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The A.C.I.T. Versus M/s. Shantilal Nagardas

2011 (11) TMI 693 - ITAT AHMEDABAD

Incorrect valuation of stock - Held that:- Revenue Department 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 th .....

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ppeal by the revenue is directed against the order of the learned CIT(A)-XX, Ahmedabad 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 fac .....

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ct 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 not appreciating that under the weighted average cost formula as per the Accounting Standard 2 (Revised), the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost .....

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a partnership firm engaged in the business of gold and silver jewelleries. The assessee firm is in existence for the last several years. For the assessment year 2006-07, the assessee firm filed its return of income on 31-12-2006 declaring total income of ₹ 9,89,570/-. The return of income was duly supported by audited annual accounts and accompanying documents. As per the audited accounts, the method of valuation of closing stock is stated to be lower cost or average market price whicheve .....

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many years, rather since inception and was followed in all the past years including immediately preceding year where the then AO had passed an order under Section 143(3) of the IT Act in relation to assessment year 2005-06. While valuing the stock, the assessee had taken into consideration the purchase price, sale price, corresponding purchase tax, labour charges, etc. for the numerator. The corresponding summation of the quantity was taken as the denominator so as to arrive at the weighted ave .....

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ever 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 or .....

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case. After rejecting the method of accounting for valuation of closing stock, without invoking provisions of Section 145 of the IT Act, the AO proceeded to revalue the closing stock at cost or market price, whichever is lower, and he has drawn revised profit & loss account, replacing the valuation of both the opening as well as closing stocks and determined the resultant net profit at ₹ 62,65,101/-. Since the net profit disclosed in the audited accounts of the assessee was ₹ 9,5 .....

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where the assessment was finalized u/s 143(3). Reliance may also be made to the decision of ITAT Ahmedabad in the case of Income Tax Officer Vs. Chokshi Hirachand & Bros (37 TTJ ,415) wherein it has been held that, "When the valuation of closing stock according to the accounting system consistently followed 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 questi .....

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The AR has pointed out the firm had valued the stock by adopting the same formula and the same has never been disturbed or challenged by the department in the past. The AO is, therefore, not justified in adopting suddenly a changed method 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, th .....

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ng 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 be applied. * Decision of your Honour in the case of M/s Soni war .....

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e stock value following that method works out at ₹ 2,62,86,543/- as against ₹ 2,78,09,346/- shown by the assessee. (5) There was an arithmetical error in calculation of opening stock. The paper book filed by the appellant also contains copy of the written submission dated 24th December, 2008 made before the Assessing Officer. The relevant portion of the same is reproduced herein below. (1) As regards your query as to why valuation of gold bars and silver should not be made at the rat .....

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e Court in the case of Union of India Vs. Kamlashi Finance Corporation Limited (1994) 72 Taxman 43 wherein it has been held that judgment of a higher appellate forum or of a higher court is binding upon all the authorities working under it and to the department before a still higher court and the issue pending before it. It may be appreciated that such method of valuation of stock has been followed by us since various years and is accepted in all such years by the department. As such, ratio of t .....

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." 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 i .....

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he above amount has not been subjected to TDS, the same has been disallowed in the return of income filed. (4) Provisions of service-tax are not applicable to us. We hope, the above will suffice your requirements. The appellant has also relied on various judicial citations which are placed on page numbers 14 to 45 of the paper book. A copy of assessment order for A. Y. 2005-06 passed under Section 143(3) of the Act dated 13th December, 2007 by the Assessing Officer is also filed in support of ar .....

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s and Purchase register v. Purchase and sales bill files vi. Karigar register The above documents are verified with reference to the assessee's submissions and it is seen that the aforesaid documents are thoroughly audited by the Chartered Accountants under the Statutory Audit under Section 44AB of th4e Act and they exhibit marking in green ink at appropriate places having made by the Auditors. In the course of verification, I do not find any discrepancy/mistake in the maintenance of the boo .....

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dered the findings of the Assessing Officer, the submissions made by the learned AR of the appellant and the case-laws relied upon by him. The primary dispute in the present appeal arises out of the method of valuation of stock which has a direct bearing on the resultant profit for the year under consideration. It is the uncontroverted and undisputed fact that the appellant-firm has been consistently valuing the inventory at weighted average cost. The Assessing Officer has disbelieved the validi .....

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ghted 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. .....

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the year of sale. 3.3.3 The learned counsel of the appellant has referred various judicial pronouncements through written submissions as well as oral arguments and has relied on the following case-laws in support of his arguments: (i) I T O Vs. Choksi Hirachand & Bros. 37 TTJ 415 of ITATAhmedabad bench; (ii) ACIT Vs. Jagdishchand (90) TTJ page 943 Chan); (iii) ACIT Vs. Gopaldas Vallabhdas 59 TTJ page 768 (Indore ITAT); (iv) I T O Vs. M/s. Son! Dwarkadas Virchand &. Sons, Bhavnagar; (v) .....

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d that the valuation of stock in trade whether at cost or market price, which is a matter entirely within the discretion of the assessee - C I T Vs. British Paints Ltd (188 ITR 44). Similarly, the Apex Court has held in Chainrup Sampatram Vs. CIT (24 ITR 481) that while valuing the closing stock, it is only the anticipated loss that is required to be taken into account, while the anticipated profit in the shape of appreciated value of stock is not required to be brought into account till its act .....

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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 ou .....

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e same formula and the same has never been disturbed or challenged by the Department in the past. The Assessing Officer is, therefore, not justified in adopting suddenly a changed method replacing the standard and accepted method of valuation of stock (weighted average cost method) to market price. 3.3.6 The contention of the appellant that the issue also gets covered by Accounting Standard - 2 (Revised) issued by the Institute of Chartered Accountants of India is also correct. The Assessing Off .....

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th there clearly being no specific identification of the stock with reference to the specific cost assigned to it. The Paragraph 14 of AS-2 (Revised) will apply only to specific kind of industries and cannot have general or blanket application. For example, a dealer of cars can separately identify each and every car lying in stock with reference to the specific cost attached to it. This is because the cars are not interchangeable and are separately identifiable with reference to the chassis numb .....

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doubtedly be covered by Para.16 which clearly provides that the cost of inventories other than those dealt with in Para.14, should be assigned by weighted average cost formula. 3.3.8 Recently, the Hon'ble ITAT, 'C Bench, Ahmedabad, has delivered a judgment in regard to method of accounting in the case of ACIT Vs. Shri Vijay M. Parekh in ITAs No.1994 to 1999/Ahd/2009 vide their order dated 25th September, 2009 wherein the Hon'ble ITAT has observed that the assessee had been regularly .....

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h 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 val .....

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assessee followed the method of valuation of closing stock at lower of cost or (average market price) whichever is less. The assessee adopted average of three years which was incorrect method. Since incorrect method was applied, therefore, average of opening stock should be adopted while making valuation of the closing stock. He has submitted that the AO has not changed the method of valuation of closing stock but applied correct method of valuation. He has submitted that the decisions cited by .....

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possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the .....

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AT Ahmedabad Bench in the case of 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 a .....

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tructure 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 consistency shall have to be followed by the revenue department while making the assessments. 7. We have considered the rival submissions and perused the material on record and do not find any merit in the departmental appeal. The assessee filed copy of the audit report .....

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revenue department accepted the same method of valuation of closing stock in the earlier years on the same set of facts and circumstances of the case of the business of the assessee. It is well settled law that though the principle of res-judicata does not apply to the income tax proceedings, but principle of consistency shall have to be followed by the revenue department while making the assessment. We rely upon the decision of the Hon ble M. P. High Court in the case of Godavari Corporation L .....

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