Obsolete stock valuation method upheld where bona fide inventory practices were used to reflect true profits

A bona fide and consistently followed method of valuing obsolete closing stock at net realisable value, rather than cost, was recognised as acceptable where it was adopted to reflect true profits. The Tribunal noted that the assessee had identified obsolete items for commercial reasons such as design changes, quality improvements and discontinuation of models, and that the Revenue had shown no better scientific method. The timing of the inventory, prepared before year-end as a practical accounting measure, did not by itself impair genuineness or justify rejection of the write-off. The obsolete stock addition was therefore deleted.

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Issues: (i) Whether the assessee was entitled to value obsolete closing stock at cost or net realisable value and write off the obsolete items in computing taxable profits. (ii) Whether the write-off could be disallowed because the inventory of obsolete stock was prepared as on 30 September instead of the year-end date.

Issue (i): Whether the assessee was entitled to value obsolete closing stock at cost or net realisable value and write off the obsolete items in computing taxable profits.

Analysis: The assessee had consistently followed the practice of identifying stocks which had become useless or had little value because of design changes, quality improvements, discontinuation of models, and similar business reasons. The valuation method was found to be fair, reasonable, and directed towards ascertaining true profits. The Tribunal accepted that no better scientific method was shown by the revenue, and that the method adopted was bona fide and continued in later years. The principle recognised in valuation cases is that a bona fide method of stock valuation, consistently followed, cannot be rejected merely because it is unfavourable to the revenue.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the write-off could be disallowed because the inventory of obsolete stock was prepared as on 30 September instead of the year-end date.

Analysis: The assessee explained that the exercise of identifying obsolete items was time-consuming and had to begin before the close of the accounting year. The inventory prepared in September was accepted as a practical accounting measure, and it was found that the method left little scope for manipulation. Any omission of items becoming obsolete after that date was not enough to reject the entire exercise. The timing of the inventory was therefore treated as an accounting necessity and not as a defect affecting the genuineness of the claim.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The additions made on account of obsolete stock written off were rightly deleted, and the revenue appeals failed.

Ratio Decidendi: A bona fide and consistently followed method of valuing obsolete closing stock, adopted to reflect true profits, cannot be rejected merely because the inventory process is undertaken before the accounting year-end or because the method is disadvantageous to the revenue.

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