TaxTMI 
TaxTMI 
2026 (9) TMI 929
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....horities and argued that the claim was not substantiated with requisite documents. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Assessment Proceedings 3.1 During assessment proceedings of assessee-firm, the main issue arose on account of write-off of obsolete stock. It transpired that the assessee had opening stock of approx. Rs. 60 Crores which was written-off as obsolete stock. The assessee's banker State Bank of India (SBI) also classified assessee' account as Non-performing asset (NPA) during the year due to obsolete condition of stock and assessee's default in repayment of debts. The auditor reported that the valuation of stock was done on the basis of ICAI Accounting Standard- 2 (AS-2) Valuation of inventories which mandate valuation of stock at lower of cost or net realizable value. The management, in consultation with its auditors and bankers, undertook physical verification of actual stock and valued it on the basis of net realizable value. Accordingly, the excess stock was written-off. It was pointed out by the assessee that the stock was very old stock and the assessee's business suffered heavily due to telec....
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.... the market and therefore, the net realizable value for such stock was taken as 'nil'. This method of valuation was in accordance with the valuation method as prescribed by ICAI and therefore, the write-off was allowable to the assessee in terms of various judicial decisions. It was further stated that old stock was lying with the assessee due to which the quality of the stock deteriorated and the firm was left with no option but to dump the obsolete stock as scrap. The bank account was classified as NPA for the same very reasons. The auditor confirmed valuation of inventories as per AS-2. No justification was given by Ld. AO as to why the value of certain items of stock could not be 'nil'. The Ld. AO did not make any enquiry about the nature of stock; whether the same had any scrap value in the open market or not etc. The assessee fulfilled its duties regarding justification of value taken for closing stock by furnishing certificate from its auditor and after following AS-2, valued the stock. Reference was made to the decision of Hon'ble Apex Court in the case of CIT vs. Alfa Laval (India) Limited (295 ITR 45) which was rendered in assessee's favor on similar facts. 4.2 The Ld.....
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....ubmissions and perused the material available on record. The short question that falls for our consideration is whether Ld. AO was justified in substituting the assessee's valuation of obsolete inventory by an assumed value when the assessee had valued the inventory in accordance with the recognised principle of lower of cost or net realizable value as prescribed by ICAI in Accounting Standard-2 (AS-2) dealing with valuation of inventories. 6. At the outset, it is important to appreciate that valuation of closing stock is not an exercise in determining the historical cost of inventory alone. The fundamental accounting principle is that inventory cannot be carried at a value higher than the amount expected to be realised from its sale or use. Thus, where inventory has become obsolete or commercially unusable, the relevant consideration is its actual net realizable value and not historical cost. The assessee's claim cannot, therefore, be rejected merely because the original cost of the inventory was substantial. What is relevant is its market value at the end of the relevant previous year. 7. From the enumerated fact, it emerges is that the assessee has followed consist....
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.... has been done in the present case. A certificate to that effect was already furnished by the assessee. 9. At this juncture, it would be useful to take note of decision of Hon'ble Bombay High Court in the case of Alfa Laval (India) Ltd. (133 Taxman 740). In that case also, the assessee wrote-off obsolete inventory which were not moving for the last three years in view of the change in designs or specifications due to its technological upgradation. The assessee valued the closing stock of obsolete items at 10% of cost. The Ld. AO held that the assessee neither furnished the list of obsolete items nor produced any records to show that the items were not moving. The Ld. AO accordingly, adopted realizable value of obsolete items at 50% of the cost. The Ld. CIT(A) deleted the addition on the ground that the actual realization of the obsolete items in the subsequent year was less than 10% of the cost. The Tribunal restored the view of Ld. AO. However, Hon'ble High Court held that the assessee furnished duly certified auditor's report which clearly justified valuation of obsolete items at 10% of cost, the assessee was entitled to value the closing stock at market value or at cost which....
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.... books of account under the head obsolescence of inventory. The separate provision of inventory was not in accordance with the Accounting Standard of ICAI for valuation of inventory. Since the assessee has reduced the value of inventory, it was nothing but a diminution in the value of asset which would fall under Explanation 1 to section 115JB and thus, needed to be added back to the Book Profits. This case law is thus clearly distinguishable and not at all applicable to the facts of the present case before us. Rather it reinforces the fact that the valuation of the inventory has to be done only on the basis of lower of cost price or net realizable value. 11. In the present case, the assessee has furnished substantially more than a bare assertion. There was physical verification of the stock by the management, item-wise details were furnished, the business line itself was discontinued, the stock was stated to have become old and non-moving, and the valuation was certified by the auditor. In the audited accounts, inventory valuation policy was disclosed and this method was consistently being followed by the assessee since nothing on record demonstrates change in method of valuati....
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....the facts of the present case, the assessee's books of accounts were audited. The physical inventory was verified and certified by the management and the auditor. The assessee furnished item-wise details and explained the circumstances resulting in discontinuation of the relevant business. The valuation was made by applying the recognised accounting principle of lower of cost and net realizable value. Once these facts are placed on record, the burden shifts to the revenue to demonstrate, with some positive material, that the inventory had a higher realizable value. The mere fact that the certificate was not countersigned by a technical expert cannot convert an otherwise supported accounting valuation into an arbitrary claim. 12. So far as the reliance placed by the Ld. CIT(A) upon SBI's letter stating that the bank had not received communication from the assessee regarding valuation of stock, is concerned, we find that the said fact, on standalone basis, do not controvert the otherwise valid claim of the assessee. There is no requirement that the valuation of stock should be done in consultation with the assessee's banker. The question before us is the value of inventory....
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....ion in profit resulting from a genuine write-down of inventory is the natural consequence of applying the lower of cost or net realizable value principle. The mere magnitude of the write-down could not be the basis for concluding that it was fictitious. In fact, the magnitude of the write-off is itself explained by the exceptional circumstances of the assessee's business. The assessee had a substantial opening inventory but only limited purchases and sales during the year and ultimately discontinued the relevant business. These facts are consistent with the assessee's explanation that a large portion of the old inventory had ceased to have commercial utility. 15. We also note that the principle underlying inventory valuation is forward-looking to the extent that net realizable value represents the amount expected to be realised from sale in the ordinary course of business. The Hon'ble Bombay High Court in Alfa Laval (India) Ltd. (supra) placed considerable significance on subsequent realization of obsolete items as corroboration of the valuation adopted by the assessee. We find that assessee's opening stock in the very next year stood accepted by the revenue as alrea....