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Facts
The appellant, Cannanore Pharma, a partnership firm, filed its income tax return for AY 2017-18. The Assessing Officer, completing assessment under Section 143(3), made an addition of Rs. 5,92,030 to the closing stock for not including the VAT rate in its valuation. The CIT(A) upheld the AO's action, prompting the appellant to appeal to the Tribunal. There was a 49-day delay in filing the appeal, which the Tribunal condoned.
Held
The Tribunal, relying on a Privy Council ruling, held that if an adjustment is made to the valuation of closing stock, a corresponding adjustment must also be made to the opening stock to correctly ascertain the true profit. The matter was remitted back to the AO with a direction to value the closing stock on the same basis as the opening stock.
Key Issues
Whether an adjustment made to the valuation of closing stock by the Assessing Officer necessitates a corresponding adjustment to the opening stock to ensure consistency and correct profit determination.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, “SMC” BENCH, COCHIN
Before: Shri Inturi Rama Rao
Asst.Year 2017-2018 Cannanore Pharma The Income Tax Officer Haji Building, Fort Road v. Ward 1 & TPS Kannur – 670 001. KANNUR. PAN : AABFC5277G. (Appellant) (Respondent) Appellant by : Sri.Sreehari A.C., CA Respondent by : Smt.Leena Lal, Sr.AR Date of Date of Hearing : 26.03.2025 Pronouncement : 08.04.2025 O R D E R This appeal filed by the assessee is directed against the order of the National Faceless Assessment Centre / Commissioner of Income- tax (Appeals) [“CIT(A)” for short] dated 27.10.2022 for the assessment year 2017-2018.
There is a delay of 49 days in filing this appeal before the Tribunal. The appellant filed a condonation petition along with an Affidavit of the Managing Partner of the appellant firm, stating therein the reasons for the belated filing of this appeal.
2.1 On a careful perusal of the reasons stated in the affidavit, I am satisfied that there is reasonable cause in belated filing of this appeal before the Tribunal and no latches can be attributed to the assessee. Therefore, I condone the delay and admit the appeal for adjudication.
. Cannanore Pharma.
Brief facts of the case are that the appellant is a partnership firm engaged in the business of distribution of pharmaceuticals. The return of income for the assessment year 2017-2018 was filed on 31st October, 2017 declaring an income of Rs.11,16,260. Against the said return of income, the assessment was completed by the Assessing Officer (“the AO”) on 28th November, 2019 passed u/s.143(3) of the Income-tax Act, 1961 (“the Act”) at a total income of Rs.17,08,290. While doing so, the AO made an addition to the closing stock of Rs.5,92,030 by holding that the appellant has not valued the closing stock by including the VAT rate on the closing stock.
Being aggrieved, an appeal was filed before the CIT(A), who vide the impugned order confirmed the action of the AO for non-prosecution and on merits.
Being aggrieved, the appellant is before the Tribunal in the present appeal. It is submitted that the valuation of closing stock is disturbed, the valuation of opening stock should be done on the same basis. In support of this, the learned Counsel relied upon the order passed by the CIT(A).
I heard the rival submissions and perused the material available on record. The AO made an addition on account when valuation of closing stock. It is well settled in law that whenever any adjustment is made in the valuation of closing inventory, the corresponding adjustment may also be made in the opening stock. In this connection, it is apt to quote the observations of Privy Council in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56, where the "If the method of altering both valuations is not adopted it, is perfectly plain that the profit which is brought forward is not the real one. It may be more, or it may be less, but it has no relation to the true profit if the stock is valued on one basis when it goes out without considering the value of the stock when it comes in. When, therefore, there is undervaluation at one end, the effect is to cause both a smaller debit in respect of the stock introduced into the next account and a larger sum for profits realised by the sale, change in market values being immediately reflected in the price obtained for the goods that are sold; in these circumstances to contend that there should be undervaluation at one end and not at the other is to raise an argument which their Lordships cannot accept."
Therefore, in the light of the above, when the AO having chosen to make the adjustment in the closing stock, he should also need to make corresponding adjustment in the opening stock as well. I, therefore, remit the matter back to the file of the AO to value the closing stock on the same basis as valuation of the closing stock was done. It is ordered accordingly.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced on this 08th day of April, 2025.