2024 (7) TMI 1017 - AT - Income Tax

Obsolete inventory write-off deduction allowed when following proper accounting standards and audit procedures

ITAT Delhi allowed deduction for obsolete inventory written off by the assessee. The AO disallowed the deduction claiming double benefit after stock was ... Disallowance of deduction of traded goods written off on account of obsolete, damaged, expired stock - case of the assessee that the amount of obsolete inventory written off has been debited to the Profit and Loss Account which has been audited by the auditor, thus, the aforesaid written off of obsolete inventory has been audited and the quantum of written off also forms part of the Audited Financial Statements in accordance with the disclosure, requirements of Accounting Standard HELD THAT:- AO while making the disallowance observed that ‘once having a taken the stock at NRB, the assessee is not permitted to again reduced the value of provision for obsolete or damaged stock otherwise this will result in double benefit’, the coordinate Bench of the Tribunal in the case of M/s BG Exploration and Production India Ltd. [2018 (7) TMI 1954 - ITAT DELHI] held that when the taxpayer has prepared obsolete inventory in accordance with the system of accounting regularly followed by it in compliance to section 211(3C) of the Companies (Accounting Standards) Rules, 2006 as amended and other relevant provisions of the Companies Act, 1956 and has duly got prepared audited report of an independent auditor on the basis of physical verification and in view of the maintenance of inventory, the disallowance made by the AO/DRP is not sustainable in the eyes of law. ITAT Bench at Jaipur in the case of Gillette India Ltd. [2015 (12) TMI 1800 - ITAT JAIPUR] held that the assessee had given details about the inventory written off along with ledger codes whereby the identified items of inventory are written off in the books of account, and accordingly deduction for written off of obsolete inventory should be allowed to the assessee. Issues Involved:1. Disallowance of deduction for obsolete, damaged, expired stock.2. Disallowance of deduction for foreclosure charges due to non-deduction of TDS.Comprehensive, Issue-Wise Detailed Analysis:1. Disallowance of Deduction for Obsolete, Damaged, Expired Stock:The primary issue in the appeal was the disallowance of Rs. 52,51,027/- claimed by the assessee for obsolete, damaged, and expired stock. The assessee argued that the Ld. CIT(A) failed to appreciate the various facts and documents provided during the assessment and appellate proceedings. The assessee contended that the provision for inventory written off had been reduced from the closing value of inventory, and this was reflected in the Balance Sheet and Notes on Accounts.The Assessing Officer (A.O.) had observed that the value of traded goods was taken at cost or Net Realizable Value (NRV), whichever was lower, and reducing the valuation of closing stock again for provisions for obsolete or damaged stock would result in a double benefit. Consequently, the amount of Rs. 52,51,027/- was added back to the taxable income.During the appellate proceedings, the Ld. CIT(A) upheld the disallowance, noting that there was no rationale provided for the quantity and value of the inventory written off. The Ld. CIT(A) highlighted wide variations in the valuation of the stock and questioned the basis for only a portion of certain items being made obsolete.The assessee argued that the inventory write-off was audited by an independent statutory auditor and disclosed in the notes to the account. The inventory written off was included in the traded goods and reflected in the Profit and Loss statement. The assessee cited the case of M/s BG Exploration and Production India Ltd. Vs. DCIT, where the Tribunal held that disallowance of obsolete inventory written off, prepared in accordance with accounting standards and audited by an independent auditor, was not sustainable.The Tribunal found merit in the assessee's argument, noting that the inventory write-off was in compliance with accounting standards and duly audited. The Tribunal referred to precedents, including the cases of Alfa Laval India Ltd. vs. DCIT and Gillette India Ltd. Vs. ACIT, where similar disallowances were overturned. Consequently, the Tribunal deleted the disallowance made by the A.O. and confirmed by the Ld. CIT(A), allowing the assessee's appeal on this ground.2. Disallowance of Deduction for Foreclosure Charges Due to Non-Deduction of TDS:The second issue involved the disallowance of Rs. 10,54,784/- for foreclosure charges due to non-deduction of Tax Deduction at Source (TDS) under Section 40(a)(ia) of the Income Tax Act. However, during the proceedings, the assessee's counsel submitted that they were not pressing this ground of appeal. Consequently, the Tribunal dismissed this ground as not pressed.Conclusion:The Tribunal partly allowed the appeal by deleting the disallowance of Rs. 52,51,027/- for obsolete, damaged, expired stock and dismissed the ground related to foreclosure charges as not pressed. The order was pronounced in the open court on 10th July 2024.