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2005 (9) TMI 506 - AT - Income TaxDepreciation in respect of plant and machinery, generator, dies and moulds - Method of accounting - Manufacturing activities discontinued - scaling down the value of obsolete items of raw material as on the year-end - HELD THAT:- It is also not in dispute that the value of the obsolete stock in question as on 31-3-1998 was lower than its actual cost. This is supported by the price at which such stock has been subsequently sold by the assessee by way of re-export. The object of valuing closing stock in terms of the method followed by the assessee is to bring into the charge of income the true profits for the year. In a hypothetical situation, it could be understood that the object of crediting the value of unsold stock to the Profit & Loss account is to balance the cost of those goods entered on the debit side of the Profit & Loss account at the time of their purchase, so that the cancelling out of the entries relating to the same stock would leave only the transactions on which there have been actual sales in the course of year thereby showing the actual profit or loss pertaining to the particular year’s trading. If the value of the stocks, which is lying unutilized at the end of the year, is equivalent to or more than the cost, then, to cull out the true profits on the goods actually sold during the year, one will have to state the value of such unsold stocks only at the cost. This is a well understood and accepted principle of commercial accounting. However, an exception is in a situation where the value of such unsold stock is less than its actual cost. In such a situation, 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, may be in the following year. The said treatment of recognizing the loss in the year itself is based on prudence as no trader would show increased profits before its actual realization. Moreover, this principle is established in the commercial world. In fact, the Hon’ble Supreme Court in the case of Chainrup Sampat Ram v. CIT [1953 (10) TMI 2 - SUPREME COURT] referred with approval the following observation of the learned Judges in Whimster & Co. v. Commissioners of Inland Revenue. We may also mention here that it is not the case of the revenue that the accounting policy with regard to valuation of inventories followed by the assessee is not consistent or was lacking in bona fides. Therefore, once the accounting policy of the assessee, which is generally accepted in the commercial world, is not doubted by the revenue, the loss resulting on account of its application cannot be disallowed merely on the ipse dixit of the Assessing Officer. In view of the aforesaid discussion, in our view, the stand of the assessee is liable to be upheld. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee with regard to the provision of loss with regard to the obsolete items of stock. In the result, the appeal of the assessee is partly allowed.
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