TMI Blog1987 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 grams of gold jewellery were valued for Rs. 1,89,181, which was the value of the opening stock. In other words, out of the total closing stock of 4369 grams of jewellery, jewellery weighing 4217 grams was valued @ Rs. 44.86 per gram. The balance jewellery weighing 152 grams was valued for Rs. 13,733 which was at the average rate of purchase of gold during the year. The average rate of purchase of gold during the year was Rs. 100.96 per gram. What we have to decide in this appeal is whether the assessee was justified to value the major portion of its closing stock, not at the average rate of purchase during the year, but at the rate of Rs. 44.86 per gram on the basis of the cost of the opening stock. The underlying assumption, which has been made by the assessee is that the gold jewellery, which was there in the opening stock, was not sold during the year. It was assumed that the jewellery, which was sold during the year, had come out of the purchases of the year. What is to be decided here is whether such a theoretical assumption was justified. The ITO had accepted the assessee's method of the valuation of closing stock. He had framed the assessment accordingly. Subsequently, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y accepting the method of valuation of stock, as shown by the assessee, had made an assessment which was erroneous. According to the CIT, the entire closing stock was required to be valued at the average rate of purchase of gold during the years. The CIT was of the view that it would be erroneous to assume that the opening stock was still intact at the end of the year. 5. It was argued by the Departmental Representative that it had been held by the courts that it was not justified to value the closing stock on the basis of LIFO assumption. It was hence argued by him that the order u/s 263 of the CIT should be upheld. 6. Hence the question in the main, which we have to decide, is whether the assessee was justified to value its closing stock on LIFO assumption. We have considered the matter carefully. It is true that the choice of the method of accounting lies with the assessee. The Department is bound by the assessee's choice of a method regularly employed by him unless by that method the true income, profits and gains cannot be arrived at. If the true income, profits and gains cannot be ascertained on the basis of the assessee's method, it would be the duty of the ITO to disca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der : " The profit of trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts." Hence, the question is to determine the expenditure on gold which could be properly charged against the receipts of the year. In the opening stock, there were 4217 grams of gold valued at Rs. 1,89,181. During the year, purchases of gold weighing 5770 grams were made for Rs. 5,82,583. 4369 grams of gold were left in the closing stock. The gold sold during the year was 5617 grams. The assessee says that from its books, it could not be said as to how much of gold sold during the year came out of the opening stock and as to how much came out of the purchases made during the year. The assessee has, hence, for the determination of its profits for the year, proceeded on the basis that the gold that was sold had come out of the purchases of the year. According to the assessee, the opening stock was not utilised and this was still intact at the end of the year. On this basis, the value of the closing stock was taken by the assessee at Rs. 2,02,914. In this manner, what the assessee charged against the receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, or FIFO assumption. We are of the view that FIFO assumption approximates more closely to the reality. The CIT has pointed out a very pertinent fact. The accounting year of the assessee started on 1-4-1979. The opening stock of gold was of 4217 grams. Within the first few days, certain sales had been made and the stock of gold was reduced to 4170 grams, as on 3-4-1979. There were no purchases till then. It is thus obvious that it would be erroneous to assume that the entire gold of the opening stock was still intact at the end of the year. If we persist with this LIFO assumption, then as rightly pointed out by the CIT, fiction will take the place of reality. When profit and gains of the business cannot be determined with certainty, an estimate has got to be made. But the method of estimate should be such which brings us closer to, and it does not remove us away from the truth. We cannot believe that the assessee could not maintain details of the jewellery in a manner which could indicate whether it was the jewellery of the opening stock which had been sold or whether it was the jewellery purchased during the year which had been sold. It appears that the assessee deliberately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, the CIT had no power to cancel such an order u/s 263. It was stated that the language of sec. 263 only speaks of the revision of the order of the ITO. The ITO had referred the matter of valuation of the closing stock to the IAC for his direction u/s 144. The IAC had given a direction on the matter of the valuation of the closing stock u/s 144A. The assessment was completed by the ITO on the basis of this direction. 12. We see no force in the contention of the assessee that the CIT did not have the power to revise the impugned order. The CIT had passed the order u/s 263 on 30-3-1985. The following Explanation to sec. 263 was introduced by the Taxation Laws (Amendment) Act, 1984 with effect from 1-10-1984 :--- " Explanation : For the removal of doubts, it is hereby declared that, for the purposes of this sub-section, an order passed by the Income-tax Officer shall include--- (a) an order of assessment made on the basis of directions issued by the Inspecting Assistant Commissioner under section 144A or section 144B ; and (b) an order made by the Inspecting Assistant Commissioner in exercise of the powers or in performance of the functions of an Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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