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2016 (11) TMI 883 - ITAT MUMBAI

2016 (11) TMI 883 - ITAT MUMBAI - TMI - Addition made on account of loss on valuation of slow moving / non-moving items and old stock - Held that:- From the record we found that the inventory in question was neither written off / written down nor shown as slow moving or old inventory in earlier assessment years including the accounts for the period ended on 31/08/2007 prepared by the erstwhile management. Since present management of the assessee-company and the auditors were of the opinion that .....

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r writing off the inventory in question. His case is that loss on inventory had already been incurred by the assessee in the earlier years when the erstwhile management of the assessee-company had shown the inventory in question as old and slow-moving stocks in the audited accounts for the year ended 31/03/2005,31/03/2006, 31/03/2007 and the accounts for the period ended on 31/08/2007. However, this loss was cristalised by valuation of non-moving and slow moving stock during the year under consi .....

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by the assessee against the order of CIT(A) for the assessment year 2008-09 in the matter of order passed u/s. 143(3) of the IT Act. 2. The only grievance of assessee relates to addition made on account of loss on valuation of slow moving / non-moving items and old stock. 3. Rival contentions have been heard and record perused. 4. Facts in brief are that the assessee company is engaged in the business of developing, manufacturing and marketing advanced pharmaceutical intermediates. During the y .....

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f loss claimed on valuation of slow moving items and old stock. 5. It was submitted before the AO that assessee M/s Novadigm Limited till 01.04.2009 was a 100% subsidiary of M/s Lupin Limited. It was further informed that vide its order dated 06.05.2010, the Honorable Gujarat High Court has given its sanction for the amalgamation of M/s Novadigm Limited with M/s Lupin Limited with effect from 01.04.2009. Pursuant to the Share Purchase Agreement dated 26/9/2007, Lupin acquired Rubamin Laboratorie .....

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the value of slow moving and old inventory. 7. By the impugned order, CIT(A) confirmed the action of the AO. 8. We have considered rival contentions and carefully gone through the orders of the lower authorities below. We have also taken into account judicial pronouncements referred by lower authorities in their respective order and cited by Ld. A.R and D.R during the course of hearing before us. From the record, we found that acquisition of Rubamin by Lupin was by way of purchase of its equity .....

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on losing their values. This change in the value of old and slowmoving or obsolete inventories has been made bonafide aimed at obtaining true business profits and such method of valuation has been continued in the subsequent assessment years. Thus, the assessee company's claim of loss was bonafide and proper. The issue under consideration is squarely covered by the decision of Hon ble Supreme Court the case of Chainrup Sampatram v. CIT 24 ITR 481. 485. 487 (SC) wherein it was held that:- &q .....

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f market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's result a greater amount of profit than the difference between the actual sale price and actual cost price of the goods in question. While anticipated loss is thus taken into account. anticipated profit in the shape of appre .....

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it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is cont .....

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the trading results or that period, and can in no sense be regarded as the "source" or such profits. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing st .....

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market value has fallen before the date of valuation and. at that date, the market value of the article on that date is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. 10. From the record we found that inventories belonged to the assessee-company. The purchaser, Lupin Ltd, only acquired the shares of the assessee-company. The said purchaser chose not to value .....

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he assessee-company with the help of photographs, inventory statements of earlier years i.e.,31/3/2006 and 31/3/2007, destruction records of inventories, etc., has clearly demonstrated before the lower authorities that the inventories in question were partly old and unusable and mainly obsolete. The erstwhile promoters / owners of the assessee-company also admitted to this fact by agreeing to receive reduced purchase consideration for sale of their shareholding. 12. Allegation of the AO is that .....

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urther, this amount was not charged to the profit and loss account as the cost of material used was taken as zero. This ultimately increased the sales realization amount and thereby the profit of A.Y.2009-10. At the most to the extent of ₹ 1,01,854/- loss in value of stock is not accepted in the A.Y.2008-09 under consideration subject to the condition that profit of assessee should be reduced by ₹ 1,32,551/- in the subsequent Assessment Year 2009-10. We direct accordingly. 13. Howeve .....

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that it is also not understandable as to what happened during 31/08/2007 to 26/09/2007 that the value of raw materials and WIP fell so much so that the value of inventories valuing ₹ 2,90,45,101/- had to be taken at NIL at the end of the financial year on 31/03/2008. 15. The Ld. A.O. has further observed that the reduction of ₹ 2,65,88,000/- may have occurred due to conversion of W1P into finished products or due to use of raw materials in production or due to writing down the value .....

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e valuation of inventory is made at cost or reliable value whichever is lower. Since the erstwhile management were of the opinion and belief that these inventories had net realisable value in excess of their cost and consequently, the value of these inventories were not written down / these inventories were written off in these assessment years by the erstwhile management of the assessee-company. 17. It is not in dispute that there was purchase of shares of the assessee-company and not its busin .....

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ceive the further consideration only when the inventory in question was realised from sale or captively consumed on or before 31/12/2007. 18. From the record we found that the inventory in question was neither written off / written down nor shown as slow moving or old inventory in earlier assessment years including the accounts for the period ended on 31/08/2007 prepared by the erstwhile management. Since present management of the assessee-company and the auditors were of the opinion that since .....

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ent records that the inventory were partly destroyed through incineration and were partly transferred to scrap yard in AY 2009-10, and therefore, they were unusable and had no market value. 20. Loss has not been occasioned because any expenses were claimed under the provisions of Sections 30,31,35 to 37 of the Income Tax Act whereas loss on valuation of inventory or on account of writing off of inventory is claimed as business loss under Section 28 of the Act. 21. It is not the case of the AO th .....

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