TMI Blog2010 (5) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT vs. Realest Builders Services Ltd. 307 ITR 202 the Hon ble Supreme Court has opined that the application of rule of consistency by the High Court cannot be followed if the method of accounting followed by the assessee results in under estimation of the profits/net income. 3. The assessee company filed its return of income on 01.11.2004 declaring total income at ₹ 1,53,39,650/-. The return was accompanied by the audited balance sheets and tax audit report. During the relevant period, the assessee was engaged in the business of production of mustard oil and mustard cake from mustard seeds in its factory located at Agra. The goods produced were sold through its network of distributors and dealers. During the year, the assessee declared turnover of ₹ 94,55,40,725/- as against turnover of ₹ 72,01,53,875/- shown in the immediate preceding assessment year. The assessee had shown the net profit of ₹ 1,66,19,610/- in the current year as against the net profit of ₹ 104,45,088/- in the immediate preceding year. The assessee had declared closing stock of ₹ 6,29,50,140/- for its finished goods i.e. mustard oil and mustard cake. The open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lot selling price of cake 4. The AO was not satisfied with the above method of valuation of closing stock as he was of the view that the proper method to value the stock was to allocate its cost of production towards two products i.e., mustard oil and mustard cake. The AO, therefore, asked the assessee to explain as to why the assessment should not be made in accordance with the provisions contained in section 145(3) of the Act. In reply there to, the assessee submitted that the system of valuing the closing stock is recognized and systematic one in accordance with the Accounting Standard 2 notified by the Institute of Chartered Accountants of India. In this reply, the assessee invited the attention of the AO to para 10 of the Accounting Standard 2. After considering the assessee s submissions and para 10 of Accounting Standard 2, the AO valued the closing stock of mustard oil and mustard seeds by allocating, the cost of raw material and manufacturing towards both the products i.e. mustard oil and mustard cake, and arrived at a difference of ₹ 32,13,980/- in the opening stock and as well in closing stock of the relevant year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71%. There is no doubt that mustard cake is a secondary product and mainly used as feed for cattle. It is not correct on the part of the AO to assume that 18.79% i.e. the amount of mustard cakes derived from the process is a significant amount. The manufacturing process is to considered carefully and in the instant case there remains no doubt that the mustard cake is a product which definitely can be termed as secondary product and there is no requirement to change the method of valuation of the closing and the opening stock of the products. In the case of Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC), it was held that the method adopted by the assessee cannot be rejected on the view that assessee should have adopted a different method of keeping accounts. A tax payer is free to employ his own method of keeping accounts for the purpose of his trade. For this purpose, he may value the stock in trade either at cost or marked price. In the case of Vijaya Traders vs. CIT (1969) 74 ITR 271 (Mysore), it was held that rejection of accounts merely on the ground that the method of valuation of stock was not correct in the absence of a finding that the manner in which the accounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es state as follows:- 2. Section 145 of the Income Tax Act, 1961 Method of accounting Valuation of stock Asstt. Year 1996-97 Assessee-company valued its work-in-progress and manufactured goods by considering raw material cost Assessing Officer took view that proportionate part of employees cost and other expenses should be added to closing stock and, accordingly, made an addition to its closing stock Whether since the assessee had been following method of valuation by adopting only raw material cost since 1994-95 and same had not been disturbed by the revenue there is no reason to disturb valuation adopted by the assessee Held, yes. In view of the above judicial pronouncements and the facts the ratios of the case laws on which the AO relied are not applicable to the facts of the instant case, I direct the AO to delete the addition. 8. Hence, the department is in appeal before us. 9. The ld. DR has relied upon the AO s order to contend that having regard to the correct method point out by AO in his order, the AO was justified in holding that the assessee had under stated the value of closing stock as well as the opening stock by ₹ 32,13,980 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, worked the proportionate selling value of both the outputs, and in that proportion, the AO allocated the cost of mustard seeds and other manufacturing expenses between mustard oil and mustard cake, and then determined the value of closing stock of both the items, and difference so worked out by the AO in opening stock as well as closing stock was added by the AO to the assessee s total income. We are, thus, concerned, in the present case, as to whether the AO can disturb the method of valuation of closing stock regularly or consistently followed by the assessee since many years, and that was also accepted by the department. 12. At this stage, we proceed to first determine as to whether the method of valuation adopted by the assessee is in accordance with the guidelines provided under AS 2. In AS 2, the net realizable value is defined to be the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimates cost necessary to make the sale. It is further provided therein that the inventory should be valued at the of lower cost and the net realizable value. The cost of inventory should comprised of costs of purchase, costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion may be based on the relative sales value of each product, either at the stage of production process when the products becomes separately identifiable or at the completion of the production. On the other hand, the assessee has followed the later part of the para 10 of AS 2, where it is provided that where there is a case where most by-products as well as scrap or waste materials, by their nature, are immaterial, they are often measured at net realizable value and this value is deducted from the cost of the main product. In the present case, the assessee is engaged in the business of manufacturing mustard oil. The main and dominant purpose of running oil mill is to produce mustard oil from the mustard seeds. It is not in dispute that the mustard cake are also simultaneously obtained from the manufacturing process of manufacturing mustard oil from the mustard seeds. Whether the mustard seeds is a by product or it is another main product being produced simultaneously with the mustard oil is to be considered from the point of view of commercial value in the market, and not with reference to the quantity of yield of each product. Though yield of mustard cake ranges from 62 % t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective so that the proper determination of profit cannot be made. In other words, the method adopted by the assessee is just and proper to determine the profit or gains of business of producing mustard oil from the mustard seeds by the assessee. It is not the case of the department that the assessee has changed its method of valuing the closing stock in the current year as against the method regularly and consistently followed in earlier years. Mere because the AO is of the opinion that some other method is to be followed, that by itself cannot be a reason or basis for the AO to reject and ignore the assessee s basis of valuation of stock-in-trade consistently and regularly being followed by the assessee since so many years as per guidelines given in later-part of Para 10 of AS - 2. In the present case, it is no where disputed that the net realizable value based on last ten lot selling prices of mustard cake adopted by the assessee was not correct. It is also not the case, where the value of closing stock of mustard cake has not been taken into account while valuing the closing stock. In the present case, instead of taking the net realizable value of mustard cake in the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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