TMI Blog2005 (9) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods traded. The assessee claimed that it continued to use the machinery for the above purpose although not for the purposes of manufacturing. In this manner, the assessee contended that the plant and machinery and other related items like generator, dies and moulds were kept in ready condition for use in the manufacturing. The Assessing Officer, however, has denied the claim on the ground that the assessee itself admitted that no manufacturing activities were carried out during the year under consideration and thus, the non-use of assets for business stood established. 4. In appeal before the CIT(A), the assessee reiterated the submissions noted by us in the earlier paragraphs. Further, the assessee submitted that it had resumed manufacturing activities in the subsequent assessment year 1999-2000. After considering the plea of the assessee, the CIT(A) has since sustained the disallowance of Rs. 1,73,732 comprising of depreciation on plant and machinery, generator, dies and moulds for the reasoning adopted by the Assessing Officer. Not being satisfied with the order of the first appellate authority, the assessee is presently in appeal before us. 5. Before us, ld. Counsel Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this issue, in our view, the fact situation, which emerges, is as follows. That the assessee has been hitherto carrying on manufacturing activities in the field of electronic items. During the year under consideration, the assessee did not manufacture the items, which its plant and machinery was capable of. Instead, it carried out activities relating to the trading of items as well as rectification, providing job work in relation to warranties given on account of items manufactured and sold in the earlier years. Thus, it is undisputed that the manufacturing activity was temporarily discontinued and such discontinuation was for the entire period of the current assessment year. Evidently, in the subsequent year of 1999-2000 as also in the preceding assessment year 1997-98, the assessee had used its plant and machinery and other items of assets in dispute, for carrying out its manufacturing activities. The aforesaid facts are not in dispute. 8. Insofar as the claim of depreciation is concerned, section 32 provides that the assessee must fulfil two conditions so as to be eligible for grant of depreciation. Firstly, the assessee shall be the owner of the assets; secondly, the same m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee during the year under consideration. Therefore, in view of the aforesaid discussion, we allow the claim of the assessee for depreciation on plant and machinery, generator, dies and moulds amounting to Rs. 1,73,731. Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to allow the claim as above. 9. On this ground, the assessee accordingly succeeds. 10. The third ground taken by the assessee is with regard to the action of the CIT(A) in allowing deduction of Rs. 9,80,177 on account of purchase of obsolete items representing fall in the value of the closing stock of raw materials. In brief, the facts are that the Assessing Officer noticed that the assessee-company had made a provision of Rs. 9,80,177 for obsolete items of stock by way of adjustment in the closing stock as on the year-end. On being asked by the Assessing Officer to produce evidence in support of the claim, the assessee could not furnish any evidence or explanation. In this manner, the Assessing Officer made an addition. However, in appeal before the CIT(A), the assessee submitted that it being in the business of manufacturing and trading of electronic items in which conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein is placed the approval of RBI permitting the assessee to re-export the obsolete items under consideration. Similarly, at pages 86 to 88 are placed the invoices of re-exports of the obsolete items under consideration. The ld. Counsel submitted that the impugned provision of loss was allowable having regard to the decision of the Apex Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. 13. On the other hand, ld. DR has reiterated the reasoning taken by the lower authorities in denying the claim of the assessee. 14. We have considered the rival submissions, perused the orders of the lower authorities and relevant material to which our attention has been drawn by the parties. The issue in dispute primarily relates to the efficacy of the claim of the assessee of scaling down the value of obsolete items of raw material as on the year-end which, in turn, led to a loss of Rs. 9,80,177. Admittedly, the method of valuation of the stocks followed by the assessee is cost or realizable value, whichever is lower. 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless 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 is 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. Coming back to the instant case, the assessee, having valued its obsolete stock at its realizable value, being lower of the actual cost, the resultant loss has to be taken into consideration to compute the profits chargeable to tax during the year under consideration. The objection of the revenue that the actual sale, which has resulted in the infliction of such loss took place in the subsequent year, pales into insignificance in the light of the aforesaid principles enunciated by the Apex Court in the case of Chainrup Sampat Ram ( supra ). 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, onc ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
