ACIT 33(3), MUMBAI vs. UDAY M GHARE, MUMBAI

In both the appeals, the Revenue is aggrieved by the decision of the learned CIT(A) in deleting the additions made by the Assessing Officer towards suppression of profit and undervaluation of closing stock.

We have heard parties and perused the record. The assessee is engaged in the business of manufacturing and sale of jewellery. The assessee is following “average cost method” for the purpose of valuing its stock. The Assessing Officer took the view that the assessee is suppressing its profit by adopting average cost method of valuation. He further took the view that first in first out (FIFO) method would be ideal for the assessee to arrive at the correct profit. He took the view that the gross profit declared by the assessee does not reflect true profit. Hence by following FIFO method, the Assessing Officer took the view that the assessee would have sold entire opening stock and remaining sales were out of purchases made during the year. Accordingly, the Assessing Officer worked out the gross profit in both the years by following FIFO method of valuation. Since the profit so arrived at by the Assessing Officer was in excess of the profit declared by the assessee, the Assessing Officer added the difference as suppressed profit.

The Assessing Officer also revalued closing stock by adopting FIFO method in both the years under consideration and added the difference in the value of stock.

The learned CIT(A) noticed that the identical adjustments have been made by the Assessing Officer in A.Y. 2009-10 and the Tribunal has deleted the additions made by the Assessing Officer, vide its order dated 19.7.2013 passed in ITA No. 4125/Mum/2012. Accordingly, by following the decision rendered by the Tribunal, the learned CIT(A) deleted both the additions made by the Assessing Officer in both years. Aggrieved, the Revenue has filed these appeals before us.

Learned counsel appearing for the assessee submitted that the decision rendered by the Tribunal in A.Y. 2009-10 was followed by the Coordinate Bench in A.Y. 2010-11 also. He further submitted that the decision rendered by the Tribunal in A.Y. 2009-10 has since been upheld by Hon'ble Bombay High Court vide its order dated 6.3.2017 passed in of 2014.

We have heard learned Departmental Representative and perused the record. We noticed that the Coordinate Bench of the Tribunal has considered identical issues in A.Y. 2009-10 in and has deleted the additions with the following observations :- 5. We have perused the records and considered the rival contentions carefully. The dispute is regarding additions made by AO on account of method of accounting being followed by the assessee and on account of valuation of closing stock. The assessee was in the business of manufacturing and trading of jewellery. The assessee had maintained proper books of accounts and had maintained quantitative details. The assessee had followed average cost method of valuation of closing stock taking average over the opening stock and the purchases. The AO has not accepted the method followed and held that Lifo method is required to be followed. He has therefore taken the entire opening stock as sold and the average cost has been computed only over the purchases. He has also rejected the accounting results and has proceeded to compute the profit in respect of opening stock and purchases separately which have resulted into substantial additions. In our view the approach adopted by the AO is not correct. The assessee has maintained proper books of accounts in which no defects have been pointed out by the AO either in the purchases or in the sales. The accounting results as per the profit/loss and trading account prepared by the assessee could not be rejected unless some defects are pointed out in the books of accounts. The AO has not accepted the method of valuation of closing stock, which was the average cost basis. The assessee has explained the difficulty in following the Fifo or Fifo method as in the sale bills only the net rate and value have been given and it was not possible to correlate various items or inputs which have gone into the manufacturing of jewellery. In such a situation the average cost method has been followed. The average cost method is one of the accepted methods of valuation of as held by the Tribunal in case of ACIT Vs. Jagdish Chand (Supra). Such method has also been held valid in several other cases. Secondly in this case, the AO himself has accepted the average cost method in the earlier years as well as in the subsequent year as claimed by the assessee which has not been controverted before us. It is a settled legal position that the profit has to be computed as per the method of accounting regularly followed b the assessee. Therefore, once the average method has been accepted in the earlier year as well as in subsequent ITA years, the same cannot be rejected in the intervening period. The AO has also not placed on record any material to show that gross profit rate or net profit rate declared by the assessee was lower compared to in the earlier years or in relation to similar comparable cases. In these circumstances we do not see any infirmity in the order of CIT (A) deleting the addition made by AO. The order of CIT (A) is accordingly upheld.

We noticed that the learned CIT(A) has followed the decision of the Coordinate Bench in A.Y. 2009-10 in deciding the impugned issues in favour of the assessee and hence, we do not find any reason to interfere in the order passed by the learned CIT(A).

In the result, both the appeals filed by the Revenue are dismissed. Order has been pronounced in the Court on 25.4.2017.