The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) deleted the addition made due to the alleged undervaluation of stock, ruling that the assessee’s practice of applying an ageing effect for inventory valuation at Net Realisable Value (NRV) was a standard accounting practice and should not be disregarded.
Zari Silk (India) Pvt. Ltd., the assessee, is engaged in the manufacturing and trading of sarees, salwar suits, and dress materials. During a survey conducted under Section 133A of the Income Tax Act, 1961, the survey team observed a discrepancy in stock valuation, observed that the company valued older inventory at a reduced percentage of cost (100% for current-year stock, 90% for one-year-old stock, 80% for two-year-old stock, and 50% for older stock).
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The Assessing Officer (AO) argued that any difference due to ageing effect was already accounted for in the physical valuation and that the company’s inventory valuation method led to stock undervaluation. Consequently, the AO added Rs. 1,29,81,073 to the assessee’s total income.
The assessee’s counsel before the CIT(A) that the ageing effect was an accepted industry practice and aligned with Accounting Standard (AS-2) on inventory valuation, which mandates that stock be valued at cost or NRV, whichever is lower. The assessee also pointed out that this valuation method had been consistently followed and accepted in previous years without objection from the tax authorities.
On appeal before the ITAT, the revenue argued that the valuation method artificially reduced stock value and that the assessee failed to provide specific documentary proof correlating NRV with actual sale prices
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The two-member bench comprising Rathod Kamlesh Jayantbhai (Accountant Member) and Narinder Kumar (Judicial Member) observed that the AO had accepted the same valuation method for opening stock in subsequent years, indicating an inconsistency in the revenue’s stance. The tribunal held that since the valuation method was regularly followed, the AO could not arbitrarily reject it for a single assessment year without substantive reasoning.
The tribunal upheld the CIT(A)’s ruling and deleted the addition of Rs. 1,29,81,073. The appeal was allowed in favor of the assessee.
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