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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VP: This appeal by the Revenue is arising out of the order of the Commissioner of Income Tax (Appeals)-3, Madurai in dated 18.05.2017. The assessment was framed by the ACIT, Cirlce-1, Nagercoil Range for the assessment year 2014- 15 u/s.143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’), vide order dated 30.12.2016.
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by AO amounting to Rs.14,83,36,580/- on account of valuation of closing stock by adopting weighted average method against Last-In-First-Out (LIFO) method followed by assessee. For this, Revenue has raised various grounds, which are argumentative in nature and hence, need not be reproduced.
Brief facts are that the assessee is a partnership firm engaged in the business of gold and silver jewellery. The AO during the course of assessment proceedings noted from the return of income and enclosed financial statement of the assessee that the assessee firm has disclosed closing stock of gold jewellery at Rs.11,24,71,068/-. In the enclosed audit report in Form No.3CB dated 07.07.2014 has given a note in the annexure for estimating the valuation and method of valuation as under:- “Closing stock has been valued at cost price under LIFO method, which is against the method of valuation prescribed u/s 145A of the Income-tax Act, 1961.” (Please refer column No.12 of the Audit Report)
According to AO, the assessee has consistently adopted valuation of closing stock on LIFO basis. The AO, in order to verify the genuineness of assessee’s claim of closing stock of inventory along
- 3 - with quantitative details of trading required the assessee to give details. The assessee gave the details of closing stock of gold in term of grams as on 31.03.2014 at 1,57,340.769 grams and in term of Rupees valued at 11,06,46,183/- by taking rate per gram on the basis of LIFO system of accounting for closing stock. The AO was not convinced and he rejected the LIFO method of valuation adopted by assessee for valuing the closing stock for the following reasons:- 1. CBDT has notified accounting standards prescribed in AS 2 of ICAI guidelines. It is to be seen that the choice is to be made between FIFO and Weighted Average Cost method. The LIFO method is not at all recognized in AS-2
2 The claim of consistency will be acceptable only when the assessee follows any one of these two methods.
3. It is only obvious that the counter sales will be of ornaments put out on display and once they are sold new purchases will replace the sold items.
Considering the above, what remains on display will be basically fresh stock.
5. Any items which remain unsold will be converted but as a result of conversion, the same will be moved out immediately after display.
6. There is very remote, if not any possibility of the Assessee having physical possession of the same gold which was introduced as stock from the inception of the firm.
Accordingly, the AO revalued the closing stock by adopting the weighted average cost method and valued the closing stock at Rs.26,08,07,646/- as against the value adopted by assessee at Rs.11,24,71,068/- thereby excess stock or differential stock of - 4 - Rs.14,83,36,578/- was added to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A).
4. The CIT(A) after considering the submissions of the assessee deleted the addition made by AO and noted that there is no change in method of accounting employed compared to earlier years and there is no deviation in the method of accounting employed by assessee in this year. Therefore, he directed the AO to value the closing stock either by weighted average method or LIFO method from assessment year 2016-17 onwards or from assessment year 2017-18. For this, he recorded his finding in para 4.2 as under:- 4.2. I have considered the submissions of the representative it is seen that the chartered account who audited the books of accounts of the appellant did not leave any remarks regarding LIFO method of closing stock as alleged by the Assessing Officer in page 2 of the assessment order. In fact, in the tax audit report in column No.12. it is stated that there is no change in the method of accounting employed when compared to the earlier year and thereby no deviation in the method of accounting employed when compared to the previous year. However, the Assessing Officer wrongly held that the chartered accountant remarked that the value of closing stock as per LIFO method was against section 145A of the Act Further, it is seen that the closing stock was more than the opening stock and the appellant had valued the portion of the opening stock as in the last year and the excess of closing stock over the opening stock at the purchase value during this year. In view of the above, there is no mistake in the valuation of closing stock. The Hon'ble Kerala High Court in the case of Commissioner of -Income Tax vs Settlement Commission (cited above) held that the CBDT did not issue any notification that the assessees have to follow weightage average method or FIFO method before 01.04.2016. It was held in the above case that AS 2 did not prohibit the LIFO method and the AS 2 accounting standard was not mandatory for the purpose of Income Tax Act. Further, the notification dated 25.01.1996 has not prescribed any method of valuation of closing
- 5 - 31.03.2015, the method of valuation of closing stock was notified. The Assessing Officer held that the CBDT has notified accounting standard prescribed in the AS 2 and made addition but for the relevant assessment year, there is no such notification and such notification is applicable only from assessment year 2016-17 as per SO 892(E) dated 31.03.2015. In view of the fact that there is no notification issued by the CBDT for the relevant assessment year, I find that the addition made is not correct and the same is deleted. However, the Assessing Officer shall ensure that the closing stock is valued either by weightage average method or FIFO method from assessment year 2016-17 onwards or from assessment year 2017-18 as allegedly claimed by the representative.
Aggrieved, Revenue came in appeal before the Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. Admittedly, the method of accounting has to be adopted in term of section 145A of the Act and valuation of inventory shall be made at lower of the actual cost or net realizable value computed in accordance with income computation and disclosure standards notified by the Board u/s.145(2) of the Act. It means that the valuation of inventory shall be made at lower of actual cost or net realization value only. In the present case before us, the assessee has valued closing stock on LIFO method instead of FIFI (First-In-First-Out) method. But in any case, whatever method consistently the assessee is following, the AO has to adopt the same method but in accordance with the provisions of section 145A of the Act. In this case, the AO has computed the value of inventory on the weighted average method as on 31.03.2014 but he has not - 6 - 01.04.2013. When this proposition was put to ld.counsel for the assessee as well as ld. Senior DR, both agreed that matter can go back to the file of the AO to give effect to the opening stock of the assessee that the same should be followed either by weighted average method or LIFO method. Hence, we remand this issue back to the file of the AO for limited purpose i.e., for valuing the opening stock of assessee as on 01.04.2013 on the basis of weighted average method, which method was adopted by AO for computing inventory as closing stock. In view of these directions, we remand this matter back to the file of the AO.
In the result, the appeal filed by the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 7th December, 2022 at Chennai.