TMI Blog2011 (9) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... its not to be included in the profits intended for shareholders by the profits and loss account and the balance sheet, however, such profit constitutes part of taxable income - addition made is restored - Decided against the assessee - IT APPEAL NO. 311 (CHANDi.) of 2011 - - - Dated:- 27-9-2011 - Ms. SUSHMA CHOWLA, MEHAR SINGH, JJ. Smt. Jaishree Sharma for the Appellant. N.K. Garg for the Respondent. ORDER Mehar Singh, Accountant Member The present appeal filed by the Revenue for Assessment Year 2007-08 is directed against the order of ld. CIT(A), Patiala dated 25.1.2011 u/s 250(6) of the Income-tax Act (in short 'the Act'). 2. The Revenue has taken the following grounds of appeal: "1 In the facts and circumstances of the case, ld. CIT(A) has erred in deleting the addition of Rs. 18,69,105/- made by the AO on account of difference in the valuation of the closing stock, by observing that the AO had not rejected the books of account and the assessee had been following a consistent method of accounting, without appreciating the facts brought on record by the AO on the basis of which it had been shown that the assessee had substantially undervalued the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per information gathered and that discussed above comes to Rs. 26,500/-. The assessee had himself sold the goods during the year at the average market price of Rs. 23,478/-. Accordingly, to be reasonable, the AO valued the quantity of closing stock i.e. 391.190 MT, at the rate of Rs. 23,478/- as on 31.3.2007 at Rs. 91,84,358/-, against Rs. 73,15,253/- as declared by the assessee, in its balance sheet. The difference of Rs. 18,69,105/-, is added to the returned income of the assessee. 4. The ld. CIT(A), upturned the findings of the AO and granted relief to the assessee. It would be in the fitness of things to reproduce the findings of ld. CIT(A) with a view to appreciate the factual and legal aspects thereof:- "In view of the facts and circumstances of the case and rival submissions of both the AO in his remand report and written submissions of the ld. counsel it is seen that no doubt the valuation of opening and closing stock is a very important aspect for ascertainment of true profits and an improper valuation of stock can be a ground for rejection of books as held in Murugappa Chettiar (S) v. CIT (1988) 174 ITR 245 (Ker). But in the present case, no rejection of book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(i) The AO observed that as per the audit report the closing stock had been valued by the assessee, at market rates. On the basis of details, in respect of valuing of closing stock item-wise, as called for by the AO, it was found that the assessee calculated average rate at 18722 per MT and the market rate has been shown at 18700 per MT. The AO specifically raised the query as to whether the lots of stock as submitted by him, are separately and distinctly identifiable. The assessee failed to file any evidence or submission to satisfy the query raised by the AO. It is observed by the AO that the nature / price of items sold in the light of sale bills, account reveal that all the bills bear the narration as "iron and steel" as the item sold. The assessee failed to substantiate the query raised by the AO. The assessee explained before the AO that the closing stock had been valued at market price, which he had shown at Rs. 18700 per MT, on the basis of sales allegedly immediately after the close of financial year 2006-07. According to the AO, this approach of the assessee is an after-thought, by making the cost price of the cheapest items as the basis thereof. The details and observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased in a lot in the preceding year at a low rate as this lot was consisting of a old iron and steel and this entire lot was included with junked material and with other impurities as (copies of the purchase bills of this material have been submitted). Out of this lot certain material a per the requirements of the purchaser was sold out during the year with other materials. Our stock register and copies of ledger account of sales were continued to be held during the year even when the purchase and sales could not take place for a long time. Therefore, at the end of the year we valued the entire stock including the residual opening stock available with us at a single average market price, which could have been realized in such circumstances. Moreover, this entire lot of stock when sold in the next year fetched the total value of closing stock as declared by us may be accepted as such." 4.1 Further on being asked to explain whether stock as specified in the details of closing stock furnished can be identified distinctly, during the course of proceedings on 24.12.2009, it was submitted by him that it is not possible in view of the kind of items being dealt with the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-lying the rule that the closing stock is to be valued at cost or market price whichever is lower, is now established rule of commercial practice and accountancy, as the profits for the Income-tax purposes are to be computed, in conformity with the ordinary principle of commercial accounting. Proper valuation of closing stock is essential for the purposes of arriving at the correct profit of the assessee. In the present case, the assessee has applied average price of items of closing stock, as the market price and valued the closing stock accordingly. This approach of the assessee runs contrary to the ratio laid down by the Hon'ble Supreme Court in the case of Chainrup Sampatram ( supra ), therefore, the ratio of decision is not application to the facts of the present case. As per the ratio of decision of the Hon'ble Supreme Court, profit can be correctly ascertained only after bringing into trade account, closing stock and valuing the same as per stock or market price which ever is lower. 9.1 A perusal of the ratio laid down by ITAT, Jodhpur Bench in the case of Tirupati Microtech (P) Ltd. ( supra ) reveals that the underlying principle was not applicable to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale to partners, so that the profit of the year of account could be substantially reduced artificially." The appeal was accordingly dismissed. The application by the firm u/s 66(1) of the Act asking for a reference to the High Court of six questions as questions of law arising out of the order of the Tribunal was also rejected. Thereupon the firm moved, the High Court u/s 66(2) and the Court directed the Tribunal to refer the following question of law for its decision:- "Whether in the circumstances of the case and on a true construction of Sec 4(1) (b) and Sec 14(2)(c) of the Indian Income-tax Act, the sum of Rs. 2,20,887/- was in law assessable to tax?" "The High Court rejected this contention on the ground that the "notional profit" represented by the appreciation in value of the stock-in-trade" emerges out of the valuation and only when it so emerges it arises or accrues. The source of the profit is thus the valuation, and its situs is where the valuation is made. What is valued is the firm's business at the site of the firm and all the stock-in-trade of the firm is necessarily drawn into the valuation wherever they may be physically situated. The profit which is the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icture of profits and gains. If the assessee does not adopt a system which discloses the true state of affairs for the purpose of determination of tax, it is the duty of the AO to adopt any such computation as deemed appropriate for the proper determination of correct and true income. This is not only a statutory right but duty of the AO. Incorrect valuation of stock leads to distorted picture of book-version and under-valuation of unsold stock at the end of the years leads to comparatively lower profit which causes distortion of the assessment of profit and gains, for the relevant Assessment Year. It is not tenable to say that the AO is bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. In fiscal matters like this, there is no estopple. For computation of true profits of the year, each year being a self-contained and separate unit, the value of the stock-in-trade, at the beginning and at the end of the accounting of year has to be taken into account. It would be impossible to accurately assess, the profit and gains merely, on the basis of statement of receipts and payments or on the basis of tu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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