M RAMESH JEWELLERS,TIRUKOILUR vs. THE DEPUTY COMMISSIONER OF INCOME TAX, VILLUPURAM

“Set Off of Excess Stock in Subsequent Year.

Excess Stock – Not Taxable under Section 69B.

Revenue cannot take inconsistent Stands”

The brief facts of the case are that the assessee is a firm, engaged in jewellery trading business. A survey u/s.133A of the Act was conducted in the :-3-:

Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A). Before the ld.CIT(A), the assessee challenged the issues of addition of Rs.3,05,94,398/- made by the AO on account of the difference in :-4-:

Being aggrieved by the order of the ld.CIT(A), the Revenue has preferred the present appeal before the Tribunal, challenging the relief granted by the ld.CIT(A) in adopting a rate of Rs.1,874/- per gram for unaccounted gold jewellery, as against the rate of Rs.2,640/- per gram determined by the AO in the assessment order. The assessee, through its cross appeal, has challenged the set-off of excess stock in the subsequent year, disputed the valuation methodology by asserting that the simple average method ought to be applied instead of the weighted average method, contended that the alleged excess stock is not taxable u/s.69B of the Act, and further argued that the Revenue cannot adopt inconsistent stands on the same set of facts.

Before us, the ld.AR submitted that the ld.CIT(A) has erred in modifying and sustaining the addition by adopting a weighted average rate of Rs.1,874/- per gram, based on the purchases made during the impugned year and treating the difference in the value per gram as unexplained investment u/s.69B of the Act. The ld.AR submitted that the assessee, being in its first year of business, had the statutory right u/s.145 of the Act read with Accounting Standard (AS) - 2 to adopt any recognised and reasonable method for valuation of stock. In line with the statute, the assessee consistently followed the simple average cost method for valuing its closing stock, and this method is duly reflected in the books of accounts maintained in the ordinary course of business. The ld.AR pointed out that the ld.CIT(A) has not disturbed the valuation method adopted by the assessee, and therefore the valuation stands accepted and finalised for the impugned assessment year.

The ld.AR further contended that the stock found during the survey was physically indistinguishable from the rest of the business inventory. There was :-6-:

It was specifically submitted that once the excess stock is taxed as business income, it automatically becomes part of the assessee’s business inventory, and consequently the assessee is entitled to treat such stock as opening stock of the succeeding year in accordance with established commercial and accounting principles. The ld.AR emphasised that even the findings of the ld.CIT(A) acknowledge the presence of stock at the business premises, which itself negates the statutory requirement for invocation of Section 69B of the Act.

In view of these submissions, the ld.AR prayed that the valuation method adopted by the assessee based on the simple average cost method be accepted for the so-called excess stock as well, that the addition made u/s.69B of the Act be deleted in full and that the excess stock already offered and taxed as income during the impugned year be permitted to be treated as opening stock in the subsequent assessment year, so as to reflect the true commercial position of the assessee’s business.

Per contra, the ld.DR during the course of hearing strongly supported the order of the AO and submitted that the ld.CIT(A) erred in reducing the valuation rate of unaccounted gold. It was contended that the AO had determined the value of such jewellery at Rs.2,640 per gram based on the survey findings and available market rate as determined by the AO in the assessment order. However, the ld.CIT(A), without adequate justification and without bringing any :-7-:

The ld.DR further contended that the ld.CIT(A) proceeded on an incorrect premise that most of the gold was purchased from the assessee’s HUF entity, thereby justifying a lower valuation. It was emphasised that the assessee never established that the majority of its purchases originated from the HUF entity. On the contrary, the assessee itself had admitted in its written submissions dated 09.11.2018 before the AO that most of its purchases comprised old gold procured from local customers. In view of this clear admission, the ld.DR argued that the reliance placed by the ld.CIT(A) on purchases from the HUF entity is misplaced, unsupported by evidence, and contrary to the record.

The ld.DR therefore submitted that the valuation adopted by the AO at Rs.2,640 per gram should be restored, and the relief granted by the ld.CIT(A) deserves to be reversed, as the assessee had failed to substantiate the basis for adopting a significantly lower valuation.

We have heard both the parties perused materials available on record and gone through orders of the authorities below. The admitted facts of the case are that the assessee is a firm, engaged in jewellery trading business. A survey u/s.133A of the Act was conducted in the business premises of the assessee on 16.02.2016. During the course of survey, excess stock of gold found was 28,876.26 grams. In a statement recorded during the course of survey, the value of the excess stock of gold found of 28,876.26 gm was valued at Rs.1,593/- per gram and accordingly, the assessee admitted Rs.4,59,99,881/- as additional income in the return of income for the impugned year. Thereafter, the assessee filed its return of income on 17.10.2016 admitting income of Rs.4,62,60,427/-. During the scrutiny proceedings, the AO questioned the value of Rs.1,593/- per gram of value adopted by the assessee for the excess stock of gold found during the course of survey. The AO observed that the rate of gold as at the beginning & 1539/Chny/2025 of the year of 2015 was Rs.2,665/- per gram and on 16.02.2016, being the date of survey was Rs.2,640/- per gram and on the basis of the above, average rate per gram was Rs.2,652.50/- per gram, adopted the same and according assessed the difference of Rs.3,05,94,398/- (28,876.26 grams x (Rs.2,652.50 less Rs.1,593/-) to tax u/s.69C of the Act. In the first appellate proceedings, the ld.CIT(A) granted partial relief to the assessee by directing the AO to recompute the value of the excess stock by adopting a rate of Rs.1,840/- per gram, as against Rs.2,652.50 per gram applied in the assessment order. The ld.CIT(A) further modified the legal basis of the addition, inasmuch as the AO had made the addition u/s.69C of the Act treating the excess stock as unexplained expenditure, whereas the ld.CIT(A) sustained the addition u/s.69B of the Act by holding the same to be unexplained investment.

We find that the excess stock of gold quantified during the survey was 28,876.26 grams. Before the ld.CIT(A), the assessee had furnished evidence of purchases made during the year, including VAT returns for the impugned year along with the purchase bills made from the HUF entities, which showed that purchases in the first four months were largely from the assessee’s HUF entity, and thereafter largely from outsiders/ old-gold customers. The ld.CIT(A) noted that the purchases recorded from the HUF entity were fully reconcilable with the sales disclosed in the HUF’s return of income. The monthly purchase details extracted from the VAT records were examined to compute the cost per gram, and on applying the simple average of the monthly averages, the average purchase rate for the year was determined at Rs.1,840.72 per gram. The ld.CIT(A) therefore held that the adoption of market rate by the AO for valuing the entire excess stock, without examining the quality or nature of the gold, was not appropriate of the assessee’s actual cost.

Further, we note that the assessee was in the first year of its business, having commenced operations on 01.04.2015. In such circumstances, the valuation of stock must be carried out in accordance with Section 145 of the Act and the principles laid down in AS-2 on valuation of inventories. A simple & 1539/Chny/2025 average of monthly averages cannot be applied for this purpose. The correct method is one that consistently applied to all purchases made during the year so as to arrive at a reliable cost for valuation of stock. This aspect assumes importance because the excess stock found during the survey was shown by the assessee to be physically indistinguishable from the rest of the closing stock, and there is no finding recorded by the AO to state otherwise. The entire stock formed part of the assessee’s regular business inventory. Accordingly, the valuation has to be carried out on the basis of a consistent and recognized cost- based method as required under law.

Therefore, the simple average cost per gram method is the appropriate method to be followed in the present case. The assessee has applied this method consistently and has arrived at a value of Rs.1,593/- per gram, which represents the true cost of purchases made during the year. This approach reflects the actual cost structure of the assessee’s business and is in line with the requirement under AS-2, which mandates that the cost of inventory should mirror the pattern in which goods are acquired and consumed.

This method also avoids distortions that may arise where small-quantity purchases are made at higher rates or large-quantity purchases are made at lower rates. Based on the valuation on the simple average cost of all purchases made during the year, the assessee has adopted a method that results in a fair and reliable measure of the cost of its closing stock, particularly when the excess stock found during survey was physically indistinguishable from the rest of the inventory.

In view of the above discussion, we are of the considered opinion that, since this is the assessee’s first year of operations, the assessee was justified in valuing the excess stock on the basis of the simple average cost of purchases, which is Rs.1,593/- per gram. This method is consistent, reasonable, and in accordance with the principles laid down u/s.145 of the Act and AS-2. We therefore hold that the finding of reduction in valuation rate per & 1539/Chny/2025 gram made by the ld.CIT(A) is set aside, and the AO is directed to accept the value of excess stock as computed by the assessee.

Since, the entire additions made by the Assessing Officer has been deleted in our above findings, adjudicating the cross appeal filed by the assessee in respect of invocation of section 69B of the Act, does not arise and hence we dismiss the corresponding grounds raised by the assessee is dismissed as infructuous.

In the result, the appeal filed by the Revenue is dismissed, and the cross- appeal filed by the assessee is partly allowed.