Inventories Valuation and Tax Deductibility

What inventory -related expense is tax deductible ?
- The general principle under Section 33(1) will be applied to determine deductibility of inventory-related expenses i.e.whether the expenses incurred are wholly and exclusively in the production of gross income.
1. Allowance for obsolete or slow moving stocks
An allowance for stock obsolescence is not allowable for tax deduction as it merely represents unrealised loss of an asset of which is contingent in nature.

2. Inventories written off
An actual write off of stock in trade charged to the profit and loss account is
allowable for tax purposes as it is deemed as realised loss. As such, an adjustment is made to the opening stock in trade in the following year.

3. Inventories written down
Stocks write down will be accorded a deduction as it reflects the write down of the cost to its net realisable value. Proper documentation has to be maintained where stocks are written down.

4. Diminution in value of shares as stock in trade
Where shares are the taxpayer’s stock in trade, any diminution in the value of shares to reflect market value is allowable for tax deduction. The diminution in value of the shares should be based on market value and cost of the particular shares.