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Income Tax Appellate Tribunal, BENCH ‘B’ KOLKATA
Before: Hon’ble Shri J.Sudhakar Reddy, AM & Shri S.S.Viswanethra Ravi, JM ]
ORDER PER J.SUDHAKAR REDDY, AM:
This is an appeal by the Assessee directed against the order of the Commissioner of Income Tax-(A)-7, Kolkata relating to A.Y.2013-14.
The assessee is a partnership firm engaged in the business of manufacturing and retail trading in gold ornaments. It filed its return of income for A.Y.2013-14 on 31.08.2013 declaring total income of Rs.17,89,270/-. The AO completed the assessment u/s 143(3) of the Income Tax Act, 1961 (Act) on 15.12.2015 determining the total income of the assessee at Rs.2,64,90,350/- inter-alia making additions on account of suppression of closing stock and also u/s 40(a)(ia) of the Act for non- deduction of tax at source u/s 194C of the Act on payments made for melting charges and hall marking charges. The AO was of the view that the assessee had undervalued its closing stock as it had followed LIFO method which is not in accordance with Accounting Standard-2 (AS-2) issued by the Institute of Chartered Accountants of India. The books of accounts of the assessee were not rejected, by the AO.
Aggrieved the assessee carried the matter in appeal. The First Appellate Authority confirmed the order of the AO. Aggrieved the assessee is before us on the following revised grounds of appeal :-
“1. On the facts and in the circumstances of the case, the learned CIT(A) erred in making addition of an amount of Rs.2,41,45,140/- alleging suppression of value of closing stock, without appreciating the fact that the assessee has been consistently following LIFO method for valuation of closing stock since the inception of the business which has been accepted all along by the revenue in the earlier years.
2(a) The AO erred in having disallowed melting and hallmarking charges paid, alleging non-deduction of tax at source, although the impugned payment has not been made under any oral and documentary contract, warranting any such deduction.
2(b) On the facts and in the circumstances of the case, the learned CIT(A) erred in disallowing the entire payment made on account of melting charges and payment made to party, M/s.G.N.Hallmarking & Refinery Pvt. Ltd. on account of hallmarking charges, u/s.40(a)(ia) of the Act, without appreciating the fact that the recipient parties have already offered the alleged sums in their computation of total income and have accordingly paid tax on the same.
3. The appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds.”
The ld. Counsel for the assessee submitted that, the AO, as well as the ld. CIT(A) have committed an error in making an addition on account of suppression of closing stock for the reason that (a) there is no dispute on facts that the assessee had valued its closing stock by following LIFO method which is a accepted and recognised method of valuation of stock.
(b) there is no dispute that this method of valuation of stock is being followed by the assessee year after year and the revenue had been accepting the same. Hence the regular system of accounting being followed by the assessee cannot be disturbed unless there is a finding that there are defects in, the books of accounts or the stock register maintained by the assessee. There is no such finding.
(c) there is no finding by the AO that, the stock registers containing purchase and sales details, maintained by the assessee, are not reliable. In fact the quantitative details maintained in the stock registers have been accepted by the AO and the addition has been made only by changing the method of valuation of closing stock and not due to any quantitative variations.
(d) reliance is placed on the provision of section 145A of the Act wherein it is specifically mandated that inventories shall be valued in accordance with the method of accounting regularly employed by the assessee and that this section over rides Sec.145 of the Act.
(e) for the proposition argued above reliance is placed on the following case laws :- i)United Commercial Bank vs CIT 240 ITR 355 (SC)
(ii)CIT vs British Paints 188 ITR 44 (SC)
(iii)CIT vs J.P.Patel 263 ITR 421 (MP)
(f) the findings of the AO that LIFO method of valuation of inventory is not prescribed in AS-2, is factually and legally incorrect, as AS-2 gives liberty to the assessee to follow a valid stock formula that may be applied.
(g) the calculation made by the AO, that the assessee has valued its closing stock at Rs.1294.69 per gram is factually incorrect.
On the issue of deduction u/s 40(a)(ia) of the Act, he submitted that there is no contract with the person’s, who are paid money towards hall marking charges or melting charges and hence the provision of section 194C of the Act would not apply. Alternatively it was submitted that the payee parties have already offered the said sums received by them to tax, in their income tax returns and in view of the second proviso to section 40(a)(ia) of the Act, no disallowance can be made in the hands of the assessee. It was submitted that the issue may be remitted to the AO for fresh adjudication and examine the issue as to whether the requirements of the 2nd proviso to section 40(a)(ia) have been fulfilled or not.
The ld. Departmental Representative, on the other hand, opposed the contentions of the assessee and submitted that the arguments of the ld. Counsel for the assessee that, the revenue has been accepting consistently, the method of valuation of closing stock followed by the assessee i.e. LIFO method is not correct, as the assessee commenced its business in the year 2001 and this case was never picked up for scrutiny and all the returns were accepted u/s 143(1)(a) of the Act. He submitted that there was no chance for the revenue to look into the method of valuation of closing stock followed by the assessee. He submitted that AS-2 issued by the Institute of Chartered Accountants of India had been notified under the Income Tax Act and that it mandates that the assessee values its stock at cost or market value which ever is less and the cost has to be determined either by FIFO method or average cost method. He pointed out that the ld. CIT(A) has observed that the assessee is not maintaining item- wise stock register and hence adoption of LIFO method would lead to perpetual undervaluation of stock. He submitted that the assessee would have sold the major part of old stock and yet claimed value of old stock, on the presumption that old stock is still lying in the shop.
In reply the ld. Counsel for the assesse submitted that the principles of stock valuation are well settled and if the revenue choses to disturb the valuation of closing stock then the opening stock should also be re-valued with on the very same principles as those applied to the closing stock.
Heard the rival submissions. On careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below as well as case laws cited we hold as follows :-
8.1. The undisputed facts that emerge from the record is that the assessee has been following LAST IN FIRST OUT (LIFO) method of valuation of closing stock from the year of its inception. The arguments of the assessee before the revenue authorities is that, old gold ornaments which are to be in display have become out of fashion and hence are slow moving and that the customers are regularly in search of new designs and hence fresh inventories manufactured to the taste and directions of the customers are sold fast and not old inventories. Thus it was contended that the assessee had specifically chosen LIFO method of valuation of closing stock as it would be best suited for the business realities of the assessee.
8.2. The assessee has produced its books of account and they have been audited u/s 44AB of the Act. The AO has not pointed out any defects either in the books of account maintained by the assessee or in the stock register maintained by it. The books of accounts have not been rejected. It is not the case of the AO that there is any variations or differences in the quantities of closing stock. The only ground on which the addition has been made in this case, is that, LIFO method of stock valuation is not approved under AS-2 of the Institute of Chartered Accountants of India, which is notified by the Government, under the Income Tax Act.
8.3. The ld. CIT(A) goes a step further and holds that the adoption of LIFO method would lead to perpetual undervaluation of stock. He also concludes that the shop keepers would exhaust the old stock by giving discount to the customers and would only keep new stock. Both these conclusions in our view are not correct.
8.4. The principles of “valuation of closing stock” have been laid down in judgments of the various courts. We extract some for ready reference :- a)In the case of United Commercial Bank vs CIT 240 ITR 355 (SC) it is held as follows :-
“The principles applicable in valuation of stock are (1) that for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower; (2) In the balance-sheet, if the securities and shares are valued at cost, from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and (or that purpose, to value stock-in-trade either at cost or market price " (3) A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation " (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within recognised limits " (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation,' (6) Under section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot be properly deduced there from, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine:....” (Emphasis supplied) b) in the case of CIT vs. British Paints 188 ITR 44 (SC) it is held as follows :-
“.........The question to be determined by the Assessing Officer in exercise of his power under section 145 is whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the Officer and the income has been computed in accordance with the method regularly employed by' the assessee......” c) in the case of CIT vs. J.P.Patel 263 ITR 421 (MP) it is held as follows :-
“that it had not been disputed that in valuing stock the assessee had adopted the last in first out method which is a recognised method. Once a recognised method has been taken recourse to and the value of closing stock had been computed on the basis of average, no question of law would arise from its order. “
8.5. Applying the above laid down proposition of law to the facts of this case we hold that it is well settled that the consistent method of accounting or stock valuation followed by the assessee cannot be disturbed by the AO, without pointing out the defects in the method. LIFO is a well accepted and recognised method of valuation of closing stock.
8.6. In our view, AS-2 by Institute of Chartered Accountants of India does not state that valuation of closing stock under LIFO method cannot be done. At para-17 of AS-2 it is stated as follows :
“A variety of cost formulas is used to determine the cost of inventories other than those for which specific identification of individual costs is appropriate.”
The formula used in determining the stock of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. Thus AS-2 does not specifically mention the LIFO method of valuation of closing stock is not an approved method. The choice of the method is always with the assessee. The only condition is that , it has to be regularly and consistently followed.
8.7. Be it as it may section 145A of the Act mandates that (a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be –
(i) In accordance with the method of accounting regularly employed by the assessee.
The section supports the above view expressed by us and also over rides section 145 of the Act. The act mandates that the valuation of inventory should be made in accordance with the method of accounting regularly employed by the assessee. Thus the AO, is wrong in disturbing the method of accounting regularly employed by the assesee for valuation of closing stock. Hence the addition is bad in law.
8.8. Even otherwise, the AO as well as the ld. CIT(A) have committed an error by revaluing of the closing stock only by adopting weighted average method of costing and arrived at the profits of the year without doing the same method of valuation to the opening stock of the assessee. This gives absurd results. The opening stock of the assessee should also be valued in the same manner in which the closing stock of the assessee is valued. Thus, by not valuing the opening stock of the assessee by employing weighted average stock method, the revenue authorities, committed a mistake. Hence on this ground also the addition is bad in law.
8.9. Moreover, the AO committed the calculation mistake. The assessee brought this calculation mistake to the notice of the ld. CIT(A). The ld. CIT(A) has not acted on the same. The allegation of the ld. AO that the assessee has valued the closing stock at Rs.1294.69 per gram is wrong. The assessee has valued the closing stock at Rs.2491.96 per gram. The calculation is extracted below :-
“ Quantitative details & Valuation of Stock as on 31.03.2013
Average rate of production unit per gm. Rs.16,31,27,839.00/54615.210 gm = Rs.2986.85 per gm.
Cost of production 54615.210 gm Purchase ornaments 22Ct. 259.480 gm Purchase Gold Bar 99.50 20.000 gm 54894.690 gm Less: Sold Ornaments 48831.260 gm Sold Gold Bar 20.000 gm 48851.260 gm 6043.430.gm Closing Stock- 6043.430 gm@2986.85 Rs.1,80,50,819.00 Opening Stock - 14123.390 gm Rs. 80,58,949.00 Total Closing Stock 20166.820 gm Value= Rs. 2,61,09,76.00”
In view of the above discussion we uphold the contention of the assessee and delete the addition made on account of suppressed value of closing stock.
In the result this ground of appeal is allowed.
11. Ground No.2 is against the disallowance made u/s 40(a)(ia) of the Act as the assessee has not deducted tax at source u/s 194C of the Act on hall marking charges paid and melting charges paid. The assessee submits that the recipient parties have already offered this receipt to tax in their computation of total income and have accordingly paid tax on the same. The second proviso to section 40(a)(ia) of the Act provides that in such cases no disallowance can be made u/s 40(a)(ia) of the Act. The courts have held that this proviso is retrospective in nature. Thus we set aside this issue to the file of the AO for verification and denovo adjudication of this issue of disallowance u/s 40(a)(ia) of the Act in accordance with law.
12. In the result ground no.2 is allowed for statistical purposes.
13. Ground No.3 is general in nature and does not require any adjudication.
In the result the appeal of the assessee is allowed in part.
Order pronounced in the Court on 16.03.2018.
Sd/- Sd/- [S.S.Viswanethra Ravi] [ J.Sudhakar Reddy ] Judicial Member Accountant Member Dated : 16.03.2018. [RG Sr.PS] Copy of the order forwarded to: 1.Rupam Jewellers, Super Market, Kamarpur, Contai-721401, Purba Medinipur. 2. A.C.I.T., Circle-27(1), Haldia. 3. C.I.T.(A)- 7, Kolkata 4. C.I.T-9, Kolkata 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Senior Private Secretary Head of Office/D.D.O, ITAT Kolkata Benches