TaxTMI 
TaxTMI 
2020 (12) TMI 220
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....g of pickles, spices, pastes and chutneys and had filed its return of income for the A.Y.2012-13 on 29/09/2012 declaring total income of Rs. Nil. The assessee apart from engaging itself in the business of manufacturing of pickles as stated supra had also engaged in the business of trading in the local market. The assessee company is having two manufacturing activities - one unit is at Ratlam and second unit is at Nasik. The Nasik unit is run under the wholly owned subsidiary called Wisdem Machines Pvt. Ltd., The Ratlam unit is engaged in manufacturing activities of curry powder and some spice products whereas the Nasik unit is engaged in manufacturing of pickles, pastes, sauces and ready meals etc., The Nasik unit of Wisdem Machines Pvt. Ltd., is undertaking job work in the assessee company. The ld. AO during the course of assessment proceedings observed that assessee during the year had written off stock worth Rs. 11,99,41,682/- on the ground that the said stock had become stale. Assessee had already treated the said stock as obsolete and had accordingly, reduced the same from the valuation of closing stock made at the end of the year. The ld. AO show caused the assessee as to why....
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.... durable life. b) Assessee had two manufacturing units- one unit is at Ratlam and Second unit at Nasik. The Nasik unit is run under the wholly owned subsidiary called Widem Machinery P Ltd. c) Due to unrest amongst the employees (workers at factory) as well as go slow tactics, the stocks was accumulated and resulted into the same becoming stale and not marketable, compelling the company to write off the stock of Rs. 11,99,41,682/-. d) The event Sheet of disturbance in manufacturing of products at factory which are brought into knowledge of the Ld. AO vide letter dated 5.3.2015 alongwith all evidences are as under: Date Event 08/05/2009 Notice issued to all workers, where in the company noticed various tactics adopted by the workers, in delaying the production. The copy of the notice were forwarded to various parties like i) CTU union, ii) Labour Office, iii) Labour Court & iv) Industrial Court, 06/07/2009 Letter address to Senior Police Officer- wherein it was complained that the union of workers are not allowing the loading-unloading and movements of qoods. 08/07/2009 Notice to workers- wherein it is stated that the union workers have stopped the contract workers....
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....ead with Accounting Standards - 2 (AS-2) of Institute of Chartered Accountants of India (ICAA) on "valuation of inventories", the closing stock is to be valued at the lower of cost or net realizable value in accordance with the method of accounting regularly employed by the assessee. It was submitted that assessee had regularly followed AS-2 issued by the ICAI for valuation of stock. The assessee also placed reliance on the following decisions: (a) Decision of the Hon'ble Supreme Court in the case of Chainrup Sampatram vs. CIT reported in 24 ITR 481. (b) Decision of Delhi Tribunal in the case of Pepperi-Fuchs (India) Ltd., vs. DCIT reported in 6 SOT 10 (c) Decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Wolkem India Ltd., reported in 221 CTR 767 (d) Decision of Hon'ble Delhi High Court in the case of CIT vs. Tupperware India Pvt. Ltd., reported in 53 Taxmann.com 232. (e) Decision of Hon'ble Supreme Court in the case of CIT vs. Hindustan Zinc Ltd., reported in 291 ITR 391. (f) Decision of Hon'ble Delhi High Court in the case of CIT vs. Hotline Teletube and Components Ltd., reported in 175 Taxmann.286 (g) Decision of Pune Tribunal in the case of Atla....
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....led by the appellant. On 30/01/2011 workers stopped the work, therefore, management requested to resume the work vide letter dated 30/01/2011 (Notice kept on Page No.82). But again and again workers stopped the work. Again on 18/10/2011 (Notice kept on Page No.78) the workers stopped the work for want of wages and Diwali Bonus. Therefore, appellant again requested them to resume the work on 18/10/2011 but they threaten the management therefore, the management requested the police to protect the goods and premises of the appellant. Due to these development appellant business highly suffered and turnover fall down by 50%. But the stock was already purchased and lying with the appellant. Appellant maintained the stock in range of the 20 to 25 cr to achieve the sales of Rs. 25 cr and above. But, during the year the appellant sales were fall down by 50% which resulted into perishable of 50% stock stale. Opening stock during the year is Rs. 24.34 cr and stock written off by the appellant os 11.99 cr which is approx 50% of stock. Hence, the written off amount by the appellant is scientifically supported by the circumstances. Further out of Rs. 11.99 cr amount of Rs. 3.35 cr pertains to ....
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....o charge the true profits for the year. Where the value of unsold stock is less than its actual cost, adoption of market value, to value it at the end of the year, would imply accounting for an anticipated loss that may result on sale of such goods, maybe in the following year. The said treatment of recognising the loss in the year itself is based on prudence as no trader would show increased profits before its actual realization. [Para 14] The Apex Court in the case of Chainrup Sampat Ram v. CIT [1953] 24 ITR 481, opined that as the profits of income-tax are to be computed in conformity with the principles of commercial accounting, unless such principles stand superseded or modified by a legislative enactment, the loss due to fall in price below cost with respect to the traded goods is allowed even if such loss has not been actually realized in the year itself. Evidently, the emphasis by the Apex Court was to effectuate the theory of prudence underlying the rule that the closing stock is to be valued at cost or market price/realizable value whichever is lower. In the instant case/ the assessee, having valued its obsolete stock at its realizable value/ being lower of the actual c....
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.... of closing stock of raw-material and stores and spares was shown at the reduced value i.e. after deducting the amount of Rs. 2,90,299 from each and individual items. The claim made by the assessee on this account was rejected by the Assessing Officer and concurrently by the learned Commissioner (Appeals), when he took the view that the loss claimed pertained to earlier year and he was not satisfied as to how the accumulated losses of earlier years could be made a charge on the profits of the year. He, thus, upheld the disallowance. Thus, the assessee is aggrieved. The learned counsel for the assessee submitted that the authorities below misread the facts and, therefore, reaching erroneous conclusion. He submitted that the assessee has been in business for the last 25 years and during this period it has accumulated large items of raw-material, stores and spares which have either become obsolete or have lost much of their value because of changed circumstances. He submitted that assessee's results were getting distorted on these facts and under these circumstances year in and year out till a conscious decision was taken to go into the whole question for this purpose a committee ....
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....sideration of relevant facts and circumstances, we are of the view that the change effected by the assessee in the method of valuation of its stocks was bona fide, the same having been made on permanent basis and the changed method having been followed in the subsequent years. Therefore, we are of the view that assessee's claim was justified. We accordingly allow this ground of appeal." (iii) Another aspect involved in this issue is that the AO raised one doubt that the stock was written off for showing loss instead of the profit. But the AO failed to consider that the appellant not earned the profit. Loss claimed by the appellant is almost equal to the stock written off. And further, in case of stock written off tax effect is neutral. Because after written off the stock, closing stock will get reduced and same will be carried forwarded to next year as opening balance. Thus, for future cost of goods will be lower. Hence, the stock written off by the appellant is allowable. In this regard reference is made and reliance is placed on the decision of Delhi High Court in case of CIT v/s Hughes Communication India Ltd. [2013] 33 taxtnann.com 95 (Delhi)whexe the Hon'ble Justice ....
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....len below even the cost price. In support of the valuation, the assessee submitted the basis of the estimate which was prepared by its technical department. Certain details were also submitted regarding certain items of stock together with their realisable rate as on 31.03.2003 and 31.03.2004. The assessing officer rejected the assessee's claim for reduction in the value of the closing stock made on the basis of the net realizable value being less than the cost and made an addition of Rs. 90,35,298/- to the business profits. 5. On appeal the CIT (Appeals) noted that though the assessee was right that there was some diminution in the value of inventory, complete details were not available. He, therefore, restricted the addition to 50% i.e. Rs. 45,17,649/-. 6. Both the revenue and the assessee filed cross-appeals before the Tribunal. The Tribunal recorded the following findings: - (a) The claim of the assessee that the value of the stock had diminished below the cost is supported by the report submitted by the technical division of the assessee; (b) The details of the valuation were placed before the assessing officer under cover of the letter dated 27.12.2006. These deta....
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....he same figure of closing stock is taken as the opening stock of the succeeding year. What is, therefore, more important to be seen is whether the same method of valuation of stock is followed consistently by the assessee so that there is no distortion of profit. There is also no finding to the effect that the true profits of the business cannot be determined having regard to the method of valuation of stock employed by the assessee. It may be noted that in India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.) the Madras High Court noted that the method of valuing the slow moving and obsolescent stock at a price below the cost was a recognised method in other countries and can be properly followed in India too. 8. In view of the foregoing discussion we do not think that any substantial question of law arises for our consideration. The appeals are accordingly dismissed. From the above discussion of facts, it is seen that the Appellant has written off the stock on accepted principal of valuation of stock and which has been explained and substantiated by the appellant. Further, keeping in view of the judicial pronouncements as discussed above, it is concluded....
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....er in the assessment. Even if these stale stocks had been written off in any earlier years as accepted by the ld. AO in his assessment order and by the ld. DR before us, the same would have only enabled the brought forward losses to get increased. Hence, in any case it will have no impact in the computation of total income for the year under consideration. One more observation made by the ld . AO that assessee had not offered any income in respect of these stocks. This observation is factually incorrect in as much as the stocks worth Rs. 11.99 crores was included in the closing stock valuation upto 31.3.2011 and hence income was duly offered for the same. The crucial point to be understood is there is absolutely no dispute that the stock to the tune of Rs. 11.99 Crores falls into the category of stale stock. Since this stale stock has been written off to the tune of Rs. 11.99 Crores, the assessee rightly had shown as an exceptional or extraordinary item in its profit and loss account as a separate line item in consonance with the requirement prescribed in accounting standards issued by ICAI. We also find that even after this write off of the stock to the tune of Rs. 11.99 Crores,....