Obsolete Inventory Prepared In Accordance With Accounting Standards And Audited By Independent Auditor, Can Be Written Off: Delhi ITAT

The Bench of Yogesh Kumar U.S (Judicial Member) and Pradip Kumar Kedia (Accountant Member) reiterated that “when the taxpayer has prepared obsolete inventory in accordance with the system of accounting regularly followed by it in compliance to section 211(3C) of the Companies (Accounting Standards) Rules, 2006 and has duly got prepared audited report of an independent auditor on the basis of physical verification and in view of the maintenance of inventory, the disallowance made by the AO/DRP is not sustainable in the eyes of law”.

Facts of the case:

The assessee filed return declaring total income at NIL by claiming current year loss at Rs.10,75,89,514/-. The case of the assessee was selected for scrutiny, wherein assessment order came to be passed by disallowing the expenses claimed u/s 40(a)(ia) of Rs. 16,38,113/-. The AO also disallowed the provision of bad debts of Rs. 10,00,000/- and provision for inventory return of Rs. 52,51,027/-.

Observations of the Tribunal:

The Bench noted from the Balance Sheet that provision for inventory written off had been reduced from the closing value of inventory, and the AO by referring to Note No. 13 of Balance Sheet had stated that the Assessee was taking value of traded goods at cost or NRV, whichever was lower, and from having such NRV, the valuation of closing stock was being reduced.

The Bench observed that once having taken stock at NRV, then Assessee is not permitted again reduce the value of provisions for obsolete or damaged stock which would otherwise result in double benefit.

Accordingly, the amount on account of provision for inventory written off was held to be not admissible and was added back to the taxable income to the Assessee, added the Bench.

The Bench further noted that the assessee had written off the inventory of traded goods of Rs. 52,51,027/- during the relevant A.Y and said inventory has been written off after audit by the independent statutory auditor wherein the details of obsolete, damaged and expired stock are placed on record.

The Bench also found that the effect of net inventories of the traded goods, after return of the obsolete, damaged, and expired stocks has been considered in the profit and loss statement of the audited financial statement.

The Bench referred to the submission of assessee that the amount of obsolete inventory written off has been which was debited to the P&L A/c has been deducted for disclosure purposes only and has been reflected in Note 21 of the Audited Financial Statements.

Therefore, the ITAT deleted the disallowance made by AO and partly allowed the Assessee's appeal.

Counsel for Appellant/ Assessee: Harsh Kumar & Divesh Kalra

Counsel for Respondent/ Revenue: Anshul

Case Title: Nihon Parkerizing (India) Pvt. Ltd verses DCIT

Case Number: ITA No. 5441/DEL/2019

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