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sakina (student)     18 June 2021

Provision for Inventory obsolescence

whether provision taken in books for inventory obsolescence is an allowable expense in tax computation?

If not, then under which section it is disallowed?


 13 Replies

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Hi it is disallowed because it is not on the deductions list here: https://www.indiafilings.com/learn/income-tax-deductions-business/

Sourav

Sourav (Student)     18 June 2021

It is disallowed
sakina

sakina (student)     18 June 2021

Okay is it disallowed under Section 37 ?
yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Yes because inventory is a capital expenditure 

sakina

sakina (student)     18 June 2021

Okay thanks
CMA Poornima Madhava

CMA Poornima Madhava (CMA)     18 June 2021

@ Yasaswi

Could you explain how inventory can be a capital expenditure?

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Throughput coating= sales-direct material costs

direct materials are capital expenses

indirect materials are indirect or fixed factory costs

So throughout costing treats inventory as direct material while absorption costing treats it as total production cost. 

Some of the intangible assets used in production are capitalised, amortised and included in the cost of inventories. 

So overall inventory purchase is for production and WIP is part of asset and not expensed. Revenue expenditure is day to day operations. 

The above should be sufficient to understand that it is capital expenditure because it stands as a current asset.   

Apart from the above facts, I could not find other assumptions to think that it is a revenue expenditure. 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Coming to waste 

normal waste is included in inventory or finished products along with cleaning costs.

abnormal waste is expensed and is revenue/opex 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Or maybe just waste is included in inventory and cleaning will be like indirect cost or factory overhead rather than production costs. 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Forgot to mention the main thing, all spares used in production are capitalised, which are stored in warehouses is treated as inventories.

CMA Poornima Madhava

CMA Poornima Madhava (CMA)     18 June 2021

But here the query is about obsolete inventory (which usually has no value/life) and also its treatment as per Income Tax Act.

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

Obsolescence = spoilage

Material spoilage= it is debited to WIP in the same batch it occurred.

Operations spoilage= Cost gaap suggests it may be assigned to factory overheads so that loss can be absorbed by all products. If this is in the case of absorbing costing, it is an indirect cost. 

ABC costing will absorb it all into the product making it a direct cost. 

Inventory standard also suggests, when inventories are sold, the CA of those inventories should be recognised as an expense. Not when they are purchased. 

 

I was answering your query about inventory being capital expenditure. 

yasaswi gomes

yasaswi gomes (My grammar is 💯 good I)     18 June 2021

The above spoilage principles are from CMA, the actual Cost accountants of India developed principles into two:

Normal spoilage- Could be allocated to the same batch or product overheads, again a direct cost making it a capital expenditure.

Abnormal spoilage- it is expensed when spoilage is beyond the normal limits.


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