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Facts
The assessee, a society dealing in hardware, had revalued its damaged closing stock, resulting in a substantial reduction in value. The Assessing Officer (AO) added back this reduction, and the Commissioner (Appeals) confirmed the addition. The assessee argued that the revaluation was based on a scientific and reasonable method supervised by the Director of Societies.
Held
The Tribunal found merit in the assessee's contention that the actual reduction in valuation during the relevant year was significantly less than what the AO had quantified. It also held that the assessee's method of valuation was scientific and reasonable, and since the AO had not invoked Section 145(3) to reject the books of accounts, the addition was unjustified.
Key Issues
Validity of addition on account of revaluation of closing stock and whether the assessee's valuation method was arbitrary or unreasonable.
Sections Cited
143(2), 142(1), 145(3)
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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: SHRI RAJESH KUMAR, AM & SHRI PRADIP KUMAR CHOUBEY, JM
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 03.03.2025 for the AY 2015-16.
The issue raised in Ground No. 1 is against the confirmation of addition of Rs.1,25,98,834/- by the ld. CIT (A) as made by the ld. AO in respect of revaluation of closing stock.
2.1. The facts in brief are that the assessee filed the return of income on 08.10.2015, declaring total income at Rs.2,34,360/-. Thereafter, the case of the assessee was selected for scrutiny and notice u/s 143(2) and 142(1) of the Income-tax Act, 1961 (the Act) along with 2.2. The ld. CIT (A) confirmed the addition in the appellate proceedings.
2.3. The ld. AR stated that the assessee is a society dealing in hardware items and serving the remote parts of Andaman & Nicobar Islands. He submitted that, due to efflux of time, moisture and erosion, the hardware items stored in the remote locations are damaged and are rendered defective. He brought to our notice that each year, a stock verification exercise is conducted under the supervision of the Director of Societies and a statement is drawn up which contains the details of physical quantities along with their retail selling rates and the expected realizable value. He then invited our attention to the stock valuation exercise undertaken upon such stock verification which is also certified by the Chartered Accountant. He pointed out that, there were very old / damaged stocks lying in several locations whose retail price was Rs.1,28,78,973/-. It was shown to us that the stocks were continuously revalued downwards over the years and it was submitted that until FY 2013-14, the reduction in the value of such damaged stock was Rs.99,10,325/-. The ld. AR accordingly submitted that the opening value of stock as on 01.04.2014 was already lower 2.4. Per contra, the ld. DR appearing for the Revenue vehemently supported the findings of the lower authorities. He argued that the assessee had not provided any scientific basis for estimation of realizable value and thus wanted us to uphold the addition.
2.5. After hearing the rival contentions and perusing the materials available on record, it is seen that, the assessee society which is dealing in hardware items would conduct stock verification exercise at the year end and thereafter quantify the old / damaged stock and estimate their realizable value. The stock verification statement for the immediately preceding year read along with the TAR of AY 2014-15 reveals that, the assessee Society had already provided for reduction in value of old / damaged stock of Rs.99,10,235/- upto 31.03.2014. We thus find merit in the ld. AR’s contention that the reduction in valuation of closing stock debited in the accounts for the relevant FY 2014-15 was Rs.26,88,599/- and not Rs.1,25,98,834/- as quantified by the ld. AO. In so far as the basis of valuation is concerned, as noted earlier, the assessee has demonstrated that the valuation was undertaken in a scientific and reasonable manner in terms of which, the Director of Societies would supervise the physical stock exercise undertaken by the branch heads at the respective locations, identify the old damaged stock and thereafter estimate the net realizable value with the approval of the auditor. According to us, it cannot be said that the method and manner of valuation adopted by the assessee was arbitrary or unreasonable. It is also not a case that the ld. AO had invoked Section 145(3) and rejected the audited books of accounts and in that view of the matter, the valuation of closing stock as undertaken by the assessee society could not have been interfered with. Hence, the addition of Rs.1,25,98,834/- on account of valuation of closing stock is held to be unjustified and the ld. AO is directed to delete the same. This ground is accordingly allowed.
The issue raised in Ground Nos. 2 and 3 is not pressed at the time of hearing and therefore, Ground Nos.2 & 3 are dismissed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 10.02.2026.