2026 (2) TMI 570 - AT - Income Tax

Revaluation of closing stock upheld; assessment addition quashed after valuation method and net realizable value accepted.

Assessee's revaluation of old and damaged closing stock was performed via year-end stock verification, branch-level identification, director supervision ... Addition of revaluation of closing stock - AO noted that the assessee had revalued damaged stocks less than the market value - reason, basis and procedure of revaluation of such stock - HELD THAT:- It is seen that, the assessee society which is dealing in hardware items would conduct stock verification exercise at the year end and thereafter quantify the old / damaged stock and estimate their realizable value. The stock verification statement for the immediately preceding year read along with the TAR of AY 2014-15 reveals that, the assessee Society had already provided for reduction in value of old / damaged stock upto 31.03.2014. We thus find merit in AR’s contention that the reduction in valuation of closing stock debited in the accounts for the relevant FY 2014-15 was Rs. 26,88,599/- and not Rs. 1,25,98,834/- as quantified by the ld. AO. Basis of valuation - The assessee has demonstrated that the valuation was undertaken in a scientific and reasonable manner in terms of which, the Director of Societies would supervise the physical stock exercise undertaken by the branch heads at the respective locations, identify the old damaged stock and thereafter estimate the net realizable value with the approval of the auditor. According to us, it cannot be said that the method and manner of valuation adopted by the assessee was arbitrary or unreasonable. It is also not a case that the ld. AO had invoked Section 145(3) and rejected the audited books of accounts and in that view of the matter, the valuation of closing stock as undertaken by the assessee society could not have been interfered with. Hence, the addition on account of valuation of closing stock is held to be unjustified. Issues: Whether the addition of Rs. 1,25,98,834 made by the Assessing Officer on account of revaluation of closing stock is justified.Analysis: The assessee is a society dealing in hardware items operating in remote locations. Stock verification statements and auditor-certified valuation reports were produced showing earlier downward valuation of old/damaged stock aggregating Rs. 99,10,235 up to 31.03.2014 and a further reduction of Rs. 26,88,599 during the relevant year, which together correspond to the claimed diminution in realizable value. The valuation exercise involved physical verification supervised by the Director of Societies, identification of old/damaged stock by branch heads, and estimation of realizable value with auditor approval; the methodology applied a percentage of MRP to estimate realizable value and was evidenced across years. The Assessing Officer did not invoke Section 145(3) to reject the audited books of account. On the record, the further reduction debited in the relevant year is limited to Rs. 26,88,599 and the overall valuation method is demonstrated as reasonable and non-arbitrary.Conclusion: The addition of Rs. 1,25,98,834 on account of valuation of closing stock is deleted and the ground is allowed in part in favour of the assessee.