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Facts
Chandra Bros., a partnership firm dealing in gold and silver ornaments, received an intimation under Section 143(1) for AY 2022-23, adding Rs. 1,14,67,009/- to its income. This addition was due to the undervaluation of closing inventory as per the Tax Audit Report (clause 13(e)), specifically because the assessee used the LIFO method while Income Computation and Disclosure Standards-II (ICDS-II), as per Section 145(2), mandated FIFO or Weighted Average Cost Method. The Addl/JCIT(A) dismissed the assessee's appeal.
Held
The Tribunal found that for proper income ascertainment, both opening and closing stock must be valued using the same method, citing the P.A. Jose (supra) case. It ruled that if ICDS-II is to be applied, it must be applied consistently to both, and the resultant income adjustment should not be entirely added in the current year. The intimation under Section 143(1) and the CIT(A)'s order were set aside, and the AO was directed to recompute the profit for AY 2022-23 and apply Section 148 for previous years where ICDS-II was applicable to ensure uniform valuation.
Key Issues
Whether the change in inventory valuation method from LIFO to ICDS-II (FIFO/Weighted Average Cost Method) mandates consistent application to both opening and closing stock across all relevant assessment years, and if the resultant income adjustment should be distributed across those years rather than entirely added in the current assessment year.
Sections Cited
143(1), 250, 145, 145(2), 145A, 148, 144, 44AB
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Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: SRI PRADIP KUMAR CHOUBEY & SRI RAKESH MISHRA
order
: 22-July-2025 ORDER
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of the Addl/JCIT(A)-3, Chennai [hereinafter referred to as Ld. ‘Addl/JCIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2022-23 dated 27.05.2024, which has been passed against the intimation order u/s 143(1) of the Act, dated 15.06.2023.
The assessee is in appeal before the Tribunal raising the following grounds of appeal:
Page 2 of 18 Page 4 of 18 Page 5 of 18 b) However, as against such valuation at Rs.27845424.00, the Tax Auditor in the Audit Report of Form 3CD, vide clause 13(e)/13(f) thereof (PB-15,16) had commented that as one of the two mandatory stock valuation methods (Weighted Average valuation method), prescribed under paragraphs 16 and 17 of the Income Computation and Disclosure Standards /ICDS-II, had been not been followed and given effect to while valuing Stock of Gold as above, there had arisen an under-valuation of stock of Rs.11467009/-. The CPC, while processing the return had, vide Sl.14/17 thereof, added the same sum and determined additional tax in consequence thereof. c) The Appellant had, by means of Written Submission, presented before the Ld. Appellate Commissioner contended that: By The abrupt enhancement of Stock Value by a completely different method would give rise to abnormal and unattainable profit A study of the Gold Account forming part of the Audited Accounts (PB-3) would reveal that Gold Manufacturing Activity had given rise to a Gross Profit of 33.58 lacs on a sale of Rs.223.15 Lacs. As such the Rate of GP had worked out at 15%. If on the other hand, the Stock Value is enhanced by Rs.11467010.00/114.67 lacs to apply the Weighted Average Value, the resultant GP amount of Rs.148.25 lacs pertaining to the same sale amount of Rs.223.15 Lacs, would hike the corresponding rate to 66.43%. Such an exercise would indisputably lead to an absurd, fictional and unachievable result. Consequently, it would defy and violate all conventions, time honoured practices and the settled laws that no fictional income could be transformed into real income. A chart of GP rates would bring clarity to this contention (PB-47). From the Gross Profit Tabulation, vide PB-47, it could be conveniently appreciated that due to consistent practice of application of LIFO Method, as against the current years 15% GP Rate, while in the immediately preceding year a GP Rate of 23.89% had been achieved, the Average GP Rate in the four preceding years had been 16.77%. So, for the sake of justice, fairness and also reasonableness, in the light of the GP Tabulation, vide PB-47, either the Gross Profit (Gold Trading Account, PB-3) be kindly upheld or alternatively, be increased by 8.84% to the level of 23.89% (GP on Sales achieved in immediately preceding F.Y. 2020-21 the immediately preceding year) as against the current year's corresponding rate of 15.05%. In such a case the addition would remained confined to 8.84% of Sales amount of Rs.223.15 Lacs (Gold Trading Account - PB-3) i.e., Rs. 1972646.00.