Delhi ITAT allows write-off of obsolete inventory under AS-2

 The Delhi ITAT held that write-off of slow-moving and non-moving inventory is allowable as deduction where the inventory had lost utility or become obsolete and the write-off was undertaken in accordance with Accounting Standard-2 (‘AS-2’) supported by technical evaluation and documentary evidence. The Tribunal observed that such write-off reflects the true and correct value of inventory.

Background:

• Taxpayer, a manufacturing company, maintained large quantities of spare parts and inventory for smooth functioning and maintenance of its manufacturing facilities.
• Over time, several spare parts remained unused for long durations and had become rusted, damaged, outdated or lost their utility and shelf life. Consequently, the net realizable value (‘NRV’) of such inventory had substantially declined.
• Taxpayer conducted detailed physical verification exercise and identified the slow-moving and non-moving inventory items. A technical committee comprising engineering and user department personnel physically inspected the items, assessed their condition and determined their residual / realizable value. Based on such technical evaluation, the taxpayer wrote off inventory amounting to ~ INR 5.68 crore towards obsolescence loss in accordance with AS-2, which requires inventory to be valued at cost or NRV, whichever is lower.

Revenue’s Arguments:

·       Taxpayer had not adopted such practice in earlier years and could not selectively adopt an accounting treatment resulting in reduction of profits. The inventory physically continued to exist and therefore complete write-off was not justified.

Taxpayer’s Arguments:

·       The write-off was done to comply with AS-2 and was based on technical evaluation. The inventory could no longer fetch the value at which it was recorded in the books and therefore reduction to NRV was necessary to reflect the true and correct value of inventory.

ITAT Held:

·       The inventory had remained unused for long periods and had either lost utility or become unusable.

·       Taxpayer adopted methodical approach by conducting physical verification, constituting technical committee and undertaking item-wise analysis based on physical condition and usability. The write-off was duly supported by technical reports and documentary evidence and was undertaken in accordance with mandatory AS-2 issued by ICAI.

·       Revenue failed to place any material on record to rebut the taxpayer’s technical findings and evaluation.

·       Merely because similar write-offs were not undertaken in earlier years cannot be a ground to deny deduction otherwise allowable in law.

Key Takeaway: The ruling reinforces that inventory write-off supported by compliance of applicable accounting standard, technical evaluation and documentary evidence is allowable as deduction. The decision is particularly relevant for manufacturing and industrial businesses holding maintenance spares and inventory susceptible to obsolescence, deterioration or loss of utility