TaxTMI 
TaxTMI 
2013 (3) TMI 171
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....reas the Revenue is in appeal against the relief of Rs 25,47,211/- granted by the Commissioner of Incometax (Appeals) out of total addition of Rs 44,75,470/- made by the Assessing Officer. The relevant facts are that the assessee is in the business of manufacturing air pollution control equipments, size reduction equipments, pneumatic handling system etc. The facts as emerging from the orders of the authorities below are that the assessee had valued the closing stock of non-moving items at 5% of the cost, thereby decreasing the value of stock by Rs 44,74,470/- from the total value of stock of Rs 1,87,62,307/-. According to the Assessing Officer, this fact was not disclosed by the assessee in the return of income and the auditors had also not pointed out specifically that the value of stock had been decreased on account of valuation of non/slow moving stock. The non/slow moving stock also included the stock of the current year amounting to Rs 2.63 lakhs and as per the Assessing Officer, the stock can be discharged or sold as scrap if the same is lying since long time, say over 5 years. Further, the Assessing Officer observed that the assessee did not furnish the complete details ....
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.... the view of the Commissioner of Income-tax (Appeals), under the garb of non/slow moving items, the assessee cannot be allowed to value the closing stock at 5% of the purchase even for items purchased during the year, especially when there was a non-disclosure of the method of valuation of closing stock followed by the assessee. Ultimately, out of the total addition of Rs 44,75,470/- made by the Assessing Officer, the Commissioner of Income tax (Appeals) sustained an addition of Rs 19,28,259/- thereby deleting the balance addition of Rs 25,47,211/-. The concluding portion of the findings of the Commissioner of Income-tax (Appeals) is as follows: "The AO, however, has added the entire amount of Rs 44,75,470/- being the non-moving/slow moving items from the first year itself since the assessee had not produce the records of non-moving items prior to the year 2000. The inventory of such nonmoving/slow moving inventory as on 31.3.2000 was Rs 25,47,211/-. The additional items becoming nonmoving during the year are only Rs 19,28,259/- which included Rs 2,63,524/- of the current year. In my considered opinion, since the non-moving items added to the closing stock during the year under ....
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....bsp; (iii) CIT v Hotline Teletube & Components Ltd. 175 Taxman 286 (Del), and (iv) Milton Cycle Industries Ltd. V. DCIT 54 TTJ 380 (Del) (Trib). It is further pointed out that even the Auditors have pointed out that the basis of the stock valuation is fair and proper and is in accordance with the normally accepted principles. It has been submitted that the Auditors have reported that the assessee has procedure of determining the unserviceable and damaged stocks at the end of the year and adequate provision thereof is made after determination. It was also pointed out that no such disallowance has been made in the past or even in the subsequent assessment years and the assessee has been following similar policy. It has also been pointed out that assessee has undertaken steps to dispose of such items of slow/non-moving stocks by giving advertisement in the newspapers for which a reference was made to pages 114 & 115 of the Paper Book. It is pointed out that in the subsequent years some items of slow/non-moving stock inventory has been sold at prices which are proximate to the rate at which such inventories have been valued by the assessee, i.e. at 5% of the original pu....
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....cturing of such specialized equipments, large number of components are required wherein lot of bought-out components are also involved. The assessee explained that on account of the production being linked to the specific requirements of the customers it undertakes procurement of specific components meeting with the requirements of the particular customer. However, for various reasons which have been enumerated in detail in the assessment order, the assessee submitted that even after completing the order of a particular customer, it is left with certain unused items. It is explained that such items are kept in stock to meet any similar requirements in future. The assessee explained that in such cases where items do not move for more than 3 years, the value thereof at the end of the year is taken at 5% of the original purchase price. On account of such policy, the Assessing Officer noticed that as on 31.3.2003, the assessee had reduced the valuation of its closing inventory by Rs 44,75,470/- on account of Raw material inventory - Rs 12,19,913/-, Bought-out inventory - Rs 17,64,564/-,. and Finished equipment inventory - Rs 14,90,993/-. The Assessing Officer has rejected the afores....
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....inventory in accordance with generally recognized methods of accounting. In other words, if the method of valuation adopted by the assessee is a recognized method, the same cannot be disregarded on mere technicalities. In the present case, the assessee contends that it has determined items of stock which are slow/non-moving and has accordingly valued the same at 5% of its cost of purchase. Such estimate of its value being lower than the actual cost, such items have been taken by inventory as on the year-end at such lower values. In our view, the method of valuing slow/non-moving stocks at the lower of cost or net realizable value, on the basis of certain estimate is a recognized method. So, however, an intertwined aspect is the manner of determination of such items of slow/non-moving stocks, which undoubtedly has to be based on a scientific and bona fide methodology. The claim of the assessee is that it has classified certain items of stock as slow/non-moving in cases where such items are lying in stock unused for 2 to 3 years. It has been explained that non-usage is primarily on account of the nature of business effected by the assessee. The assessee manufactures equipment based o....
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....ase, the CIT(A) has rightly observed thayt the diminution in value claimed as deduction during the year is only to the extent of Rs 19,28.259/- comprised in Rs 44,75,470- and, therefore, it is only to that extent the Assessing Officer could have examined/verified the case of the assessee. 12. Another point made out by the Assessing Officer is that the aforesaid methodology has not been disclosed by the assessee in the financial statements and that the classification of slow/non-moving inventory be done on the basis of 5 years of non-utilization of the stock. In so far as the former aspect is concerned, the learned Counsel pointed out that in the Annual accounts accompanying the Balance Sheet, the assessee had disclosed full details. The learned Counsel submitted that in so far as the said statement of accounting policy is concerned, it was an error so however, factually speaking in the past as well as in the subsequent years the assessee has been undertaking the exercise of identifying non-moving items of stock and valuing the same at 5% of original purchase cost. Moreover, it has also been pointed out that the statutory Auditors of the assessee have clearly reported in Clause 6....
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....ucts are manufactured primarily specific to the requirements of each customer. In fact, even the aspect of valuing the same at 5% of the original purchase cost can also not be said to be an under-estimation because the assessee has illustrated that sales made in subsequent period of some of the items have fetched prices which is near about 5% of its original cost. In fact, in the case before the Hon'ble High Court of Rajasthan in the case of Wolkem India Ltd. (supra), the valuation of unusable and non-moving items on account of obsolescence at 5% of the cost on estimation has been found to be reasonable. Therefore, on all these aspects, we uphold the plea of the assessee in principle. 13. Now, we may come to the specific aspects of the identification of nonmoving items as on 31.3.2003 undertaken by the assessee. In this regard, we find ample substance in the plea of the Commissioner of Income-tax (Appeals) that since the non-moving items added to the closing stock during the year is only 19,28,259/-, the Assessing Officer shall be justified to put such working for further verification and examination. For examination of this aspect, we set aside the matter to the file of the Ass....