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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-15, Kolkata [in short the ld CIT(A)] in Appeal No. 160/CIT(A)- 15/14-15/Range-50/Kol dated 28.03.2016 against the order passed by the ITO, Ward- 50(2), Kolkata[ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 22.03.2014 for the Assessment Year 2011-12.
The only dispute involved in this appeal is as to whether the ld CITA was justified in upholding the addition made towards difference in valuation of closing stock by using different method , in the facts and circumstances of the case.
The brief facts of this case are that the assessee is a partnership firm engaged in the jewellery business. The return of income for the Asst Year 2011-12 was filed by the assessee firm on 23.12.2011 declaring total income of Rs 9,90,976/-. The ld AO
2 M/s the Keshab Jewellers A.Yr.2011-12 observed that the assessee had produced books of accounts, bank statements, statement of closing stock and other relevant documents and the same were examined by him. The ld AO observed that from the perusal of the tax audit report, the relevant column no. of 12(a) of Form 3CD regarding method of valuation applied in the previoyus year was not mentioned. Hence it was not clear from the tax audit report, the method which was followed with regard to valuation of closing stock of jewellery. The assessee filed a written submission in the course of assessment proceedings wherein it was stated that it had followed Last in First Out (LIFO) method for valuation of closing stock. The ld AO on verification of the purchase bill of Gold Bar dated 26.3.2011 observed that the same were purchased at the rate of Rs 21,185/- per 10 grams. He found that the assessee has shown raw gold of 403.598 grams (22 karats) at the rate of Rs 1596/- per gram. However, price should be Rs 19,419/- per 10 grams of 22K raw gold. Hence total value should be Rs 7,83,770/- as against Rs 6,44,142/- shown by the assessee thereby resulting in difference in valuation of closing stock of Rs 1,39,628/- which was added to the total income of the assessee by the ld AO.
3.1. The ld AO observed that only First in First Out (FIFO) or Weighted Average Method is permitted as per Accounting Standard (AS) 2 issued by ICAI for valuation of inventories. As per the weighted average method, cost of finished goods per grams of 22K was calculated by the ld AO as under:-
3 M/s the Keshab Jewellers A.Yr.2011-12 The ld AO accordingly brought the difference in valuation of closing stock of finished gold (22K) of Rs 70,54,057/- to tax towards under-valuation of stock.
3.2. The ld AO observed that the assessee had shown making charges of Rs 21,77,277/- in its profit and loss account and the total production in quantity during the year was 103888 grams. Hence the weighted average rate per gram was Rs 20.95. So making charges included in total finished stock of 16506 grams of gold would be Rs 3,45,931/-, whereas the assessee had shown Rs 2,29,918/-. This difference of Rs 1,16,013/- was brought to tax towards under-valuation of stock.
3.3. The ld AO accordingly made the total addition towards difference in valuation of closing stock of Rs 73,09,698/- ( 1,39,628 + 70,54,057 + 1,16,013). The ld CITA upheld the action of the ld AO by observing that the item wise jewellery register was not furnished by the assessee. Accordingly, he observed that the book results and the books of accounts are to be rejected. Aggrieved by the upholding of the addition and by the observations of the ld CITA, the assessee is in appeal before us.
We have heard the rival submissions. It is not in dispute that the assessee had produced the entire books of accounts and the statement of closing stock together with the workings thereon specifying the method adopted for valuation thereon. It is not in dispute that the assessee had produced purchase register, sales register and stock register before the lower authorities. It is not in dispute that the assessee had adopted LIFO method for valuation of closing stock of jewellery which has been regularly employed by it from the inception of its jewellery business. There is no dispute with regard to the quantity of raw gold and finished gold lying as closing stock at the end of the year in as much as there was no discrepancy thereon and the assessee was able to take the said closing stock from its stock register which has been accepted by the ld AO and the ld CITA. The ld AR pointed out that the ld AO adopted weighted average 3
4 M/s the Keshab Jewellers A.Yr.2011-12 method for valuation of closing stock. We find that the ld CITA had observed that the assessee had not maintained item wise stock register for jewellery and hence the book results and the books of accounts of the assessee were sought to be rejected by the ld CITA in the appellate proceedings. Having done so, he had upheld the action of the ld AO. The ld AR brought to our notice that the ld AO having stated to adopt weighted average method of valuation of jewellery , had adopted FIFO method which is contradictory. He argued that the valuation of inventories are governed by the provisions of section 145A of the Act, which does not prohibit usage of LIFO method of valuation of closing stock. We find that the assessee had given reasonable explanation before the lower authorities that item wise jewellery register could not be maintained in view of impracticality due to huge number of items. In these circumstances, without pointing out any defects in the books of accounts and other documents maintained by the assessee, there is absolutely no basis for rejection of books of accounts and book results of the assessee by the ld CITA. We find that having rejected the books of accounts of assessee, the ld CITA ought to have proceeded to determine the net profit of the assessee on an estimated basis based on some rationale or comparables etc. That was admittedly not done in the instant case. Hence the observation made by the ld CITA for rejection of books of accounts is treated as baseless and is unwarranted. There is no dispute that the assessee had been following LIFO method for valuing its inventories right from its inception which has been accepted by the revenue in the past. Hence there is no need to take a divergent view during the year under consideration. We find that from the said LIFO method of valuation and the entries in the books of accounts, proper profits of the assessese could be easily deduced therefrom. It is not in dispute that the assessee had indeed produced stock register containing certain details of stock movement before the lower authorities. Only item wise jewellery register was not maintained by the assessee. We find that this issue is directly addressed by the Hon’ble Jurisdictional High Court in favour of the 5 M/s the Keshab Jewellers A.Yr.2011-12 assessee in the case of Ashoke Refractories P Ltd vs CIT reported in 279 ITR 457 (Cal) wherein it was held as under:- Conclusion : 7. For all these reasons, the rejection of the books of account only in the absence of stock register for the year 1990-91 as discussed above having regard to the availability of other materials from which the income could be deduced, the rejection of the books of account by the learned Tribunal was contrary to the proviso to section 145 unless there is a finding or opinion either that the records were incorrect and incomplete or that the method applied was such that the income could not be deduced from the accounts maintained by the assessee. 7.1 In respect of the assessment year 1991-92, the stock register was there, but only on the ground that the item-wise stock register was not maintained, the accounts were sought to be rejected, which is absolutely perverse and cannot be sustained in the absence of any opinion expressed or any finding arrived at that the accounts maintained were incorrect or incomplete or that the method of accounting applied was such that the income could not be deduced. In the absence of any such finding, the account books could not be rejected merely on the ground that item-wise stock was not maintained in the stock register. Order : 8. In the result, the appeal, therefore, succeeds and is allowed. The order of the learned Tribunal is hereby set aside. The order of the Commissioner of Appeal is upheld and affirmed. The question involved in this appeal is answered in the negative for the first part and for the second part in the affirmative. 8.1 There will, however, be no order as to costs. 8.2 Urgent xerox certified copy of this Judgment be made available to the parties, if applied for, within seven days from the date of such application on usual undertakings.See More 4.1. Hence we find that the basic premise on which the ld CITA sought to sustain the addition of the ld AO on the ground that item wise jewellery register is not maintained and thereby profits of the assessee could not be properly deduced from the books of accounts, completely fails. Once the foundation fails, the superstructure also fails i.e the addition also is to be deleted. In this regard, the ld AR rightly placed reliance on the legal maxim “Sublato fundamento cadit opus” (meaning thereby that foundation being removed, structure /work falls). Hence the initial action of the revenue itself is not in consonance with law, then all the subsequent and consequential proceedings would fall through for the reason that illegality strikes at the root of the order. 5
6 M/s the Keshab Jewellers A.Yr.2011-12 4.2. We also find that this tribunal in its recent decision had discussed a similar issue in the case of Roopshree Jewellers (P) Ltd vs ITO reported in (2018) 93 taxmann.com 159 (Kolkata Trib.) dated 17.4.2018, wherein the undersigned was the author of that order, had held as under:-
We have heard the rival submissions. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that the assessee had duly reflected in the audited financial statements under Significant Accounting Policies with regard to inventory valuation as under:— Gold : At cost including making charges under LIFO method Diamond : At cost or net realizable value whichever is lower under LIFO method Pearl & Emerald : At cost under LIFO method We find that the said accounting policy is part and parcel of the audited financial statements which has been approved by the shareholders in the general body meeting. It is not in dispute that the assessee had been following LIFO method regularly for valuation of closing stock since its inception. It is not in dispute that the LIFO method adopted by the assessee had been accepted by the revenue in the past. It is not in dispute that the LIFO method is also one of the recognized methods for valuation of closing stock. The ld AO had observed that as per AS-2 issued by ICAI, the assessee is not permitted to adopt LIFO method for valuation of closing stock. In this regard, the relevant portion of AS-2 issued by ICAI is reproduced hereunder:— Cost formulas 14. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific information of their individual costs. 15. Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have been purchased or produced. However, when there are large number of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate since, in such circumstances, an enterprise could obtain predetermined effects on the net profit or loss for the period by selecting a particular method of ascertaining the items that remain in inventories. 16. The cost of inventories, other than those dealt with in paragraph 14, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.
7 M/s the Keshab Jewellers A.Yr.2011-12 7.1 The ld AR pleaded before us that the LIFO method is also recognized in AS-2 and in this regard, he placed reliance on the decision of Pune Tribunal in the case of Sandvik Asia Ltd. (supra) wherein it was held: "18. Lastly, we shall deal with the contention of the learned Senior Departmental Representative that true profits cannot be deduced on the basis of LIFO method and, therefore, the same should be rejected despite the fact that the same was being consistently followed by the assessee in the past. Such a contention has been raised in view of the Hon'ble Supreme Court decision in the case of British Paints India Ltd. (supra). We have given our deep thought to this contention but we are unable to accept the same. The LIFO method is one of the recognized method of valuation of closing stock as per Accounting Standard 2 laid down by the Institute of Chartered Accountants of India and para 26 of the International Accounting Standard (IAS-2) as observed by the Third Member of the Tribunal in the assessee's own case. This shows that much water has flown after the decision of the Privy Council in the case reported as 30 ITR 84 (supra). One cannot keep his eyes shut to the latest development of the modern age. The Tribunal in the country have also accepted the LIFO method. The Delhi Bench of the Tribunal in the case of Jain Abhushan Bhandar v. ITO (1987) 29 TTJ(Del) 75 and the Cochin Bench of the Tribunal in the case of ITO vs. Sree Padmanabha Jewellery Mart (1987) 28 TTJ (Coch)15 (1987) 19 ITD 816 (Coch) have accepted the LIFO method in the past. Even recently, the Ahmedabad Bench of the Tribunal in the case of Dy. CIT v. M/s Harjivandas J. Zaveri (supra) to which one of us (A.M.) was a party, has approved the LIFO method. Therefore, it is wrong to say that LIFO method is incorrect method." 7.2 We find that the ld CITA had deleted the addition on the ground that the assessee company had been regularly employing LIFO method for the purpose of valuation of its stocks since its inception and there is no deviation of the same during the year and the said method had been accepted by the revenue in the earlier years. We find that the entire issue under dispute is squarely covered by the decision of this tribunal in the case of ACIT v. Jewell India Jewellers [IT Appeal No. 2085/Kol/2013 for the Asst Year 2009-10 dated 1-6-2016] wherein it was held that:— '7. We have heard the rival submissions and perused the materials available on record. The facts elaborately stated in the arguments advanced by the assessee remain undisputed and hence the same are not reproduced herein for the sake of brevity. The only dispute is with regard to valuation of closing stock of gold. It is not in dispute that the assessee has been following consistently LIFO method for valuation of closing stock of gold. It is not in dispute that the same has been consistently accepted by the revenue in the earlier years even in the scrutiny assessment proceedings. It is elementary that the regular system of accounting followed by the assessee could be disturbed only in the event of finding out defects in the books of accounts and stock registers maintained by the assessee. Admittedly, no defects were noticed or pointed out by the Learned AO in the books of accounts and stock registers etc furnished before him at the time of assessment proceedings. Infact no discrepancy was noticed on the quantity of gold and other jewellery by the 7
8 M/s the Keshab Jewellers A.Yr.2011-12 Learned AO. We find that the Learned AO had not recorded any clear finding in his order that the LIFO method of accounting followed by the assessee for valuing its closing stock was such that correct profit could not be deduced from the books of account maintained by the assessee. In these circumstances, it would not be justified in rejecting the closing stock valuation regularly adopted by the assessee. Reliance is also placed on the decision of the Hon'ble Calcutta High Court in the case of British Paints India Ltd. v. CIT reported in (1978) 111 ITR 53 (Cal). We also find that the reliance placed by the Learned AR on the co-ordinate bench decision of Cochin Tribunal in the case of jeweller in ITO v. Sree Padmanabha Jewellery Mart reported in 19 ITD 816 is directly on the point involved in this appeal. In the said case, it was held that :— The manner of valuation of closing stock by the assessee is as under:— "The quantity of stock left at the end of any years is first ascertained by reference to the detailed books of accounts maintained by the appellant-firm. From out of this, the quantity of jewellery relatable to the stock carried forward from the previous year is ascertained and isolated. Any excess over the last year's stock is considered to be out of current year's purchase. The last year's stock is valued at its cost to business. The current year's left over is valued at a moving average which represents the average price paid for all purchases made by the firm in the year of account." 7.1. In the instant case, the assessee had furnished the closing stock valuation workings as on 31-3-2006, 31-3-2007, 31-3-2008 and 31-3-2009 before the revenue. On going through the said workings, we are fully convinced with the method of accounting regularly employed by the assessee for valuation of closing stock of Gold and other jewellery. The value of closing stock of gold as worked out by the assessee are given below :— For 31.3.2006 Grams Rate Value Value of closing 25234.070 621.00 15670357 stock of FY 2004-05 Value of Balance 31645.550 650.28 20578468 stock 56879.620 36248825
For 31.3.2007 Grams Rate Value Value of closing 56879.620 637.29 36248825 stock of FY 2005-06 Value of Balance 12220.260 917.50 11212089 stock 69099.880 47460914 For 31.3.2008 Grams Rate Value
9 M/s the Keshab Jewellers A.Yr.2011-12 Value of closing 69099.880 686.85 47460914 stock of FY 2006-07 Value of Balance 6389.830 1005.59 6425549.15 stock 75489.710 53886463.15 For 31.3.2009 Grams Rate Value Value of closing 69099.880 686.85 47460914 stock of FY 2006-07 Value of Balance stock rate of FY 07- 4652.780 1005.59 4678789.04 08 73752.660 52139703.04
7.2. It is quite natural that jewellery being a fashion industry, the old stocks would most of the times remain with the assessee and the revenue cannot expect the old stocks to be sold out first though it would remain in the wish list of the jeweller. We find that the aforesaid valuation exactly fits into the accepted method of valuation for a jeweller as approved in the case of Cochin Tribunal supra. We also find that the decision of the Chandigarh Tribunal in the case of DCIT v. Vipin Aggarwal in dated 23-7-2010 wherein it was held that :— "6. We have heard the rival contentions and perused the records. The issue arising in the present appeal is with regard to the valuation of closing stock. The assessee is a jeweler and had declared closing stock of Rs. 3,79,84,232/- as on 31-3-2007. The contention of the assessee was that it was valuing the closing stock at cost. Out of the total closing stock of 54,756 gms, the assessee claims that gold weighing 31,905 gms was its opening stock valued @ Rs. 482/- per gram. The balance stock available out of the purchases made during the year was 22850 gms which was valued at cost price of Rs. 905/- per gram. The contention of the assessee was rejected by the Assessing Officer as according to the Assessing Officer the assessee was not following one of the methods specified in accounting standard AS-2 issued by the Institute of Chartered Accountants of India for determining the cost of inventories. The explanation of the assessee in this regard was that the opening stock of 31950 gms was valued at Rs. 482/- per gram and similar value be adopted to work out the value of closing stock. It as further explained that the said jewellery being old conventional jewellery was not sold during the year and was available at the close of the year. The balance stock was out of the purchases made during the year less sales made by the assessee. The Assessing Officer while re-computing the value of stock has accepted the weights in grams of stocks but had only revalued the stock by adopting a figure higher than rate disclosed by the assessee. We find no merit in the said addition being made by the Assessing 9
10 M/s the Keshab Jewellers A.Yr.2011-12 Officer where the valuation of closing stock has been changed vis-a-vis its value and not because of any difference in the quantity of stock. The assessee was consistently following a particular method of accounting which is being accepted from year to year and in the absence of any contrary findings by the Assessing Officer, there is no merit in not adopting the method of valuation of stock being consistently followed by the assessee. Further we find support from the ratio laid down by the Hon'ble Supreme Court in Chainrup Sampat Ram v. CIT 24 ITR 481 (SC) (supra) wherein it has been held that the value of stock cannot be appreciated higher than the cost because the closing stock is not the source of profit for the assessee. It has also been held by the Hon'ble Supreme Court that the closing stock is to be valued either at cost or market value, whichever is low. In the facts and circumstances of the present case, we are in conformity with the order of CIT(A) and uphold the same. There is no merit ill adopting the weighted average cost method for valuation of inventory of stock in the circumstances of the case. We confirm the deletion of addition made by the Assessing officer totaling Rs.52,23,753/-. The ground of appeal raised by the Revenue is thus dismissed.; 7.3 In any event, we hold that no addition could be made towards value of stock because the closing stock cannot be construed as a source of profit for the assessee. We place reliance on the decision of the Hon'ble Supreme Court in the case of Chainrup Sampat Ram v. CIT reported in 24. ITR 481 (SC) in support of this proposition. 7.4. We find that the assessee has been consistently following LIFO method of accounting for valuation of its closing stock of gold which has been accepted by the department in the earlier years even in scrutiny assessment proceedings of the assessee. Then there is no justifiable reason to reject the same method during the year under appeal. In this regard, we place reliance on the decision of the Hon'ble Apex Court in the case of United Commercial Bank v. CIT reported in 240 ITR 355 (SC) wherein the principles were laid down for valuation of assets at page 366. We find that the following decisions also support the case of the assessee:- CIT v. Sant Ram Mangat Ram reported in (2005) 275 ITR 312 (P&H) CIT v. Ema India Ltd reported in (2006) 296 ITR 510 (All) CIT v. Jagatjit Industries Ltd reported in (2011) 339 ITR 382 (Del) CIT v. Shah Doshi & Co reported in (1982) 133 ITR
23. (Guj) 7.5. In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we do not find any reason to interfere with the order of the Learned CITA. Accordingly the grounds raised by the revenue are dismissed." 7.3 Similar decision was rendered by this tribunal in the very same case for the Asst Year 2011-12 in ITA No. 202/Kol/2015 dated 4-10-2016. The facts of that case and 10
11 M/s the Keshab Jewellers A.Yr.2011-12 decision rendered thereon are squarely applicable to the facts of the instant case. Hence respectfully following the said decision of this tribunal, we hold that the ld CITA had rightly deleted the addition made in the sum of Rs 3,91,71,167/- and hence no interference is warranted in the same. Accordingly, the Ground No.1 raised by the revenue is dismissed.
4.3. In view of the aforesaid observations in the facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, we direct the ld AO to delete the addition made towards difference in valuation of closing stock of Rs 73,09,698/-. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 01.08.2018