ASHOKKUMAR T. SONI,,SURENDRANAGAR vs. THE INCOME TAX OFFICER, WARD-2,, SURENDRANAGAR

आदेश /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. This appeal filed by the Assessee is directed against order of learned Commissioner of Income Tax(Appeals)-XVI, Ahmedabad(in short “the CIT (A)”) dated 29.10.2013 pertaining to Assessment Year 2009-10 which in turn has arisen from order passed by the Income Tax Officer, Ward-2, Surendranagar(in

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 2 of 12

short “the AO”) dated 13.12.2011 under section 143(3) of Income

Tax Act,1961 (in short ‘the Act’).

Ground No.1 to 3 of the appeal relates to confirming action 3.

of the Assessing Officer (AO) who has adopted the value of

closing stock higher than the actual cost price of the stock for

making addition of Rs.15,66,738/-. However, the CIT(A) has

given slight relief directing the AO to exclude the opening stock

which has been wrongly included in the closing stock valuation by

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 3 of 12

the AO. Thus, the ld.CIT(A) has erred in applying the rates of

current purchase price of items sold as against actual purchase

price of items remained as a closing stock whereas the assessee

is regularly valuing the closing stock at cost price consistently.

hence being considered together.

Jewellers and doing the business of trading and jewellery the

books of accounts are regularly maintained and has been audited

u/s.44AB of the Act. The assessee has valued the closing stock at

cost. However, the AO has under valuation of closing stock and

made the addition amounting to Rs.15,66,739/- as difference in

valuation of closing stock.

ld.CIT(A). The ld.CIT(A) observed that the assessee is dealing in

the fancy items and hence FIFO Method cannot be applied. The

appellant has argued that its 99% sales are out of current

purchases and that majority of its closing stock pertains to

earlier purchase. Accordingly, it was argued that the addition

deserves to be deleted. The CIT(A) observed that the AO has

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 4 of 12

valued the stock by taking 10539.840 gms of gold at the cost of

Rs.1,11,77,611/- so as to arrive the average of 1060.51 gms per

gram. It has been submitted that the figure of 10539.840 gms of

gold includes the value of opening stock ofRs.12,58,366/-, hence,

the valuation by the AO is faulty. After considering the

arguments, the ld.CIT(A) observed that the argument of the

assessee that it is dealing in fancy items and hence stock is to be

valued differently are untenable or unacceptable and the stock is

to valued only as per any one method of accounting which the

assessee follows consistently. The order of the AO shows that

appellant is not doing the same. However, perusal of the details

of valuation of stock shows that opening stock valued at

Rs.12,58,376/- is included in the figure of Rs.1,11,77,611/- which

has been adopted by the AO for making this additions. The same

is not permissible as the closing stock cannot contain the figures

of opening stock. The AO was therefore directed to re-calculate

the value of addition on account of closing stock made by him by

reducing the figures of opening stock of Rs.12,58,376/- which has

possible been inadvertently included in the calculation while

making the addition. However, the other findings of the AO were

upheld.

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 5 of 12

this Tribunal. The ld.Counsel for the assessee submitted that the

CIT(A) has rightly given part relief to the assessee that opening

stock of Rs.12,58,376/- cannot be part of closing stock of

Rs.1,11,77,611/-. Therefore, same is required to be excluded.

However, the CIT(A) has considered the average value by

adopting FIFO Method, according to which average rate comes to

1269.08 per gram as against the value adopted by the AO at

average rate at Rs.1060.51 per gram and as against the value

considered by the assessee @461.99 by applying the LIFO Method.

Thus, the value adapted by the AO by considering average rate of

1060.51 was lesser than value considered by the CIT(A). Hence,

the CIT(A) has enhanced the valuation of closing stock which has

been done without giving any show-cause notice. It was

contended that the assessee maintains regular books of accounts

as per provisions of 44AB of the Act and the auditor has not

pointed out any defect in the books of accounts and method of

valuation of closing stock which has been consistently being

followed by the assessee from year to year. The ld.Counsel

placing reliance in the case of DCIT vs. Harjivandas J.Javani

[1998] 60 TTJ 155 [AHD] submitted that where the assessee had

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 6 of 12

been following a regular system of accounting since last so many

years and this method was based on accepted principles of

accounting i.e. at cost and there was no justification for

rejecting the method on valuation of stock. Similarly, the

ld.Counsel further placed reliance in the case of ACIT vs. Samar

Kumar [2016] 47 CCS 402 (Kol. Tribunal) wherein it was held that

method of accounting regularly employed in valuation of stock by

adopting average cost price (LIFO Method) which was one of the

recognized method for stock and which has been consistently

followed by the assessee for several years has been discarded

without giving any reason by the AO and valuation of gold was

done at market price thereby increasing profit of assessee

notionally which was without any basis or reasoning. Therefore,

same was not held to be justified. Similarly, the ld.Counsel has

also placed reliance in the case of CIT vs. Settlement Commission

(IT & WT) [2015] 272 CTR 559 (Kerala).

Representative(Sr.DR) has heavily supported the orders of the

Lower Authorities and submitted that valuation of closing stock

to be on cost basis and not of opening value shown by the

assessee. However, in rejoinder to this argument, the ld.Counsel

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 7 of 12

submitted that the assessee has valued the closing stock on cost

basis only by applying LIFO Method, hence the argument of

ld.Sr.DR is not tenable.

We have heard the rival submissions and perused the 9.

material on record, on going through the details and chart of

valuation of closing stock filed by the ld.Counsel, it is seen that

the assessee has followed the LIFO Method of valuation and

adopted the value @ 461.99 per gram as per opening stock for

working out the valuation of closing stock and arrived at the

closing stock. However, the CIT(A) has considered the average

value by applying the FIFO rate according to which average rate

comes to 1269.08 per gram which in our view is not correct

method when the assessee is regularly following the method of

accounting on cost basis by applying the LIFO Method of

accounting consistently. Furthermore, the closing stock mostly

items of opening stock, which has been valued on cost as per

LIFO Method. The ld.Counsel placed reliance in the case of DCIT

vs. Harjivandas J.Javani (supra) of Co-ordinate Bench,

Ahmedabad wherein it was held that where the assessee had

been following a regular system of accounting since last so many

years and this method was based accepted principles of

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 8 of 12

accountancy i.e. at cost there was no justification for rejection

of valuation of method of closing stock, therefore, the AO was

not justified in considering the average rate based on current

years purchases as per FIFO Method. Further, the value adopted

by CIT(A) has in fact resulted in enhancement of value of closing

stock without giving any notice as average rate of valuation

comes to 1269.08 (FIFO Rate) as against average rate at 1060.51

per gram adopted by the AO. Similarly, we find that the AO has

considered the average rate for valuation of closing stock without

pointing out any defect in the books of accounts whereas books

of accounts are audited statements and mechanically referred

the rejection of the same and proceeded to determine the facts

and the regular method of valuation of closing stock being

followed by the assessee. We are of the considered opinion that

the AO and CIT(A) have not justified in adopting average value

rate of purchases for working out closing stock by applying FIFO

Method whereas the assessee has been consistently following

LIFO Method for valuation of closing stock. Further, the books of

accounts of the assessee are audited u/s.44AB and no adverse

comments have been made by the auditor.

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 9 of 12

made on account of valuation in closing stock by the AO as well

as CIT(A) is therefore deleted, accordingly, ground no.1 to 3 of

appeal are allowed.

facts and not appreciating the facts of the case and confirming

the addition of Rs.1,80,000/- made by the AO u/s.40A(2)(a) of

the Act.

was an abnormal increase in salary payment from Rs.60,000/- in

preceding year to Rs.4,56,000/- in current year as against the

increase in turnover by about 105% and increase in salary by

369%. It was noticed that the assessee had paid salary of

Rs.1 lakh each to his three sons aggregating to Rs.3 lakhs and

which were debited on 31.03.2009 whereas the balance salary of

Rs.1,56,000/- was paid to other staff members on monthly basis.

There was no response from the assessee to two show cause

notices issued by the AO for disallowance of salary u/s.40A(2)(a)

of the Act, hence, the AO has made addition of Rs.1,80,000/-

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 10 of 12

treating the same as excessive as against total claim of

Rs.3,00,000/-.

ld.CIT(A), wherein it was contended that no addition can be

made to salary by comparing with the turnover and that merely

because the payment has been made to sons of the appellant.

Therefore, provisions of section 40A(2)(b) are not attracted.

However, the CIT(A) was of the view that the argument of the

assessee that there can be no connection between salary and

turnover are untenable. Besides, facts of the case indicates that

the payment of salary has been made towards the end of the

financial year and that too persons who are covered under the

provisions of section 40A(2)(b) of the Act. The appellant has

failed to respond to the queries of the AO as well as during the

appellate proceedings to justify as to how the payment of salary

to his sons was as per the market rates. Considering these facts,

the addition made by the AO was therefore confirmed.

Tribunal. The ld.Counsel submitted that these three persons

have rendered services for purchasing and sale of goods and for

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 11 of 12

recovery of outstanding dues. Therefore, the disallowance made

by the AO needs to be deleted.

Representative (Sr.DR) submitted that no details of payments on

account of salary made to three sons is filed during the course of

assessment proceedings as well as during appellate proceedings.

Therefore, the nature of services rendered by these persons were

not explained, moreover, the salary was credited in the month of

March debited on 31.03.2009 and remained as credited on

31.03.2009 whereas the salary of the other employees has been

paid on monthly basis.

material available on record. We find that the salary expenses of

Rs.1,56,000/- to the employees other than the specified persons

were debited and paid by the assessee, on monthly basis whereas

salary amounting to Rs.3 lakhs was debited only on 31.03.2009.

It is also noticed that Rs.1 lakh was credited on 29.03.2009 in the

account of Shri Brijesh Ashokbhai Soni, Shri Kalpeshbhai

Bharatbhai Soni and Pritesh Ashokbhai Soni there no payments of

withdrawals made during the year and entire amount of salary

Ashok Kumar T.Soni Vs. ITO, Ward-2, Surendranagar /ITA No.103/RJT/2014/A.Y.2009-10 Page 12 of 12

remained as credited on 31.03.2009 in respect of persons who

are specified u/s.40A(2)(b) of the Act. Further, we noticed that

the turnover of the assessee has increased by 105.73% whereas

there is thereby increase in the salary expenses by Rs.369.52%,

which is also not justifiable to increase in salary to employees,

particularly relatives of the assessee. In view of these facts and

circumstances, we are of the considered opinion that the

disallowance of Rs.1,80,000/- out of salary of Rs.3 lakhs made by

the AO is quite justifiable, particularly when no details of work

and services rendered and performed by the sons of the assessee

have been brought on record nor the salary had been paid during

the year on regular monthly basis. Therefore, we do not find any

infirmity in the order of CIT(A), accordingly this ground of appeal

of the assessee is therefore dismissed.

Sd/- Sd/- (सी.एम.गग�/C.M. GARG) (ओ.पी.मीना/O.P.MEENA) �याियकसद�यतथा/JUDICIAL MEMBER लेखासद�यकेसम� /ACCOUNTANT MEMBER राजकोट/ Rajkot, �दनांक Dated: 19th November, 2018/S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Rajkot