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TMI Blog2023 (2) TMI 967X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Rs.3,50,00,000/- towards undisclosed investment in stock of brass vessels and utensils in the assessment for the A.Y 2013- 14. 2.2. Having regard to the facts and reasons stated by the AO in paras 8 to 12 of the assessment order passed by the AO for the A.Y. 2013-14 the Id CIT(A) ought to have confirmed the addition of Rs. 3,50,00,000/- made by the AO, in the assessment. 3. The Ld. CIT(A) is not justified in directing the AO to adopt the closing stock value returned by the assessee and thereby deleting the addition of Rs. 5,37,29,886/- made by the AO, towards undervaluation of closing stock in the assessment order passed for the A.Y 2013-14 given as per AnnexureA-4 to the assessment order. 3.1 The Ld. CIT(A) ought to have appreciated the fact that the assessee had adopted different methods for valuing the opening and closing stocks and the AO had arrived at the value of closing stock by adopting the very same method adopted by the assessee for valuing the opening stock and bringing the difference of Rs.5,37,29,886/- for taxation. 3.2 For the reasons stated by the AO in detail, in paras 13 & 14 of the assessment order for the A.Y. 2013-14 the Id CIT(A) ought to have uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. 5. The first issue that came up for our consideration from ground no. 2 to 2.2 of revenue's appeal is deletion of addition towards undisclosed investment in stock of brass vessels and utensils u/s. 69 of the Act for Rs. 3.5 crores. The facts with regard to the impugned dispute are that during the course of search, the Department has valued closing stock of brass vessels and utensils at Rs. 15 crores, on the basis of physical stock taken during the course of search and the same has been confirmed by the firm in the statement recorded u/s. 132(4) of the Act. The assessee had disclosed undisclosed income of Rs. 3.5 crores towards difference in valuation of closing stock of home appliances and metal wares. The assessee has included additional income offered towards difference in value of stock and arrived closing stock as on the date of search i.e., on 30.10.2012 and prepared its financial statements. During the course of assessment proceedings, the AO noticed that the assessee did not disclosed additional income offered towards undisclosed investment in stock of home appliances and metal wares of Rs. 3.5 crores separately, and thus, redrawn trading and profit and loss account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. The result is given in annexure A-3. The book stock of this division as on 30.10.2012 worked out on the basis of G.P. rate of 7.14% declared by the assessee for the immediate previous year should be Rs.18,68,25,000. If undisclosed stock of Rs.3,50,00,000/- is added to this the opening stock for the remaining part of the year becomes Rs.22,18,25,000/-. The gross profit for the remaining period from 31.10.2012 to 31.03.2013 is Rs.(- )28,09,299/-. The G.P.ratio is (-) 0.69%. The assessee cannot incur trading loss in this division as the prices of Electronics, Home appliances and Metal wares are stable and the selling prices are fixed by marking up the purchase price. The inconsistent G.P. rate for the remaining period of the year after the date of search also proves that the excess closing stock of brass vessels and utensils of Rs.3.5 Cr. declared by the Managing Partner as undisclosed investment in the firm is not included in the accounts of the firm and thereby in computing the total income of the assessee for the year. The undisclosed stock of brass vessels and utensils valued at Rs.3,50,00,000/- declared by the Managing Partner Sri.P.Mookan in the statement dt:31.10.2012 is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earch party accepted a declaration* of Rs.3.50 crores as excess stock. As per the trading account drawn by the assessee based on the books of accounts maintained, to assessee has taken the closing stock at Rs.18,68,25,000 as or.. 30.10.2012 which includes the declaration of Rs.3.50 crores as additional stock to the approximate value of Rs.15 crores of stock available in the premises of the assessee. To this extent, the assessee has followed up on his declaration of Rs.3.50 crores of additional stock during the course of search. conducted Subsequently, the assessee has drawn a trading account for the period 31.10.2012 to 31.3.2013 whereby the opening stock has been taken inclusive of stock already declared and arriving at a closing stock of Rs. 10,59,65,638 and a gross profit of Rs.3,40,15,701. From the closing stock figure as on 31.3.2013 and the GP for the period 31.10.2012 to 31.3.2013 there is a profit calculated with the GP rate of 8.36% for the part period. The AR has explain l the same on account of the assessee partners being busy with post search investigations and the business marginally suffering on account of the same. Even though the claim of the assessee appears a stre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaration of additional income towards difference in stock, the assessee had claimed closing stock as on the date of search at Rs. 15 crores, and the same has been validated by the partner of the firm shri. P. Mookan in his statement recorded u/s. 132(4) of the Act. The search party should have ideally carried out verification of stock held by the assessee as on the date of search, but this was not done. In fact, the search party has accepted closing stock value arrived at by the assessee at Rs. 15 crores and on that basis taken declaration of additional income at Rs. 3.5 crores towards difference in valuation of closing stock. The assessee has redrawn its financial statements including trading and profit and loss account and has included additional income offered towards difference in valuation of closing stock at Rs. 3.5 crores and has changed closing stock value as on the 30.10.2012 at Rs. 18,68,25,000/-, which includes closing stock valued as on the date of search plus additional income offered towards difference in valuation of closing stock. The AO, redrawn financial statement prepared by the assessee and according to the AO, the assessee did not separately disclosed additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration from ground no. 3 to 3.2 of revenue's appeal is deletion of additions towards difference in value of closing stock of gold and jewellery division. The assessee is following weighted average method for valuation of closing stock right from the beginning. During the course of search, the Department has valued closing stock on the basis of six months average price of purchases, which works out to Rs. 2862/- per gram as on 30.10.2012 and has determined difference in value of stock. During the course of assessment proceedings, the AO called upon the assessee to furnish method of valuation of closing stock for which the assessee submitted that although, it has valued closing stock as on the date of search on the basis of six months average purchase price, but it has followed weighted average price method for valuation of stock and thus, the closing stock as on the 31.03.2013 has been valued by adopting weighted average cost price method. The Assessing Officer, however was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, when the assessee has followed six months average price method for valuation of stock at the time of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock. It may be mentioned that the assessee himself has accepted that the method adopted by it prior to search was not correct and revalued the stock as on 31.03.2012 by taking the average purchase price for the six months prior to 31.03;2012. The assessee also filed return u/s.153A based on this revaluation. Therefore, the closing stock valuation as on 31.03.2013 made by the assessee in the return is rejected as the valuation of opening stock by one method and valuation of closing stock by another method leads to distorted calculation of the profits for the year. The closing stock as on 31.03.2013 is revalued based on the average purchase price for the prior six months as adopted by the assessee to value the opening stock. The working of the valuation is enclosed as annexure A-4. The revalued closing stock amounts to Rs.2,16,12,99,835/-. The assessee has shown closing stock of Rs. 210,75,69,949/- in the return on income. The difference of Rs.5,37,29,886/- between the revalued closing stock and the closing stock shown by the assessee in the return is added to the income of the assessee as undervalued closing stock." 13. Being aggrieved by the assessment order, the assessee prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regularly from year on year by the assessee. The valuation of stock during the course of search and the method of declaration of such excess stock found was a special case and due to an agreement between : the assessee and the search party. However, this special arrangement for valuing the excess stock cannot be imposed on the assessee for all successive years disregarding the accepted methods o: accounting. After valuing the stock on 31.3.2012, the assessee has gone bad to the regular mode of accounting whereby the methods of accounting historically adopted by 'the assessee have been followed. The assessee has followed the weighted average cost method historically and has a right to practice the same for this year also. 10. Out of the total purchases of Rs.375.79 crores in the jewellery division the value of old and worn out jewellery purchased during the year has been given by the assessee at 90.71 crores. This substantially brings down the value of the total of gold jewellery purchased during the year. The AO has ignored this crucial aspect while arriving at the value of closing stock. In fact, the assessee has given the value of worn out and old jewellery at a average of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt has valued closing stock by adopting six months average purchase price and determined excess stock held by the assessee. The assessee has adopted weighted average cost method right from the beginning including for the impugned assessment year while valuing closing stock. The AO disputed weighted average cost method adopted by the assessee and has replaced six months average purchase price method by taking into account purchase of new gold jewellery. It was an argument of the assessee before the AO that six months average price of new jewellery alone cannot be considered because its purchases includes substantial amount of worn and old jewellery from the customers, which is having different purchase price. The assessee, further contended that weighted average cost method is one of the prescribed method for valuation of closing stock as per accounting standards. Therefore, there is no reason to substitute six months average price in place of weighted average cost method. 17. We have given our thoughtful consideration to the reasons given by the AO to make additions towards difference in valuation of closing stock and we ourselves do not subscribe to the reasons given by the AO fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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