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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI MANJUNATHA. G, HON’BLE
आदेश /O R D E R
PER MANJUNATHA.G, ACCOUNTANT MEMBER:
This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-19, Chennai, dated 09.02.2017 and pertains to assessment year 2013-14.
:-2-: ITA. No: 1154/Chny/2017 2. The Revenue has filed the following grounds of appeal: “1. The Order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Ld. CIT(A) is not justified in setting aside the addition of Rs.3.50 Crores made by the AO towards undisclosed investment in stock of brass vessels and utensils u/s.69 of the IT Act, in the assessment for the A.Y 2013-14. 2.1. The Ld. CIT(A) ought to have appreciated the reasons stated by the AO before making the addition 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 upheld the addition of Rs. 5,37,29,886/- made by the AO towards undervaluation of closing stock in the assessment.
4. For these grounds and other grounds that may be adduced at the time of hearing, it is prayed that the order of learned CIT (Appeals) may be set aside and that of the Assessing Officer be restored.
:-3-: ITA. No: 1154/Chny/2017 RELIEF CLAIMED IN APPEAL The order of the learned CIT (Appeals) may be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are that, M/s. Mangal and Mangal is a partnership firm, engaged in the business of trading in gold and diamond jewellery, silver ornaments, electronics, home appliances and metal wares. A search action u/s. 132 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) was conducted in the case of the assessee on 30.10.2013. During the course of search, excess stock of 22,833.72 grams of gold jewellery was found. The managing partner of the firm, Shri. P. Mookan in the statement recorded u/s. 132(4) of the Act, had admitted excess stock of gold jewellery worth Rs. 6,00,40,077/- as undisclosed income. It was further noted that, there is a difference in closing stock of electronics, home appliances, metal ware division and the firm has agreed to offer a sum of Rs. 3,50,00,000/- undisclosed income towards difference in value of stock. During the course of assessment proceedings, the AO noticed that the assessee did not offer additional income towards difference in stock while filing return of income and thus, after considering relevant explanations of :-4-: ITA. No: 1154/Chny/2017 the assessee, made additions of Rs. 3.5 crores towards undisclosed investment in stock of brass vessels and utensils. The AO, had also made additions towards difference in valuation of closing stock by adopting average purchase price of last six months to value closing stock as on 31.03.2013 and determined undervalued closing stock of Rs. 5,37,29,886/-.
The assessee carried the matter in appeal before the first appellant authority and the ld. CIT(A), for the reasons stated in their appellant order dated 30.03.2015, deleted additions made by the AO towards undisclosed income on account of difference in value of closing stock of electronics, home appliances and metal wares division and also difference in value of closing stock as on 31.03.2013 in respect of gold jewellery. Aggrieved by the CIT(A) order, the revenue is in appeal before us.
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 :-5-: ITA. No: 1154/Chny/2017 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 the assessee and split into two parts i.e., for the period from 01.04.2012 to 30.10.2012 (up to the date of search) and from 31.10.2012 to 31.03.2013. The AO, on the basis of redrawn trading account opined that, the assessee did not include additional income offered towards difference in valuation of closing stock at Rs. 3.5 crores. Therefore, made separate :-6-: ITA. No: 1154/Chny/2017 additions of Rs. 3.5 crores u/s. 69 of the Act. The relevant findings of the AO are as under: 10. It is seen that in the return for AY 2013-14 the assessee has not included the above mentioned investment of undisclosed stock of Rs. 3.50 crores as income. During the hearing the assessee's representative was asked to explain how the undisclosed stock of metal mart brass vessels and utensils is reflected in the return of income. The A.R. vide letter dt.11.12.2014 stated that "the sum had been admitted as part of the closing stock in Metal wares and Home Appliances division. We had increased a sum of Rs.3,50,00,000/- to the book stock originally furnished by the assessee. The gross profit rate on account of inclusion had become 8.06% as against 4.16% in 2011- 12 and 5.62% in 2012-13. If the additional value of the stock is eliminated the gross profit will be 5.62% in tune with the past years. A statement of gross profit is also attached for reference."
11. It is observed that the gross profit working given by the assessee is not correct. As per the purchase, sale and stock values mentioned in the audit reports filed with the returns, the Gross Profit for Electronics, Home appliances and Metal wares for the A.Y.2013-14 is 7.52% as compared to G.P of 7.14% in 2012-13, 3.47% in 2011-12 and 7.93% in 2010-11. Addition of excess closing stock of Rs.3.5 Cr would have resulted in jump of gross profit rate of 4.25% on a sales turnover of Rs.80.60 Cr. Since there is no significant change in the G.P. rate for A.Y.2013-14 as compared to the previous years it can be inferred that the assessee has not included the excess closing stock of brass vessels and utensils of Rs. 3.5 crores declared by the Managing Partner as undisclosed investment in the firm in the statement made on 31.10.2012.
In order to ascertain the assessee's claim, separate trading accounts of the Electronics, Home appliances and Metal wares division was drawn for the period up to the date of search and for the remaining period of the year. 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 :-7-: ITA. No: 1154/Chny/2017 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 therefore brought to tax as unexplained investments u/s.69 of the I.T.Act. The above income was not disclosed by the assessee ti II the search. Therefore, penalty proceedings u/s.271AAB is initiated on this undisclosed income found during search u/s.132.”
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has filed detailed written submissions on the issue along with trading account of home appliances/ electronics and metal ware division, up to the date of search and from the date of search to the end of financial year, and argued that if you consider value of closing stock arrived at by the Department during the course of search on 30.10.2012 at Rs. 15 crores and additional income offered by the assessee towards difference in value of stock at Rs. 3.5 crores, then the :-8-: ITA. No: 1154/Chny/2017 value of closing stock arrived at by the AO by taking into account average GP of earlier financial year is matched with closing stock declared by the assessee. Therefore, submitted that the AO is erred in making separate additions towards closing stock, even though the assessee has already included additional income towards difference in closing stock in the books of accounts.
The Ld. CIT(A), after considering relevant submissions of the assessee and also taken note of trading account prepared by the assessee, opined that if you go by the method followed by the Department to ascertain value of closing stock as on the date of search plus additional income declared by the assessee towards difference in valuation of stock, it matched with closing stock value arrived at by the AO by considering GP declared by the assessee for immediate preceding assessment years. Therefore, he opined that the AO is erred in making further additions towards valuation of closing stock at Rs. 3.5 crores, when the assessee has already offered additional income by increasing the value of closing stock as on the date of search. The relevant findings of the ld. CIT(A) are as under:
:-9-: ITA. No: 1154/Chny/2017 “5. The submissions made by the assessee are considered. During the course of statement recorded from the assessee at the time of search, prior +o the declaration of income, the assessee had claimed the stock at Rs.15 crores. The search party should have ideally completed the stock taking even in the brass and utensils section. However this was not done. The search 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 stretch, there are n,1 documentary evidences to disprove the closing stock declared. of Rs.10.59 crores as on 31.3.2013 and the gross profit percentage declared of 8.36% for the part period 31.10.2012 to 31.3.2013. Considering the same, the additi011 of Rs.3.50 crores is set aside and the assessee's ground of appeal on this issue is allowed.”
The Ld. DR, submitted that the ld. CIT(A) is not justified in deleting additions of Rs. 3.5 crores made by the AO towards undisclosed investment in stock of brass vessels and utensils :-10-: ITA. No: 1154/Chny/2017 u/s. 69 of the Act, without appreciating fact that the assessee could not justify accounting of difference in valuation of stock with the help of trading account prepared up to the date of search and after the date of search. The Ld. DR, further referring to the trading account prepared by the assessee which is part of Ld. CIT(A) order, submitted that if you go by the arguments of the assessee that it had accounted a sum of Rs. 3.5 crores for valuation of closing stock as on 30.10.2012, then it comes to distorted figure going by the trading account prepared for the period from 31.10.2012 to 31.03.2013. Therefore, the AO redrawn the trading account and ascertained the correct GP of the assessee, on the basis of GP declared in earlier financial years to come to the conclusion that, the assessee did not disclosed additional income offered towards difference in value of stock.
9. The Ld. Counsel for the assessee, on the other hand supporting the order of the ld. CIT(A) submitted that, the assessee has explained with necessary evidences, including trading account drawn up to the date of search and from the date of search to the end of the financial year and argued that the GP from home appliances and utensils division is 8.36%, :-11-: ITA. No: 1154/Chny/2017 when compared to GP declared for earlier financial year, which was at 7.14%. The assessee had also filed necessary evidences to prove that a sum of Rs. 3.5 crores declared towards excess stock has been accounted and included in valuation of closing stock as on the date of search. The Ld. CIT(A), after considering relevant submissions has rightly deleted additions made by the AO and their order should be upheld.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The facts borne out from record indicates that at the time of search, prior to the 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 :-12-: ITA. No: 1154/Chny/2017 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 additional income offered towards difference in value of stock.
11. Having heard both sides, we find that the observations of the AO is devoid of merits, for the simple reason that the AO has analyzed trading and profit and loss account of the assessee on the basis of GP declared for financial year 2011- 12 and according to the AO, if assessee has considered additional income of Rs. 3.5 crores towards stock, its GP should have been increased at 4.25%, whereas, the GP declared by the assessee for assessment year 2013-14 is only 7.52%, which is almost comparable to GP declared for assessment year 2012-13. In our considered view, the AO has :-13-: ITA. No: 1154/Chny/2017 made additions towards difference in value of stock on the basis of surmises ignoring explanation furnished by the assessee with the help of redrawn trading account which clearly shows that the assessee had included additional income offered towards difference in stock as on the date of search. If you go by figures of closing stock computed by the search parties as on the date of search at Rs. 15 crore and closing stock declared by the assessee in its books of accounts as per the return of income, which was at Rs. 18,68,25,000/-, then there is no doubt with regard to the admission of the assessee that it had declared additional income at Rs. 3.5 crores. Further, the financial statement drawn by the assessee by splitting its trading account into up to the search and from the date of search to the end of the financial year clearly indicates that there is an increase in gross profit for the assessment year in consideration when compared to the previous year after inclusion of additional income of Rs. 3.5 crores to value of closing stock. The Ld.CIT(A), after considering relevant facts has rightly observed that there is no documentary evidences to disprove the closing stock declared by the assessee as on 31.03.2013 on gross profit percentage, which is almost more than the gross profit declared in the previous :-14-: ITA. No: 1154/Chny/2017 financial year, while deleting additions towards value of closing stock. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. CIT(A) to delete additions made towards undisclosed investment in stock of home appliances and electronics division and thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue.
12. The next issue that came up for our 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 :-15-: ITA. No: 1154/Chny/2017 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 search, there is no reason for the assessee to change method of valuation to weighted average cost method for the financial year ending 31.03.2013. Therefore, rejected closing stock value adopted by the assessee and has re-worked closing stock by taking into six months average purchase price and has made additions of Rs. 5,37,29,886/- to total income. The relevant findings of the AO are as under: “13. During search, the Search Team found that the assessee had undervalued the closing stock as on 30.10.2012. The assessee could not state clearly as to what method was used to value the closing stock. The search team asked the accountant of the assessee to give the present value of purchase of the stock as on the date of search. The accountant of the assessee valued the gold jewellery stock at Rs.2862/- per gm as on 30.10.2012. The AR has submitted that it was worked out by taking the average purchase rate of the last six months. Similarly the assessee's accountant was asked to give the then purchase value of stock as on 31.03.2012. The accountant valued the jewellery at Rs.2635/- per gm. It is submitted that it is the average purchase price for the six months prior to 31.03.2012. This valuation was adopted to value the closing stock of :-16-: ITA. No: 1154/Chny/2017 A.Y.2012-13 in the return u/s.153A. Since the closing stock of A.Y.2012-13 becomes the opening stock for the A.Y2013-14, it is also valued at Rs.2635/gm.
During assessment proceedings the assessee was requested to explain the method of valuing the closing stock as on 31.03.2013. The AR vide letter dt.16.03.2015 stated that the closing stock of gold jewellery as on 31.03.2013 is valued at R!:.2771/gm by calculating the weighted average rate of the opening stock and the purchases made during the year. However, as mentioned above, the assessee has valued the closing stock as on 31.03.2012 which is the opening stock for A.Y.2013-14 (and as on the date of search i.e.30.10.2012) by taking the average price of gold jewellery for the six months prior to the date of valuation. Valuation of the opening stock by one method and the closing stock of the same year by adopting different method results in distorted figure of the profits for the year. Therefore, to correctly arrive at the profits for the year, the closing stock as on 31.03.2013 needs to be valued by adopting the same method as adopted by the assessee for valuing opening 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.”
:-17-: ITA. No: 1154/Chny/2017 13. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has explained the reasons for adopting weighted average cost price method for valuation of closing stock as on 31.03.2013. The assessee explained before the CIT(A) that, substantial part of purchase includes purchase of worn out jewellery from customers and average purchase price works out to Rs. 2458.20 per gram as against this, the AO has taken only purchase price of jewellery which works out to 2856.55 per gram. The CIT(A), after considering relevant submissions of the assessee and also taking note of various facts, deleted additions made by the AO towards difference in value of stock in trade on the ground that the AO is completely erred in substantiating new method in place of weighted average cost method adopted by the assessee particularly taking into account average six months price of fresh gold purchase to arrive at the value of closing stock as on 31.03.2013. The relevant findings of the Ld. CIT(A) are as under: “8. The submissions made by the AR are considered. It is noted that there was substantial amount of excess stock found during the course of search 01, 30.10.2012. The assessee has admitted the same and has offered an amount of Rs.71,73,08,463 as unexplained income on account of undervaluation of closing stock for AY 2012-13 and Rs.24,68,06,849 as undisclosed income 011 account of valuation of stock :-18-: ITA. No: 1154/Chny/2017 and stock excess for AY 2013-14. While working out the excess stock as on 31.3.2012, the assessee agreed to adopt the average of previous six months' purchases for arriving at the excess stock value. However, while working out the value of stock as on 31.3.2013, the assessee adopted the traditional method of weighted average rate of opening stock and purchases made during the year. This has been objected to by the AO and the AO has insisted on taking the last six months average rate of purchases. While the Assessee has taken closing stock value at Rs.2,771 per gram, the AO has taken the closing stock value at Rs.2,856.558 per gram. This has resulted in the excess stock value added as income by the AO.
The arguments of the AO are not correct. The AO cannot impose any artificial method of valuation of closing stock. The assessee has an option o~ taking the value either at the market value or at the average cost value whichever is lower. This method should be adopted 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 :-19-: ITA. No: 1154/Chny/2017 jewellery at a average of only Rs.2,458.20 per gram for the year.
Considering the totality of reason as above, there is no merit in the A.O Substituting the weighted average method adopted by the assessee with average of last six months' fresh gold purchase to arrive at the value of closing stock as on 31.3.2013. The AO is directed to adopt the closing stock value returned by the assessee. The grounds of appeal on this issue are allowed.”
14. The Ld. DR, submitted that the Ld. CIT(A) has not justified in directing the AO to adopt closing stock value determined by the assessee and thereby deleting addition of Rs. 5,37,29,886/- made by the AO towards undervaluation of closing stock, without appreciating fact that the assessee had adopted different method for valuation of opening and closing stock and the AO had arrived at the value of closing stock by adopting the very same method adopted by the assessee for valuation of opening stock. The Ld. CIT(A), without appreciating facts simply deleted additions made by the AO.
The ld. Counsel for the assessee, supporting the order of the CIT(A) submitted that, no doubt the assessee has followed six months average price method for valuation of stock in trade as on the date of search, and said valuation is as per agreement between the assessee and department. However, :-20-: ITA. No: 1154/Chny/2017 as per prescribed method of valuation of closing stock, assessee can follow either cost or market price whichever is less or weighted average cost method to value the closing stock. The assessee was following weighted average cost method for valuation of closing stock right from the beginning, except at the instance of search period during the course of search. However, facts remains that it is consistently following weighted average cost method for valuation of cost and the assessee has explained the method followed for valuation of stock which depends upon various factors. The Ld. CIT(A), after considering relevant facts has rightly deleted additions made by the AO and their order should be upheld.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. During the course of search, the assessee has declared substantial amount of undisclosed income towards excess gold found during the course of search on 30.10.2012 which includes under valuation of closing stock. At the time of search, the department has valued closing stock by adopting six months average purchase price and determined excess stock held by the assessee. The assessee has adopted :-21-: ITA. No: 1154/Chny/2017 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.
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 for the simple reason that the Accounting Standard has prescribed two methods for valuation of closing stock, as per which assessee can follow cost or :-22-: ITA. No: 1154/Chny/2017 market price whichever is less or weighted average cost method. The only prescribed condition in terms of provisions of section 145 of the Act is that, the assessee had to follow one method consistently without there being any change in method of valuation of closing stock. In this case, the assessee had followed weighted average cost method right from the beginning and has followed very same method for the impugned assessment year, except to the extent of valuation of closing stock as on the date of search for the purpose of declaration of income, where the assessee had followed six months average price and said method is as per the agreement between the assessee and the department. Therefore, in our considered view, the AO cannot change the method which was not recognized method as per the prescribed standards for valuation of closing stock, when the assessee has explained the valuation of closing stock by adopting weighted average cost price method. We further, noted that the assessee had also explained the price adopted by the AO on the basis of its purchases as per which substantial part of purchases related to worn out jewellery from customers, which is having a different purchase price. Therefore, in our considered view, the AO is completely erred :-23-: ITA. No: 1154/Chny/2017 in substituting its own method of six months average price in place of weighted average cost method followed by the assessee to arrive at a closing stock valuation as on 31.03.2013. The Ld. CIT(A), after considering relevant facts has rightly deleted additions made by the AO. Thus, we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the revenue.