2009 (1) TMI 241 - HC - Income Tax

High Court upholds 10% valuation for obsolete stores by Income-tax Commissioner, favoring assessee

The High Court upheld the valuation of obsolete stores at 10% of the cost by the Commissioner of Income-tax (Appeals), ruling in favor of the assessee and ... Obsolete Stores – Held that - As per the provisions of section 145A of the Act of 1961, the income from business under the head “Profits and gains from business” has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, section 145A of the Act of 1961 provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee, therefore, if the method of valuation adopted by the assessee is recognized method, then, the same cannot, be rejected on the ground that the net realizable value/market value has keen determined on the basis of certain estimate. - It has come on record that the assessee has valued the inventories such as nut, bolt, glass fuse, bearing bushes, lock pin, pipe, screw etc., which were rusted non-moving and unusable on account of obsolescence/damage/deterioration by efflux of lime at cost and net realization value, whichever is lower. - It is also not disputed before this court that the assessee had made the requisite efforts to dispose of the same. – Decided in favor of assessee Issues:1. Disallowance of deduction claimed for obsolete stores written off under 'Plant and machinery repairs' account.2. Valuation of obsolete stores by the Commissioner of Income-tax (Appeals) at 10% of the cost.3. Justification of the valuation method under AS-2 and section 145A of the Income-tax Act.4. Dispute regarding the valuation of inventories and the decision of the Income-tax Appellate Tribunal.Analysis:1. The appeal concerned the disallowance of a deduction claimed by the assessee for obsolete stores written off under the 'Plant and machinery repairs' account for the assessment year 2000-01. The Assessing Officer disallowed the claimed amount of Rs. 68,59,108 as obsolete stocks, adding it to the assessee's income, based on arbitrary valuation without considering purchase period or item condition. The Commissioner of Income-tax (Appeals) later reduced the disallowed amount to Rs. 3,61,005 after finding that the assessee's valuation was not justified and determined the value of the stores inventory at 10% of the cost.2. The Income-tax Appellate Tribunal, on further appeal by the Revenue, upheld the Commissioner's valuation decision, citing a similar case from the Bombay High Court. The Tribunal dismissed both the Revenue's appeal and the cross-objection by the assessee, leading to the current appeal.3. The substantial question of law revolved around whether the Tribunal was justified in valuing the obsolete stores at 10% of the cost without following AS-2 and section 145A of the Income-tax Act. The Revenue argued that the Tribunal erred in confirming the Commissioner's order, while the respondent contended that the valuation method was consistent with the assets' realisable value and the Tribunal's findings were based on a thorough examination of the records.4. The High Court analyzed the provisions of section 145A of the Income-tax Act, emphasizing that the method of valuation employed by the assessee should be recognized and not rejected solely based on estimated net realisable value. The Court noted that the assessee had made efforts to dispose of the obsolete inventory and some items were actually sold in subsequent years. Ultimately, the Court upheld the Commissioner's valuation at 10% of the cost, ruling against the Revenue and in favor of the assessee.In conclusion, the High Court dismissed the appeal, upholding the valuation of the obsolete stores at 10% of the cost by the Commissioner of Income-tax (Appeals) and finding in favor of the assessee.