BAL MUKAND AGGARWAL PROP. BAL IRON & STEEL CO. vs. COMMISSIONER OF INCOME TAX (APPEALS), PATIALA, PUNJAB

Facts

The assessee, Bal Mukand Aggarwal, proprietor of Bal Iron and Steel Co., is in appeal against the order of the Income Tax Appellate Tribunal (ITAT). The ITAT, in its order dated 27.09.2011, upheld the Assessing Officer's (A.O.) conclusion that the assessee had undervalued closing stock by showing items purchased at lower rates. The A.O. valued the closing stock as on 31.03.2007 at ₹91,84,351/-, against the assessee's declared value of ₹73,15,253/-, adding the difference to the income. The assessee contended that the CIT(Appeals) had examined the A.O.'s order and found no rejection of books or need for adjustment, stating the valuation method was consistently applied. The ITAT, however, concluded that stock should be valued at the lower of cost or market price, disagreeing with the assessee's average price method.

Held

The High Court held that the ITAT's view that stock should be valued at the lower of cost or market price was correct. Regarding the first issue, the Court found that the A.O. had assessed the stock on the basis of the price at which the goods had been sold by the assessee, which was higher than the declared value. The Court reasoned that the market price of goods can change annually, and therefore, the value of stock would accordingly change, necessitating valuation based on market price where it is higher. Section 145 of the Income Tax Act, 1961, was considered, which allows the A.O. to make an assessment if not satisfied with the accounts or if the method of accounting is not regularly followed. On the second issue, the Court held that the decision in CIT vs. British Paints India Ltd. (Supra) laid down principles for stock valuation considering the facts and circumstances of that specific case and would not be a binding precedent in all cases, especially when the market price of goods has not changed. The Court agreed with the view taken by the A.O. and affirmed by the ITAT, answering both questions in favour of the respondent-revenue.

Key Issues

1. Whether under the facts and circumstances of the case, the Tribunal order is unsustainable and perverse, while overlooking the ‘Material on Record’ and rejecting the consistency and regularity of the method of valuation, particularly when there is an erroneous assumption and application of jurisdiction, without invoking the provisions of Section 145 of the Income Tax Act, 1961? 2. Whether the decision of CIT vs. British Paints India Ltd. (1992) Supp.(1)SCC 55 is a binding precedent for the principles of law regarding the method of valuation of stock? Assessee's Contentions: - The CIT(Appeals) examined the A.O.'s order and found no rejection of books or need for adjustment in the closing stock valuation. - The method of valuation adopted by the assessee was consistent and the accounting method had been consistently followed. - The ITAT erred in concluding that stock should be valued at the lower of cost or market price, contrary to the established proposition and the assessee's consistent method. - The ITAT overlooked material on record and applied jurisdiction erroneously without invoking Section 145. Revenue's Contentions: - The revenue supported the view taken by the A.O. and affirmed by the ITAT.