TMI Blog2018 (4) TMI 1625X X X X Extracts X X X X X X X X Extracts X X X X ..... or a jeweller as approved in the case of Cochin Tribunal in the case of ITO vs Sree Padmanabha Jewellery Mart[1986 (8) TMI 120 - ITAT COCHIN ] In any event, we hold that no addition could be made towards value of stock because the closing stock cannot be construed as a source of profit for the assessee - assessee has been consistently following LIFO method of accounting for valuation of its closing stock of gold which has been accepted by the department in the earlier years even in scrutiny assessment proceedings of the assessee. Then there is no justifiable reason to reject the same method during the year under appeal. - Decided against revenue Addition towards making charges included in valuation of closing stock - Held that:- We find that the assessee had stated that it had included making charges in the closing stock. But this statement made by the assessee has been accepted by the CITA without verifying the said fact. Thus remand this issue to the file of the AO, with a direction to verify the fact of inclusion of making charge in the valuation of closing stock - grounds raised by the assessee and revenue as above are allowed for statistical purposes. MAT addition u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DISPUTE IN VALUATION OF CLOSING STOCK Ground No. 1 of Revenue Appeal The brief facts of this issue are that the assessee is engaged in the business of manufacturing and selling of Gold Diamond Studded Gold Jewellery and had filed its return of income for the Asst Year 2010-11 on 23.9.2010 declaring total income of ₹ 6,10,961/-. During the year under consideration, the assessee company has also done job work of other parties. The assessee has shown turnover of ₹ 6.10 crores and contractual receipt for manufacturing of jewellery of ₹ 38.46 lacs. The ld AO observed that vide Column 12 (a) of the Audit Report of the assessee, the method of valuation of closing stock adopted by the assessee is as under:- Gold : At cost including making charges under LIFO method Diamond : At cost or net realizable value whichever is lower under LIFO method Pearl Emerald : At cost under LIFO method 4.1. The ld AO vide notice u/s 142(1) of the Act dated 1.10.2012 asked for monthly statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduce section 145A wherein the provision is that the valuation of ..inventory shall be [a(i)] in accordance with the method of accounting regularly employed by the assessee. 4.4. The assessee stated that it had applied the same method regularly, since inception of the business from the year 1994 and the same method of accoutnign have been followed year to year and every year and have been accepted by the department. The method followed was to take the value of the opening stock as per the earlier years closing stock and for addition in the value of stock every year, the yearly average rate is applied for addition in the stock over and above last year stock. For the purpose of valuation under LIFO method, the aforesaid method is proper and well recognized method. 4.5. The ld AO observed that the inventories are to be valued in accordance with the method prescribed under Accounting Standard (AS) -2 issued by the Institute of Chartered Accountants of India (ICAI). He observed that AS-2 prescribes valuation of inventories should be valued on First in First Out (FIFO) method or weighted average method and LIFO method is not permitted. Since the assessee is a company, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made by the assessee, is to be accepted, then, even after 30 years, it would be open to the assessee to say that this stock is still intact. Hence the ld AO observed that the LIFO method is not justified. 4.6. The ld AO observed that in the absence of records to indicate as to whether the sales were out of the jewellery of the opening stock or out of the purchases made during the year, an estimate of the cost of gold, which may be charged as an expense in arriving at the profit for tax purposes, has got to be made. The question is whether these expenses should be, determined on the basis of LIFO assumption, as made by the assessee, or FIFO assumption. The ld AO observed that FIFO assumption approximates more closely to the reality. He observed that LIFO method adopted by the assessee is not giving true profit of the year and hence method adopted by the assessee company is rejected. The ld AO accordingly adopted the weighted average method as prescribed in AS-2 of ICAI to reach nearer to true profit. The ld AO arrived at the closing stock by adopting the weighted average cost as under:- Value of Gold (24K,22K,20K and 18K) 8,77,57,418.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 dated 23.7.2010 c) Pune Tribunal in the case of Sandvik Asia vs DCIT reported in 69 ITD 59 d) Ahmedabad Tribunal in the case of ITO vs Chokshi Hirachand Bros reported in 37 TTJ 415 e) Ahmedabad Tribunal in the case of ACIT vs Vijay M Parekh in ITA Nos. 1994 to 1999/Ahd/2009 dated 25.9.2009 f) Ahmedabad Tribunal in the case of Neptune Infrastructure Pvt Ltd in IT(SS) A No. 450/Ahd/2011 dated 31.10.2011 It was further pleaded that there would be no revenue effect when the closing stock is revalued since if the AO had revalued the closing stock for the assessment year in question then he will be duty bound to increase the value of the opening stock in the next year. Therefore such addition becomes revenue neutral. Moreover, the opening stock of this year which is claimed as deduction should also be revalued by the ld AO using weighted average method, which in turn would go to increase the expenditure thereby reducing the profit of the year. 6. The ld CITA appreciated the aforesaid contentions of the assessee and the case laws relied upon by it and deleted the addition made by the ld AO in the sum of ₹ 3,91,71,167/- towards valuation of closing stock. Aggri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te treatment for items that are segregated for a specific project, regardless of whether they have been purchased or produced. However, when there are large number of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories. 16. The cost of inventories , other than those dealt with in paragraph 14, should be assigned by using the first-in, first-out (FIFO) , or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 7.1. The ld AR pleaded before us that the LIFO method is also recognized in AS-2 and in this regard , he placed reliance on the decision of Pune Tribunal in the case of Sandvik Asia vs DCIT reported in 69 ITD 59 wherein it was held : 18. Lastly, we shall deal with the contention of the learned Senior Departmental Representative that true profits cannot be deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has been following consistently LIFO method for valuation of closing stock of gold. It is not in dispute that the same has been consistently accepted by the revenue in the earlier years even in the scrutiny assessment proceedings. It is elementary that the regular system of accounting followed by the assessee could be disturbed only in the event of finding out defects in the books of accounts and stock registers maintained by the assessee. Admittedly, no defects were noticed or pointed out by the Learned AO in the books of accounts and stock registers etc furnished before him at the time of assessment proceedings. Infact no discrepancy was noticed on the quantity of gold and other jewellery by the Learned AO. We find that the Learned AO had not recorded any clear finding in his order that the LIFO method of accounting followed by the assessee for valuing its closing stock was such that correct profit could not be deduced from the books of account maintained by the assessee. In these circumstances, it would not be justified in rejecting the closing stock valuation regularly adopted by the assessee. Reliance is also placed on the decision of the Hon ble Calcutta Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69099.880 47460914 For 31.3.2008 Grams Rate Value Value of closing stock of FY 2006-07 69099.880 686.85 47460914 Value of Balance stock 6389.830 1005.59 6425549.15 75489.710 53886463.15 For 31.3.2009 Grams Rate Value Value of closing stock of FY 2006-07 69099.880 686.85 47460914 Value of Balance stock rate of FY 07-08 4652.780 1005.59 4678789.04 73752.660 52139703.04 7.2. It is quite natural that jewellery being a fashion industry, the old stocks would most of the times remain with the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer, there is no merit in not adopting the method of valuation of stock being consistently followed by the assessee. Further we find support from the ratio laid down by the Hon'ble Supreme Court in Chainrup Sampat Ram Vs. CIT 24 ITR 481 (SC) (supra) wherein it has been held that the value of stock cannot be appreciated higher than the cost because the closing stock is not the source of profit for the assessee. It has also been held by the Hon ble Supreme Court that the closing stock is to be valued either at cost or market value, whichever is low. In the facts and circumstances of the present case, we are in conformity with the order of CIT(A) and uphold the same. There is no merit ill adopting the weighted average cost method for valuation of inventory of stock in the circumstances of the case. We confirm the deletion of addition made by the Assessing officer totaling ₹ 52,23,753/-. The ground of appeal raised by the Revenue is thus dismissed. 7.3. In any event, we hold that no addition could be made towards value of stock because the closing stock cannot be construed as a source of profit for the assessee. We place reliance on the decision of the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred / suffered loss to the extent of 3.5% 9% to convert into finished product. Hence the loss suffered while making into finished goods is a cost of finished goods and therefore it should be included with value of closing stock and accordingly he added a sum of ₹ 10,96,584/- to the total income thereon. 8.1. The assessee pleaded that the ld AO had not disputed the % of wastage that occurred during the course of manufacturing of gold. It was clearly explained that gold was issued to karigars for making the jewellery and they charge making charges and the wastage in process of making the jewellery is to be borne by the assessee. There cannot be any control over the quantum of such wastage. To avoid such sistuationm the assessee issues gold to the karigars and fix the total maximum allowable wastage. The wastage in the process was quite fair and reasonable. The assessee denied the basic fact that it had not included making charges in valuation of stock., It was stated that making charges are part of direct expenses which are inclusive of wastage of gold. In the making charges, the assessee had duly taken effect of the wastage, as wastage rate of 3.5% and 9% for 22 carat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of ₹ 10,96,584/- on account of under valuation is reduced to ₹ 7,73,488/-. 8.3. Aggrieved, both the assessee as well as the revenue are in appeal before us on the following ground:- I .T.A. No. 882/Kol/2015 for the assessment year 2010-11 2. On the facts and circumstances of the case the Ld. CIT(A) has erred in reducing the addition of ₹ 10,96,584/- to ₹ 7,73,488/- on account of expenditure towards making charges not included during the valuation of closing stock. I.T.A. No. 442/Kol/2015 for the assessment year 2010-11 3. For that the Ld. CIT(A) erred in confirming the addition of ₹ 7,73,488/- out of addition of ₹ 10,96,584/- made by the AO on account of alleged non inclusion of making charge in the value of closing stock when the same was duly included in the valuation and the statement of which was filed in the course of assessment proceedings. 4. For that the Ld. CIT(A) erred in confirming the addition of making charge when the same system of accounting was followed from earlier years and the books of accounts have also been accepted by the AO. 8.4. We have heard the rival submissions. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the I.T. Act, to make the adjustment in the book profit if the accounts are not prepared in accordance with the accounting standard prescribed by the ICAI. 9.1. We have heard the rival submissions. We had already deleted the addition made towards valuation of closing stock in the sum of ₹ 3,91,71,167/- due to difference in method of valuation as per Ground No.1 of revenue appeal. We have held that LIFO is also a recognized method of accounting. Hence it cannot be said that the valuation method is not in consonance with the accounting standards and Part II and Part III of Schedule VI of the Companies Act. Hence no such addition could be made to the book profit u/s 115JB of the Act. With regard to the other item of making charges inclusion in the closing stock of ₹ 10,96,584/- , the assessee had stated that it had already included the making charges including wastage (i.e amount paid to karigars) in the valuation of closing stock, which has been directed to be verified by the ld AO in the earlier grounds supra by us. The ld AO would decide this ground vis a vis inclusion of the same in the book profits u/s 115JB of the Act accordingly. If any addition is sustaine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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