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2011 (11) TMI 693

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..... hmedabad dated 30-09-2009, for assessment year 2006-07, on the following grounds: 1. The Ld. CIT(A)-XX Ahmedabad has erred in law and on facts in deleting the addition of ₹ 53,13,006/- made by the AO on account of incorrect valuation of stock, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer. 1.2 In doing so, the Ld. CIT(A) has erred in law and on facts in holding that the department cannot compel the assessee to adopt a particular system of accounting, without appreciating that the assessee had not followed the recognized commercial accounting policy for valuation of closing stock, which is lower of cost or market price. 1.3 In doing so, the Ld. CIT(A) has erred in law and on facts in not appreciating that from the assessee's method of valuation of closing stock on the basis of the average rate method for the last three years, the correct profit of the assessee for the year under consideration could not have been arrived at and as such the AO was justified in law in rejecting the said method of valuation adopted by the assessee. 1.4 In doing so, the Ld. CIT(A) has erred in law and on facts in .....

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..... tive balance sheet dates. The AO, during the course of the assessment proceedings was of the opinion that the closing stock was required to be valued on the last day price of the gold/silver articles. He accordingly asked the assessee to show cause as to why the method of valuation adopted by the assessee should not be adopted at cost or market price, whichever is lower as prevailing on 31-03-2006 instead of average of market rate of preceding three years followed by the assessee vide letter dated 17-12-2008. The assessee strongly objected to this proposal of the AO to disturb the value of closing stock. Copy of the reply filed by it before the AO objecting to this proposal is appended at page No.5 to 7 of paper book. The AO, on perusal of detailed working of closing stock, found that the assessee has maintained closing stock of gold and silver ornaments by adopting average rate method of three years which is not in conformity with the accounting policy for valuation of closing stock. The AO has after considering the facts and explanation of the assessee concluded that the same cannot be accepted, as the assessee has not followed the recognized commercial accounting policy for valu .....

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..... hod replacing the standard and accepted method of valuation of stock (weighted average cost method) to market price. A copy of the above decision is enclosed herewith. (4) Without prejudice to whatever stated above, it may be appreciated that in any case, the valuation of stock should be at cost or market price whichever is lower. There is a catena of decisions holding that closing stock should be valued at average cost price method calculated on the basis of value of opening stock and purchases made during the year. Reference may be made to the decision of Decision of ITAT Chandigarh in the case of ACIT vs Jagdish Chand (90 TTJ 943) wherein it has been held that Valuation of closing stock of gold ornaments at the average rate of opening and purchases made during the year was justified, addition made by applying average rate of purchases to the stock could be sustained. Decision of ITAT Indore Bench in the case of ACIT Vs. Gopaldas Vallbhdas (59 TTJ 768) wherein it has been held that Closing stock should be valued at average cost calculated on the basis of value of opening stock and purchases made during the year where LIFO or FIFO method could not b .....

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..... lowed was accepted by the Revenue in earlier as well as subsequent assessment years, ITO was not justified in making additions by adopting a different method for assessment years in question. A copy of the above decision is enclosed herewith. Without prejudice to whatever stated above, it may be appreciated that in any case valuation of stock should be at cost or market price whichever is lower. There is a catena of decisions holding that closing should be valued at average cost price method calculated on the basis of value of opening stock and purchases made during the year. The learned counsel has furnished revised working of stock on the basis of average price from which it may be appreciated that our stock value works out at ₹ 2,62,86,543/- as against ₹ 2,78,09,346/- shown by us. Thus, in any case, the valuation as per market rate as asked for by your goodself is not a standard method. (2) As regards introduction to partner capital, copies of bank pass books of partners showing source of amount introduce are enclosed herewith. (3) A copy of bill of making charges paid to Vinayak Silver Works amounting to ₹ 25,875/- is enclosed herewith .....

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..... ntroverted and undisputed fact that the appellant-firm has been consistently valuing the inventory at weighted average cost. The Assessing Officer has disbelieved the validity of this method and recasted the trading account by taking both the opening and closing stock at the prevailing market rates on the last date of the Financial Year i.e. 31-03-2006. In both the instances, the prevailing market price was substantially higher than the corresponding cost and this resulted into a notional addition of ₹ 53,13,006/-. 3.3.1 On perusal of the records of the appellant, I find that the appellant has been consistently following method of valuing the inventory at weighted average cost which in this line of business is the generally accepted accounting method and also acceptable as per Accounting Standard 2 (revised) issued by the Institute of Chartered Accountants of India. This also has been upheld by various Courts and Tribunals. The ITAT, Chandigarh 'A' Bench on the similar facts and in similar nature of business in the case of ACIT Vs. Jagdishchand (2004) 90 TTJ (CHD) 943 held such enhancement of valuation of closing stock as not justified. 3.3.2 Considering .....

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..... ess, the stock has to be valued at market price. This is because in the case of dissolution of the firm with discontinuation of business, going concern concept does not apply and the accounts are required to be settled primarily for determining the rights and obligations of the persons concerned. The Hon'ble Gujarat High Court has also followed the above view in Balapur Vibhag Jungle Kamdar Mandali Ltd Vs. CIT (135 ITR 91) and in Kwality Steel Suppliers Vs. C I T (271 ITR 40). Since in the present context, there is neither dissolution of the firm nor discontinuation of business, the exception carved out from the general rule, thus, clearly does not apply. 3.3.5 The issue of disturbing the valuation of closing stock can also be seen from the context of the rule of consistency. It is a matter of fact that the appellant is a partnership firm carrying on this business for the last several years. A number, of scrutiny assessments have also been completed by the Department in the past in all these years. The Authorised Representative has pointed out that the firm had valued the stock by adopting the same formula and the same has never been disturbed or challenged by the Depar .....

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..... d that the assessee had been regularly following the very same method of accounting consistently which had been accepted by the Department even in the past in the orders passed under section 143(3) of the Act. It is further observed therein that the Assessing Officer has not brought any cause or evidence in rejecting the method of accounting regularly followed by the assessee but on the other hand, the Assessing Officer has applied another system of accounting against the spirit of applicable section i.e. Section 145 of the Act though he has not categorically rejected the books of the appellant. It is further held that the Department cannot compel the assessee to adopt a particular system of accounting. The Hon'ble Tribunal has also observed that there is no cogent and valid reason for disturbing the method of accounting regularly followed by the appellant. 3.3.9 In view of what has been discussed above, I hold that the Assessing Officer's approach in the present case is not justified in disturbing the method of valuation of opening and closing stocks and thereby making an addition pf ₹ 53,13,006/-. In view of above discussion and taking into consideration the entiret .....

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..... f M/s. Balar Exports Vs DCIT in ITA No.3010/Ahd/2010 dated 11-02-2011 in which the Tribunal observed that what is disturbed by the AO is the working by the assessee with regard to the market value of the closing stock and not changed the method of valuation of closing stock. 6. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and referred to the audited balance sheet of assessment year in appeal and preceding assessment year 2005-06 and submitted that the assessee followed the same method of valuation of closing stock in the assessment year under appeal as well as in the earlier assessment years. He has submitted that in the preceding assessment year 2005-06, the AO accepted the same method of valuation in the scrutiny assessment u/s 143 (3) of the IT Act copy of which is filed at PB-103 of the paper book. He has relied upon the order of ITAT Ahmedabad Bench in the case of Neptune Infrastructure Pvt. Ltd. etc. in IT(SS)A No.450/Ahd/2011 etc. dated 31-10-2011 in which it was held that it is well settled law that though the principle of res-judicata does not apply to the income tax proceedings but the principle of .....

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..... nt not only in past but in subsequent years also accepted the claim of the assessee. This stand of the AO would demolish all arguments of the learned DR. The findings of the learned CIT(A) on correct method of valuation adopted by the assessee have not been rebutted through any evidence on record. The learned CIT(A) on proper appreciation of the facts and material on record rightly followed the various orders of the Tribunal including the orders of jurisdictional ITAT Ahmedabad Bench in arriving at the just decision in the matter. We, therefore, do not find any justification to interfere with the order of the learned CIT(A). Considering the above discussion, we do not find any merit in the appeal of the revenue. The decision cited by the learned DR of M/s. Balar Exports (supra) if clearly distinguishable from the facts of the present case. We may also note that in this case in Para 11 the Tribunal has observed that the AO has made correct valuation of the closing stock as per the method followed by the assessee. Such observations would rather support the findings of the learned CIT(A). In view of the above, the departmental appeal has no merit and the same is dismissed. 8. In th .....

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