INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Stale stock written off - AO co-related this with loss returned during earlier years and profit declared during the year concerned - AO ignroed negative development having taken place during relevant year

Assessee engaged in manufacturing of pickles and spices, pastes and chutneys, etc., wrote off stock worth Rs. 11 crores on the ground that said stock had become stale. AO noticed that in earlier years assessee had booked net loss, whereas during the year under consideration, assessee-company showed net profit. Accordingly, AO took the view that stocks which were subject-matter of write off during the year under consideration were stocks pertaining to earlier years which assessee had not chosen to write off in those years and conveniently chose to write off during the year under consideration because of net profit earned by assessee during the year. Thus, AO disallowed stock written off. Assessee's case was that due to unrest amongst employees (workers at factory) as well as go slow tactics, stocks was accumulated and resulted into same becoming stale and not marketable, compelling the company to write off the stock. Held: Intention of assessee to write off stale stock was to be understood in a pragmatic manner and due to negative developments that had happened during the year under consideration in October 2011, factory of assessee was closed due to labour unrest and assessee had also become a defaulter in bank by not able to pay its regular dues to the bank and bank had declared assessee's account as a non-performing asset (NPA) in its books. Due to closure of factory during the year, assessee thought it fit to reduce stale stock from closing stock in its books and there was no possibility of opening the factory in the near future. Hence, retaining stale stock would become more stale and obsolete. In this background, assessee had chosen to write off stock to present a realistic picture of its financial statements. No ulterior motive in any manner, whatsoever, could be attributed to assessee in view of the fact that even after disallowance of stock write off to the tune of Rs. 11 crores was made by AO, there was no taxable income for assessee in view of set-off of loss brought forward from earlier years which had also been duly granted by AO. Even if stale stocks had been written off in any earlier years as accepted by AO the same would have only enabled brought forward losses to get increased. Hence, in any case it would have no impact in computation of total income for the year under consideration. Accordingly, no disallowance was called for.

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