KETAN SURESHCHANDRA MEHTA,MUMBAI vs. JCIT - 17(2), MUMBAI

The present appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-57, Mumbai for AY. 2012-13, A.Y. 2013-14 and A.Y. 2014-15, dated 01.02.2018, which in turn arises from the respective assessment orders passed under Sec.143(3) of the Income-tax Act, 1961 (for short I-T Act). As common issues are involved in the aforementioned appeals, therefore, the same are being taken up and disposed off together by way of a consolidated order. We shall first advert to the appeal of the assessee for A.Y. 2012-13. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal :

Briefly stated, the assessee who is engaged in the business of trading in dyes, chemicals and general merchandise had filed his return of income for A.Y. 2012-13 on 24.09.2012, declaring total income of Rs.1,00,42,842/-. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2) of the I.T Act.

During the course of the assessment proceedings it was observed by the A.O that the assessee had valued its „Closing stock‟ at Rs.2,87,04,589/- on 31.03.2012. On the basis of details gathered by the A.O, it was noticed by him that the assessee had not debited the proportionate amount of costs which were directly attributable to the imports/purchases of Rs.49,15,11,569/- made by him during the year under consideration. It was observed by the A.O that the expenditure of Rs.78,72,116/- viz. (i) interest expenditure: Rs.45,76,054/-; and (ii) transport expenses: Rs.32,96,062/- were directly attributable to the import/purchase of material of Rs. 49,15,11,569/-, part of which material was lying with him as on 31.03.2012 as „closing stock‟. The A.O was of the view that the assessee could not furnish any documentary evidence which would substantiate that the interest bearing funds were not utilized for making the aforesaid import/purchase of Rs. 49,15,11,569/- during the year under consideration. Further, the A.O was of the view that in the absence of any documentary evidence to the contrary, it could safely be presumed that the assessee was following the method “First-in”, “First-out” (for short „FIFO‟) for the purpose of valuation of its „closing stock‟. As such, the A.O was of the view that the „direct expenditure‟ of Rs.4,59,737/- was attributable to the „closing P a g e | 3 to 2860/Mum/2018 AYs. 2012-13 to 2014-15 Ketan Sureshchandra Mehta Vs. JCIT,17(2) stock‟ of Rs.2,87,04,589/-. However, as the same was not taken into consideration by the assessee for the purpose of valuation of the closing stock, therefore, he called upon him to put forth an explanation as to why the expenditure to the said extent „debited‟ in the profit and loss account may not be added to the value of his „closing stock‟ for the year under consideration. In reply, it was submitted by the assessee that the „closing stock‟ was valued by him as per the “Accounting Standard 2” (for short “AS 2”), as per which the inventory was to be valued at “cost or market value, whichever is less”. It was submitted by the assessee that as he had consistently been following the said method for valuing his inventory, hence no adverse inferences on the said count were liable to be drawn in his hands. Apart there from, it was also the claim of the assessee that the valuation of the inventory was in accordance with the management decision/standard practice. However, the A.O after deliberating on the contentions advanced by the assessee was not persuaded to accept the same. In fact, the A.O held a conviction that the valuation of the closing stock, work-in-progress, finished products, raw materials and stores and packing material could not be based on the management decision/standard practise, as the same in itself was not backed by any credible evidence. It was observed by the A.O that as the valuation of the inventory was not in accordance with the Explanation to Sec.145A(a) of the I.T. Act, therefore, the claim of the assessee that he had consistently been valuing its inventory by following the aforesaid method did not merit acceptance. The A.O while concluding as hereinabove relied on the judgment of the Hon‟ble Supreme Court in the case of CIT Vs. British Paints India Ltd. (1991) 188 ITR 44 (SC). On the basis of his aforesaid deliberations, the A.O was of the view that the method of accounting being followed by an assessee could be disturbed, if it is found that the income cannot be correctly determined on the basis of accounting policy adopted by the assessee. Apart there from, the A.O P a g e | 4 to 2860/Mum/2018 AYs. 2012-13 to 2014-15 Ketan Sureshchandra Mehta Vs. JCIT,17(2) held a conviction that the A.O was not bound to accept the system of accounting regularly employed by the assessee, specifically when the correctness of the same had not been questioned in the past. In fact, the A.O was of the view that as there was no estoppel in the income tax matters, therefore, the A.O was not bound by the method followed by the assessee in the earlier years. In the backdrop of his aforesaid deliberations, the A.O made an addition of Rs.4,59,737/-, being the expenditure directly attributable to the „closing stock‟, and added back the same to the total income of the assessee.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) observed that the assessee had not specifically assailed the aforesaid addition of Rs.4,59,737/-, as the corresponding relief had been granted by adding the said value to his „opening stock‟ for the succeeding year i.e A.Y. 2013-14. On the basis of his aforesaid observations, the CIT(A) did not proceed with the issue under consideration.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee, at the very outset submitted that he was not pressing the ground of appeal

Per contra, the ld. Departmental Representative (for short „D.R‟) though did not object to the aforesaid submissions of the assessee, however, it was submitted by him that in case the matter is to be restored to the file of the A.O, then a similar direction may also be given for making necessary modifications insofar the „opening stock‟ for the year under consideration was concerned.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that as per Sec.145A(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profit and gains of business or profession” shall be viz. (i) in accordance with the method of accounting regularly employed by the assessee; and (ii) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. In the backdrop of the aforesaid settled position of law, we are of the considered view that P a g e | 6 to 2860/Mum/2018 AYs. 2012-13 to 2014-15 Ketan Sureshchandra Mehta Vs. JCIT,17(2) merely for the reason that the assessee as per the method of accounting that was regularly employed by him was not including the „direct expenses‟ viz. (i) inward transport charges; and (ii) interest expenses, in the value of his inventory, the same cannot be held to be justified. We thus in terms of our aforesaid observations reject the contention of the assessee and uphold the view taken by the lower authorities that the valuation of the inventory of the assessee was to be worked out after allocating the „direct expenses‟ relatable to the same. However, we are in agreement with the contention advanced by the ld. A.R that the expenses over and above the „direct expenses‟ could not have been attributed and therein proportionally allocated to the value of the „closing stock‟ for the year under consideration. At the same time, our aforesaid view would also be applicable insofar the „opening stock‟ of the assessee for the year under consideration is concerned. We are of the considered view that the matter in all fairness requires to be restored to the file of the A.O, with a direction to verify the aforesaid claim of the assessee and therein restrict the allocation of the „transport charges‟ and the „interest expenditure‟ to the value of the „closing stock‟, only to the extent the same is attributable as a „direct expenditure‟ to the purchases of Rs. 49,15,11,569/- carried out by the assessee during the year. Apart there from, a similar exercise is also directed to be carried out insofar the „opening stock‟ of the assessee for the year under consideration is concerned. Needless to say, the assessee shall during the course of the set aside proceeding furnish the requisite details with the A.O to facilitate giving effect to our aforesaid directions. The Ground of appeal

During the course of the assessment proceedings the A.O observed that the assessee had failed to allocate certain direct expenses ,viz. (i) interest expenditure; and (ii) transport expenses, while working out its „closing stock‟ of Rs.3,20,13,613/-. On the basis of his aforesaid deliberations, the A.O attributed a proportionate amount of the aforesaid expenses to the value of the „closing stock‟ and made an addition of Rs. 2,07,706/-. Aggrieved, the assessee unsuccessfully assailed the aforesaid addition before the CIT(A), who upheld the same.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We find that as the facts and the issue involved in the present appeal remains the same as were there before us in the appeal of the assessee for the immediately preceding year i.e A.Y. 2012-13 in , therefore, our order therein passed shall apply mutatis mutandis for disposal of the present appeal for the year under consideration i.e A.Y. 2013-14 in ITA No.2859/Mum/2018. 12. The appeal of the assessee is allowed for statistical purpose in terms of our aforesaid observations.