A pharma company in MIDC Bhosari, Pune discovered 42 batches of raw material past their expiry date during a stock audit - still carried on the books at Rs 14 lakh. The stock had been physically present in the warehouse for 18-24 months, slowly accumulating as formulations changed and procurement continued on auto-pilot. The company had never conducted an NRV assessment, never written down the expired stock, and had been reporting Rs 14 lakh of worthless inventory as a current asset in both its financial statements and bank stock statements.
The consequences cascaded: the statutory auditor qualified the report for material overstatement of inventory, the bank reduced drawing power by Rs 14 lakh, the tax auditor flagged the non-compliance with Ind AS 2, and the GST department questioned whether ITC reversal had been done on the written-off stock. A single category of obsolete inventory created four separate compliance problems.
This guide covers how to identify slow-moving, dead, and obsolete stock, the accounting treatment under Ind AS 2 / AS 2, the income tax deductibility of write-offs, GST implications (ITC reversal), the impact on bank drawing power, journal entries, disposal methods, and a practical implementation framework.
Definitions: Slow-Moving vs Dead vs Obsolete Stock
| Category | Definition | Typical Indicator | NRV Assessment | Accounting Treatment |
|---|---|---|---|---|
| Slow-Moving Stock | Has not been consumed or sold for an extended period but is still usable/saleable | No movement for 6-12 months; turnover ratio significantly below category average | NRV may be lower than cost due to ageing, market decline, or reduced demand | Write-down to NRV if NRV < cost; continue to carry at NRV |
| Dead Stock | Zero movement for 12+ months with no foreseeable demand; product still exists but nobody wants it | Zero consumption/sales for 12+ months; no pending orders; product discontinued by customer/market | NRV may be near-zero - only scrap/salvage value | Write-down to scrap value; provision for full loss if no scrap value |
| Obsolete Stock | No longer usable or saleable due to technology change, regulatory change, expiry, or physical deterioration | Product replaced by new version; regulatory ban; expiry date passed; physical damage beyond use | NRV is zero or scrap value only | Write-off entirely (cost = expense) or write-down to scrap value |
| Damaged Stock | Physically damaged but may be partially recoverable through rework, discounting, or scrap sale | Visible damage; quality rejection; customer return; production defect | NRV = discounted selling price or rework cost + selling price | Write-down to recoverable amount; write-off if unrecoverable |
A professional stock audit identifies and segregates each category during physical verification - providing the documentation needed for accounting treatment, tax deduction, and bank compliance.
Key Terms
- NRV (Net Realisable Value): Estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale. NRV is entity-specific - not fair value (which is market-based).
- Write-Down: Reducing the carrying value of inventory from cost to NRV when NRV < cost. The inventory remains on the books at the lower value. The write-down is recognised as an expense in the P&L.
- Write-Off: Removing inventory entirely from the books - the full carrying value becomes an expense. Used when the item has zero recoverable value (completely obsolete, destroyed, or lost).
- Provision for Obsolescence: An estimated provision created for anticipated inventory losses - before the actual write-down or write-off. Used when management knows some stock will become obsolete but has not yet identified specific items.
- ITC Reversal: Under GST, when goods on which input tax credit was claimed are subsequently written off or destroyed, the ITC must be reversed - effectively returning the tax benefit to the government.
Who Is Affected?
- Manufacturers - raw materials with shelf life, WIP from discontinued product lines, finished goods replaced by new models
- Pharma companies - API and formulation raw materials with expiry dates; batch-tracked inventory with strict shelf-life rules
- FMCG and food companies - perishable goods with short shelf life; seasonal products with limited selling windows
- Auto component manufacturers - parts made obsolete by model changes; specification revisions by OEMs
- IT and electronics - rapid technology obsolescence; hardware components superseded by new generations
- Retailers - fashion/seasonal stock; products with declining consumer demand
- Bank borrowers - obsolete stock directly reduces drawing power and available working capital credit
Companies undergoing statutory audit face CARO 2020 reporting requirements on physical verification and material discrepancies - including identification and treatment of obsolete inventory.
Accounting Treatment Under Ind AS 2 / AS 2
Ind AS 2 (Para 28-33) provides the authoritative guidance on writing down inventory to NRV. The key principles are as follows.
- Para 28: The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The practice of writing inventories down below cost to NRV is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.
- Para 29: Inventories are usually written down to NRV item by item. In some circumstances, it may be appropriate to group similar or related items - for example, items in the same product line with similar purposes, produced and marketed in the same geographical area.
- Para 30: NRV must be reassessed at each reporting date. When the circumstances that previously caused the write-down no longer exist (e.g., market prices have recovered), the write-down is reversed - but only up to the original cost. The reversal is recognised as a reduction in the amount of inventories recognised as an expense (i.e., credited to COGS or a separate reversal line).
- Para 34: The amount of any write-down of inventories recognised as an expense in the period must be disclosed. The amount of any reversal of write-down must also be disclosed, along with the circumstances or events that led to the reversal.
For a detailed comparison of how Ind AS 2 and ICDS-II handle inventory valuation differently, see our guide on Ind AS 2 vs ICDS-II inventory valuation.
How to Identify and Write Down Obsolete Stock: Step-by-Step
1. Generate an ageing analysis report. Extract stock-wise ageing data from ERP/Tally showing the last movement date for each item. Classify items into ageing buckets: 0-90 days (current), 90-180 days (watch), 180-365 days (slow-moving), 365+ days (dead/obsolete). This is the foundation for all subsequent action.
2. Conduct physical verification of aged items. Physically inspect all items in the 180+ day buckets. Check for: expiry (raw materials, chemicals, food), physical damage, technology obsolescence (replaced by new version), customer discontinuation (OEM specification change), and regulatory ban. Segregate and tag each item.
3. Assess NRV for each identified item. For each item, estimate: Can it be sold at a discount? Can it be reworked and sold? Can it be returned to the supplier? Can it be sold as scrap? What is the estimated selling price minus costs to complete and sell? If NRV < cost, the item must be written down. If NRV is zero, the item must be written off.
4. Record the write-down or write-off. For write-down: Debit P&L (Cost of Goods Sold or a separate write-down expense line) and Credit Inventory for the difference between cost and NRV. For write-off: Debit P&L and Credit Inventory for the full cost. Maintain detailed working papers showing item, quantity, cost, NRV assessment, and write-down amount.
5. Address GST implications - ITC reversal.If ITC was claimed on the written-off stock, reverse the ITC under Section 17(5)(h) of the CGST Act. File the reversal in the next GSTR-3B. Maintain documentation linking the write-off to the specific GST invoices on which ITC was originally claimed. Employers filing GST return filing must track ITC reversal on written-off stock - failure to reverse ITC is a compliance gap that GST audits specifically check.
6. Physically dispose of the stock and document. Options: scrap sale (with GST invoice if applicable), destruction (with destruction certificate from authorised person), return to supplier (with credit note), or donation. Maintain documentation: destruction certificate, scrap sale invoice, photographs of destroyed goods, and management approval. This documentation is essential for income tax deductibility.
7. Disclose in financial statements and tax audit report. Disclose the write-down amount in the financial statements (Ind AS 2 Para 36 - amount recognised as expense). Report in the tax audit (Form 26) if the write-off affects the ICDS-II closing stock for tax computation. Inform the bank if the write-off reduces the value of hypothecated stock.
Income Tax Treatment of Inventory Write-Offs
The deductibility of inventory write-offs for income tax purposes depends on whether the write-off is genuine, properly documented, and represents a real business loss.
| Scenario | Tax Treatment | Documentation Required | Key Consideration |
|---|---|---|---|
| NRV write-down (inventory still exists, valued lower) | Deductible - lower closing stock increases COGS, reduces taxable income | NRV assessment working papers; ageing report; market price evidence | ICDS-II / Section 277 governs the valuation for tax; write-down must be per ICDS rules |
| Full write-off (inventory destroyed or disposed) | Deductible as business loss - if genuine and documented | Destruction certificate; scrap sale invoice; management resolution; photographs | AO may question if documentation is insufficient; maintain complete evidence trail |
| Provision for obsolescence (estimated, not actual) | Generally not deductible - provisions are disallowed unless crystallised into actual loss | Board resolution; estimation methodology; historical obsolescence rates | Provision is added back in tax computation; deduction allowed only when actual write-off happens |
| Scrap sale of obsolete stock | Sale proceeds taxable as income; cost already debited to P&L through write-down/off | Scrap sale invoice (with GST if applicable); weighment slip; buyer details | If sold below book value - loss is deductible; if above written-down value - gain is taxable |
| Insurance claim for damaged/destroyed stock | Insurance proceeds taxable; write-off of uninsured portion deductible | Insurance claim documents; surveyor report; FIR (for theft/fire) | Net loss (write-off minus insurance recovery) is the deductible amount |
Employers managing income tax return filing must ensure that write-offs are supported by documentation - the Assessing Officer under Section 268(5)(ii) of the Income Tax Act 2025 can direct independent inventory valuation if the write-off figures appear questionable.
GST Implications: ITC Reversal on Written-Off Stock
Under Section 17(5)(h) of the CGST Act 2017, input tax credit is not available in respect of goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. This means that when inventory is written off, the ITC originally claimed on the purchase of that inventory must be reversed.
| GST Scenario | ITC Treatment | How to Reverse |
|---|---|---|
| Stock written off (full write-off) | ITC must be reversed for the full amount originally claimed | Reverse in GSTR-3B of the month in which write-off is recorded |
| Stock written down (NRV write-down, stock still exists) | No ITC reversal required - stock is not "written off," just revalued | No action needed; ITC remains valid as goods still exist |
| Stock destroyed (physical destruction) | ITC must be reversed | Reverse in GSTR-3B; maintain destruction certificate as evidence |
| Scrap sale of written-off stock | ITC reversal on write-off + GST payable on scrap sale proceeds | Reverse ITC on write-off; charge GST on scrap sale invoice |
| Stock given as free sample | ITC must be reversed | Reverse in GSTR-3B; maintain distribution records |
Critical Distinction: NRV write-down (stock remains on books at lower value) does NOT trigger ITC reversal - because the goods still exist. Full write-off (stock removed from books) DOES trigger ITC reversal. This distinction is important - many businesses incorrectly reverse ITC on write-downs, or fail to reverse on write-offs.
Impact on Bank Drawing Power
For borrowers with CC/OD facilities, obsolete and slow-moving stock is excluded from eligible stock for drawing power computation. Banks typically apply the following exclusion rules.
| Stock Category | Bank Treatment for DP | Typical Bank Policy |
|---|---|---|
| Stock older than 90 days (some banks) | Excluded from eligible stock | Conservative banks exclude at 90 days |
| Stock older than 180 days (most banks) | Excluded from eligible stock | Standard policy for most commercial banks |
| Stock older than 365 days | Always excluded | No bank includes 365+ day stock in DP |
| Expired stock (pharma, food, chemicals) | Always excluded | Zero DP value regardless of age |
| Damaged/rejected stock | Excluded | Only undamaged, saleable stock qualifies for DP |
| Written-down stock (NRV < cost) | Included at NRV (not cost) | DP computed on the lower NRV value |
| Written-off stock | Excluded entirely | Zero DP value - removed from bank stock statement |
Proactively identifying and disposing of obsolete stock - before the bank-appointed stock auditor discovers it - preserves the borrower's credibility with the bank. A borrower who self-reports Rs 10 lakh of write-offs demonstrates good inventory management. A borrower whose Rs 10 lakh of obsolete stock is discovered by the bank auditor demonstrates poor controls - and the bank responds accordingly.
Journal Entries: Write-Down, Write-Off, Reversal, and Scrap Sale
| Transaction | Debit | Credit | Amount (Example) |
|---|---|---|---|
| Write-down to NRV (NRV < cost, stock still exists) | Inventory Write-Down Expense (P&L) | Inventory (or Allowance for Inventory Write-Down) | Rs 3,00,000 (cost Rs 8,00,000; NRV Rs 5,00,000) |
| Full write-off (stock has zero value) | Inventory Write-Off Expense (P&L) | Inventory | Rs 5,00,000 (full cost) |
| Reversal of write-down (NRV recovered - Ind AS 2 only) | Inventory (or Allowance account) | Reversal of Inventory Write-Down (P&L) | Rs 1,50,000 (reversal limited to original cost) |
| ITC reversal on written-off stock | GST ITC Reversal (P&L) | Input Tax Credit (GST liability) | Rs 90,000 (18% GST on Rs 5,00,000) |
| Scrap sale of obsolete stock | Bank / Cash | Scrap Sale Income (P&L) + GST Output (liability) | Rs 50,000 + Rs 9,000 GST = Rs 59,000 |
| Provision for obsolescence (estimated) | Provision for Inventory Obsolescence (P&L) | Provision for Inventory Obsolescence (B/S - contra asset) | Rs 2,00,000 (estimated) |
How to Dispose of Obsolete Stock: Methods and Documentation
| Disposal Method | When to Use | Documentation Required | Tax/GST Treatment |
|---|---|---|---|
| Scrap sale | Stock has scrap/salvage value (metals, paper, plastic, chemicals) | Scrap sale invoice (with GST); weighment slip; buyer details; management approval | GST payable on scrap sale; sale proceeds taxable as income |
| Physical destruction | Stock is hazardous, expired, or has zero scrap value | Destruction certificate (signed by authorised person); photographs; management resolution | ITC reversal required; write-off deductible for income tax with documentation |
| Return to supplier | Supplier accepts returns (defective goods, warranty claims) | Debit note to supplier; supplier credit note; reverse ITC if applicable | GST credit note adjusts liability; closing stock reduces |
| Donation | Goods are usable but unsaleable (e.g., food near expiry donated to NGO) | Donation receipt from recipient; ITC reversal required | ITC reversal under Section 17(5)(h); donation may qualify under Section 80G for tax deduction |
| Discount sale | Stock is saleable at reduced price (clearance, promotional pricing) | Sales invoice at reduced price; documentation of discount reason | No ITC reversal (goods sold, not written off); GST on discounted price; loss on sale deductible |
| Rework/reprocessing | Stock can be converted into a different usable product | Internal job order; rework cost allocation; transfer to finished goods register | No write-off; rework cost added to new product cost; no ITC reversal |
Practical Framework: Quarterly Obsolescence Review
Businesses should implement a quarterly obsolescence review cycle to prevent the accumulation of unidentified obsolete stock. The following framework can be implemented without additional software - just disciplined use of existing ERP/Tally data.
- Quarter 1 (April-June): Generate ageing report; identify items with zero movement in Q4 (January-March); add to watch list
- Quarter 2 (July-September): Re-assess watch list items; items with continued zero movement for 6+ months = slow-moving. Conduct NRV assessment for slow-moving items. Write-down if NRV < cost.
- Quarter 3 (October-December): Items with zero movement for 9+ months = dead stock candidates. Initiate disposal process (scrap sale, destruction, supplier return). Obtain management approval for write-offs.
- Quarter 4 (January-March): Final year-end assessment. Write off all dead/obsolete stock. Complete ITC reversal in GSTR-3B. Update bank stock statement. Prepare disclosure for statutory audit.
- Continuous: Maintain a running "obsolescence log" documenting each identified item, NRV assessment, disposal decision, and timeline. This log becomes the primary evidence trail for tax deductibility and audit defence.
Key Takeaways
Slow-moving stock (6-12 months no movement), dead stock (12+ months no movement), and obsolete stock (no longer usable/saleable) must be identified, segregated, valued at NRV under Ind AS 2 / AS 2, and written down or written off - not carried at cost on the balance sheet.
The accounting treatment is: write-down to NRV (if NRV < cost and stock still exists) or write-off (if stock has zero recoverable value). Ind AS 2 permits reversal of write-downs when NRV recovers - but only up to the original cost. ICDS-II for tax purposes follows the same principle but reversal treatment may differ.
GST ITC reversal is required under Section 17(5)(h) when stock is written off or destroyed - but NOT when stock is merely written down to NRV (stock still exists). This distinction is critical. Many businesses either over-reverse (reversing on write-downs) or under-reverse (not reversing on write-offs).
For income tax, write-offs are deductible as business losses if genuine and documented - destruction certificates, scrap sale invoices, management resolutions, and photographs are essential. Provisions for estimated obsolescence are NOT deductible - only actual write-offs crystallised into real losses.
For bank borrowers, obsolete stock is excluded from eligible stock for drawing power. Proactively identifying, writing down, and disposing of obsolete stock - before the bank stock audit discovers it - preserves DP accuracy and bank credibility. A quarterly obsolescence review cycle prevents the accumulation of hidden obsolete inventory.
Need Help Identifying and Managing Obsolete Inventory?
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