SHRI ADISHWAR OILS AND FATS LTD., MAHASAMUND,MAHASAMUND vs. ACIT, CENTRAL CIRCLE-1,RAIPUR, RAIPUR

Vide sole effective ground, the assessee has challenged the addition of Rs.27,61,679/- made on account of under valuation of closing stock.

The relevant facts giving rise to this appeal are that the assessee is engaged in the business of extraction and refining of vegetable oils. It filed its original Income Tax Return (‘ITR’) of the relevant year on 29.09.2009 declaring income of Rs.82,82,030/-. The original ITR was picked up for scrutiny and the consequential assessment was completed accepting the returned income under section 143(3) of the Act. Later, the case was reopened under section 148 of the Act. Consequentially, the reopened assessment was completed under section 143(3) r.w.s. 148 of the Act on 18.02.2015 determining the income at Rs.1,20,05,797/-, wherein the addition of Rs.27,61,979/- was made on the issue of under valuation of closing stock. Aggrieved with the reopened assessment, the assessee filed appeal before the Ld. CIT(A), who dismissed the appeal as under: “8.3 I have given my anxious consideration to the rival submissions. This ground pertains to the valuation of closing stock, a matter of settled legal principles. The primary issue is not the arithmetic, but the admissibility of the valuation method and the evidentiary value of documents provided post-assessment. The appellant claims a consistent practice of valuing stock at average market price) meaning the price on the closing date. However, a perusal of the Tax Audit Report in Form No. 3CD (Page 17 of the Paper Book) at Clause 12(a) clearly states: "Raw material - At Cost; Finished Goods - At Average market price.) The appellant's Interpretation that "average" refers to the price on a single day is semantically and logically flawed. An "average" cannot be derived from a single data point. The phrase "Average market price" implies the mean of the prevailing prices over a period. If the appellant's intention was to adopt the Net Realizable Value (NRV) as on the balance sheet date, the appropriate description should have been "At market price" or "At lower of cost or market price". Therefore, the ambiguity in the method was created by the appellant themselves.

On merit, the Ld. AR submitted that the assessee had valued the entire stock/inventories (opening and closing) at the prevailing market rate on and around 31.03.2009, the date on which the Balance Sheet was drawn and Profit & Loss Account was finalized. Whereas, the Ld. AO had adopted the average sale price of the entire year instead of the prevailing sale price/market rate on and around 31.03.2009. To strengthen the argument that there was wide variation in 4 the sale price/market rate of Soya Oil, the Ld. AR drew our attention to the order of the Ld. CIT, Raipur passed under section 263 of the Act, where the assessee’s submission showing average rate of Soya Oil during the relevant year was mentioned as under: “30th June 2008 Rs.67800/- Per MT 30th Sep. 2008 Rs.57000/- Per MT 31st Dec. 2008 Rs.46800/- Per MT 31st March, 2009 Rs.43200/- Per MT”.

The Ld. AR demonstrated that the Ld. AO had taken average of the above four figures and valued the closing stock of Soya Oil @ Rs.52,927/- per MT instead of the assessee’s valuation @ Rs.42,536/- per MT. Similarly, the Ld. AO valued the Acid Oil also (applying the average sale price of the Acid Oil in FY 2008-09). He submitted that there was wide variation in sale price of soya oil and acid oil during the year which is also evident from the above four figures (para-5 of this order). The assessee had valued the closing stock at the prevailing market rate on and around 31.03.2009, the date on which the Balance Sheet was drawn and Profit & Loss Account was finalized. Such valuation was later found in the Statute under section 145A of The Act wef 01.04.2017. Such valuation was in accordance with the Accounting Standard-2 issued by the ICAI. According to which, the valuation had to be done either at the cost or Net Realizable Value (‘NRV’), which ever was lower. He emphasized on the procedure to arrive NRV, which simply defined the realizable value on and around the closing date of the Financial Year (‘FY’) and not the average sale price of the entire year. 5

The Ld. AR contended that the dispute was limited to interpretation of average realizable value. He submitted that the average price prevailing on or around the closing date of the FY had to be taken in accordance with Accounting Standard-2 (AS 2) issued by the ICAI for valuation of closing stock (effective for AY 2017-18 onwards) which clearly mentioned that the lower of the purchase cost or NRV as on and around the date on which the balance sheet drawn had to be adopted for valuation of closing stock and not the average sale price of the relevant FY. He submitted that the price of Soya Oil and Acid Oil being volatile throughout the year; hence, taking average price of the entire year would result a distorted figure/value of the closing stock much higher than the NRV as on and around the date on which the balance sheet drawn.

In respect to the Acid Oil, the Ld. AR submitted that the dispute was limited not only to the rate of valuation but also the quantity of the stock worked out by the Ld. AO. As far as the issue of rate of valuation, the Ld. AO had adopted the average sale price of the FY whereas the assessee had adopted the NRV as on and around the date on which the balance sheet was drawn. With respect to the quantity of closing stock of acid oil, the Ld. AR admitted that there was typographical error in the Form 3CD where production was shown at 368.168 MT instead of 308.168MT whereas the correct figure had been shown in the Balance Sheet of the assessee. He submitted that the correct quantity of closing stock would be worked out by taking opening stock of the Acid Oil at 102.662 MT plus (+) Production of 308.168 MT minus (–) Sale of 365.655 MT = Closing Stock of 45.175 MT. He submitted that the said actual figures got fortified with the day to day production register and the audited balance sheet submitted along with the ITR (except the clerical error in 3CD report). He further submitted that the Ld. CIT(A), vide paragraph 8.5 of the impugned order, had given categorical finding that the audited figure of 105.175 MT was an arithmetical error derived from an overstated production figure of 368.168 MT. The Ld. AR distinguished the cases relied upon by the Ld. CIT(A). He further submitted that the Ld. CIT(A) had not accepted the additional evidence submitted by the assessee during the course of appellate proceedings on the reasoning that the additional evidence produced for the first time before him was for filling the gap. The Ld. AR further submitted that the said evidence was not created evidence but a primary document justifying the details mentioned in the audited balance sheet filed along with the ITR. He contended that the audit report was not the primary document; hence, committing error in the audit report could not be ruled out whereas the production registers, Balance Sheet being the original documents had more sanctity than that of the audit report. Rejecting the primary documents as additional evidence on technical ground by the Ld. CIT(A) after categorical finding in favour of the assessee in para 8.5 of the impugned order was not justified.

On the other hand, the Ld. Sr. DR placed reliance on the finding of the authorities below and prayed for dismissal of the appeal.

We have heard both parties and have perused the material available on the record. The accounting policies adopted in valuation of stock/inventories have been disclosed in the Financial Statements. As per the section 145A Act, wef 01.04.2017, the stock/inventories have to be valued at cost or Net Realizable Value (‘NRV’), whichever is lower. The NRV is the value of the stock that can be realized upon the sale of the stock less a reasonable estimate of the costs associated with the sale of stock. However, section 145A Act was in existence in the relevant year. Even then, it is worth mentioning here sections 145 and 145A of the Act applicable in the relevant year and thereafter for proper appreciation of the law evolved over the years: “Section 145 as on 01.04.2009 and amendment made thereafter: (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to sub-section (2), is computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

As per the applicable provisions of the Act in the relevant year, the assessee is required to maintain books of accounts. The assessee can maintain books of accounts under cash basis or mercantile basis of accounting. During the relevant year the valuation of stock/inventory has to be done in accordance with the method of accounting regularly employed by the assessee; and further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. During the relevant year, the assessee was not required to value its stock/inventories as per the provisions of section 145A of the Act because section 145A of the Act came into existence w.e.f. 01.04.2017. During the relevant year, there was no concept of valuation of stock/inventory at the cost or NRV, whichever is lower. The concept of valuation of stock/inventory at the cost or NRV, whichever is lower was brought into the Statute with effect from 01.04.2017. Prior to that, the accounting method regularly employed by the assessee including the valuation of stock/inventory was the sole requirement for valuation of stock/inventory unless the books were not rejected under section 145 of the Act.

The first dispute is that whether the average annual sale/purchase price of stock/inventory is validly applied by the Ld. AO [upheld by the Ld. CIT(A)] for valuation of stock/inventory over the NRV. The principle that where a later amendment makes explicit clear that what the earlier text already conveyed is declaratory and may be used as an aid to the construction of the earlier provision has been applied by the Hon’ble Supreme Court in cases of Vatika Township (P) Ltd., (2014) 367 ITR 466, Allied Motors (P) Ltd. (1997) 224 ITR 677, Podar Cement (P) Ltd., (1997) 226 ITR 625 and Zile Singh v. State of Haryana, (2004) 8 SCC 1. Therefore, the substitution of clause (i) to section 145A of the Act, by the Finance Act, 2018, wef 01.04.2017 is nothing but only a declaration of method of valuation of stock/inventories.

Keeping in view the principle that where a later amendment makes explicit clear that what the earlier text already conveyed is declaratory and may be used as an aid to the construction of the earlier provision; we are of the considered view that the stock/inventories have to be valued at cost or Net Realizable Value (‘NRV’), whichever is lower. Thus, the purpose of valuation of stock/inventories is on lower side. Further, we are also of the considered view that the NRV has to be worked out based on the realizable value in and around the date on which the Balance Sheet is drawn otherwise it would result distorted figures particularly where there is substantial fluctuation in prices over the period. The assessee is duty bound to follow a regular method of accounting during the relevant AY, which it has followed consistently over the years. Thus, keeping in view the above observations, we find merit in the submission of the Ld. AR that the valuation of stock/inventories done based on the prevailing market price as on and around the date on which the Balance Sheet drawn followed regularly by the assessee is justified. We therefore, set aside the finding of the Ld. CIT(A) and direct the Ld. AO to adopt the prevailing market price as on and around the date on which the Balance Sheet drawn in this case over and above the average annual price and allow the consequential relief to the assessee on this score.

With respect to the working of closing stock of Acid Oil in quantitate terms, we find that the Ld. CIT(A) was satisfied with the submission of the assessee (para 8.5 of the impugned order). However, he did not admit the evidence and did not allow relief on this score on the reasoning that the evidence was produced after lapse of substantial time. But we do not see any occasion 12 where the assessee failed to produce the documents after reassessment. The production register and Balance Sheet annexed with the ITR being primary documents have to prevail over the detail mentioned in 3CD report being secondary documents. Thus, the addition made on this score is also deleted. The assessee gets consequential relief.

In the result, the appeal of assessee is allowed as above.