Provision for obsolete stock allowed as deduction: ITAT

The issue in this appeal of the assessee is regard to the disallowance on account of provision for obsolescence of inventory amounting to Rs. 60,00,000/-.

In this matter, the assessee had shown an opening balance towards provision for obsolescence. The Assessing Officer(AO) asked assessee to explain. The assessee claimed that due to technological advancement the finished goods as well as spare parts become obsolete after one(01) year. The assessee claimed that company follows valuation policy based on which each item wise analysis is carried out to determine if a particular item has become obsolete or not. The assessing officer decided that in the absence of any documentary evidence to suggest that particular items have market value nil or half of the cost price, the value of inventory cannot be reduced. The AO after an elaborate discussion made addition of Rs.74,00,000/-.

Aggrieved by the same the assessee filed an appeal before the Ld. Commissioner of Income Tax (appeal). The Ld. Commissioner of Income Tax (appeal) upheld the addition. aggrieved by the same the appellant assessee filed appeal before the Tribunal.

ITAT observed that the issue of valuation of obsolete inventory had been decided by the ITAT for AY 2011-12. It was also observed that the Assessing Officer in the assessment order for AY 2012-13 had follow the earlier assessment order. The Hon’ble ITAT Pune in ITA No.2920/PUN/2017 for AY 2011-12 has held as under:

“14. In the present case, though the appellant made a provision for obsolescence of stock of finished goods following a methodology but it was not demonstrated before us that there was o under-valuation of the finished goods or spares and the excess provision, if any, was written back in the succeeding year or in the year of sale of obsolete stock, etc. nor was it demonstrated that obsolete stock was valued at lower of cost or net realizable value. In the circumstances, in principle, we hold that the provision for obsolete stock is allowable but it requires to be satisfied that the value of obsolete items of finished goods is valued on the cost or market price whichever is less. In the circumstances, we remand the matter back to the file of Assessing Officer with a direction that the provision for obsolete stock be allowed as deduction subject to satisfying himself that the valuation is done based on the principle that at cost or market price or net realizable value, whichever is less. Thus, this ground of appeal is allowed for statistical purposes.”

Hence, respectfully following the order of Hon’ble ITAT(supra) ITAT remand the issue to the file of the Assessing Officer with a direction that the provision for obsolete stock to be allowed as deduction subject to Assessing Officer himself satisfying that the valuation is done based on the principle of cost, or market price or net realizable value whichever is less.

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