost-or-net-realizable-value rule despite AO rejection

HC dismissed the appeal, upholding the Tribunal's factual finding that a provision for diminution in value of obsolete stock was justified. The assessee showed the stock had not moved for over three years, could only be sold as scrap, and sale proceeds would be lower than excise duty payable. Applying the lower-of-cost-or-net-realizable-value rule, the provision represented an anticipated diminution in value and was allowable despite the AO's rejection.

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Issues: Whether the provision for diminution in value of obsolete closing stock (written down as loss on account of obsolescence) is allowable while computing income under the Income-tax Act, 1961.

Analysis: The valuation principle of closing stock at cost or realizable market price, whichever is lower, and the doctrine permitting anticipation of loss where market value falls below cost were applied. Factual findings recorded by the Tribunal established that the inventory had not moved for over three years, had become scrap or incapable of further use, and that sale even as scrap would yield value lower than excise burden; consequently the provision represented an anticipation of loss rather than an uncrystallized or speculative expense. These findings of fact support valuation below cost in accordance with established commercial accounting principles.

Conclusion: The provision for diminution in value of obsolete stock is allowable; the appellate challenge is rejected and the revenue's appeal is dismissed, which is in favour of the assessee.

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