shortage in stock & devaluation in stock

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ca rahul (Querist)
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02 November 2007 an partnership firm(an export house of furniture, textile) having turnover 125 crore ,gp ratio is 40% & np ratio is 22%.

there are huge value of stock of rs 30 crore & it is continusouly incrsing from last few year. this year phifically varification of stock was conducted & a shortage of rs 10 crore was found, inspite of this there was devaluation of stock (due to damage & obsolence, out of fashion etc.)of rs 2-3 crore.
now the firm wants to writeoff this amount.but how ,& what will be the consequance of this.& what type of avidance should be collected.

CA Prasanna Krishnan V

CA Prasanna Krishnan V (Expert)
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02 November 2007 Dear Sir

Definitely the aforementioned firm should be under Tax Audit all these years. First check up how far your tax audit reports (Form 3 CB and Form 3 CD) are properly and safely using apt words in respect of stock and its valuation.

If adequate qualification/disclaimer/adverse comment is there to safeguard yourself, please get a perfect management representation letter for the latest year with itemwise statement of obsolete stock with valuation (Rs 2-3 Crores) to ensure that the same is safely written down or written off.

Regarding stock lost (Rs 10 crore), police complaints/insurance claims are the convincing evidences. If not management representation is the only way, which involves case specific professional skill. The impact of the same could be on the previous years too if not carefully done.

o.velavan

o.velavan (Expert)
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04 November 2007 In case of textile goods,shortage may be explained with little evidence.In case of furniture,you should have stock note.

Second thing,shortage may occured due to many reasons,it may normal shortage like shrinkage in textile goods and wastage in furniture(if you are manufacturer).in case you are trader shortage may not be accetable one.Obsolete or waste may be written off after obtained management letter.But you have to see that the party recovered any amount from sale of obsolete or waste items.

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