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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”,
Before: SHRI R.C. SHARMA & SHRI AMARJEET SINGH
PER R.C. SHARMA, ACCOUNTANT MEMBER :
These are the appeals filed by the Revenue against the order of Ld. CIT(A) for the AY 2008-09 and 2009-2010, in the matter of order passed under section 143(3) of the Income Tax Act.
In both the years Revenue is agrieved for deleting the addition made by the AO on account of under valuation of closing stock.
Rival contentions have been heard and record perused.
Facts in brief are that the assessee is engaged in the business of trading and supply of iron and steel and deals with variety of items. In the AY 2008-09, the Assessing Officer analyzed the purchases of iron & steel products in the month of February & March furnished by the assessee which worked out the average cost of purchases at Rs. 39,587/- per MT. The Assessing Officer was of the view that as per FIFO method of valuation, the entire closing stock available as on 31/03/2008 should be out of the purchases made in the month of March only. A.O. found that substantial purchases were made in the month of March by the assessee which was lying as closing stock, the value of the same cannot be less than the purchase price and accordingly he worked out under valuation of closing stock by taking the average cost of purchase at Rs. 40,768/- per MT. (based on the purchase for March 2008) Applying this rate on the closing stock, the Assessing Officer arrived at the value of Rs. 11,35,65,175/-. Further, the Assessing Officer has added proportionate amount of the direct cost attributable such as transport charges and Octroi charges to the value of the closing stock and finally arrived at the value of Rs. 40803.17 per MT and worked out Rs. 9,53,622/- which was also added to the value of the closing stock. Thus, the Assessing Officer has concluded that the appellant has suppressed Rs. 42,41,946/- while valuing the closing stock.
By the impugned order Ld. CIT(A) deleted the addition after observing as under:
I have gone through the submissions of the AR, contents of the impugned assessment order, statement of facts alongwith the material on record. I have also perused the paper book. The average purchase cost to the assessee based on the purchases made in the month of February 2008 and March, 2008 comes to Rs.39,587/- per metric ton and the appellant has valued the closing stock at Rs.39,587/-MT on 2785.645 MT. The average rate of purchase in the month of March 2008 worked out by the AO was Rs40,787/- .(Rs. 17,80,77,263/4368.056 MT. 40,787) This clearly shows that the average rate of purchase is much more than the value admitted in the closing stock which has prompted the Assessing Officer to make the addition. It is relevant to point here the submission of the appellant that the closing stock did not comprise only of the purchases made in the month of March and it comprises of various items steel purchased in the whole year. In support of this contention details such as item, date of purchase and bill no, date and quantity sold ,the balance quantity left and it's value for the purpose of closing stock were furnished which is available in pages 1 to 8 of the paper book.
7. It is the claim of the appellant that most of the purchases made in the month of March was sold in that month itself. The appellant has given the details of the same in pages 1 to 15 of the paper book. Details such as date, name of the supplier, invoice no, quantity purchased, and details for the sales date, invoice no, quantity sold and balance remaining after the sales are available in these pages. The perusal of the details clearly shows that most of the purchases made in March were sold in March itself. Following are few examples :-
Purchases Sales Date Purchase Bill No. Qty Date Sales Bill No. Qty Bal. party party Qty 1/03/08 Prabhat 690 3.850 1/03/08 Navdeep 11627 3.850 0 Steel Trds. (M- Traders 3) Pvt. Ltd. 1/03/08 Steel 25764 7.290 3/3/08 Rajesh 4205 3.020 0 Authority Steel (I) P. of India Ltd. Ltd. 3/3/08 Rajdeep 4202 4.200 0 Steels 1/3/08 Monnet 473 20.290 5/3/08 Paragon 4240 9.485 0 Ispat & Yarn Mfg. Energy Co. Pvt. Ltd. 1/3/08 Monnet 474 6.200 5/3/08 Vijay 4245 5.780 0 Ispat & Mehta & Energy Co (M-10) Ltd.
5/3/08 Balaji 4246 6.880 0 Mktg. Agency 5/3/08 Raj 4248 4.210 0 Darshan Enterprise 26.49 26.355 0.135 25/3/08 Prabhat 744 8.220 25/3/08 Shiv AUM 11687 8.220 0 Steel Steels Pvt. Traders Ltd. P. Ltd. 25/3/08 Tirupti 499 16.300 25/3/08 Tilaknagar 11687A 16.300 0 Steel Indus. Traders (PUR) 25/3/08 Rashtriya 2007015410 0.650 25/3/08 M.K. Steel 11683 22.140 0 Ispat Corpn Nigam Ltd.(M) 25/3/08 Rashtriya 2007015411 21.490 Ispat Nigam Ltd.
The above clearly proves that the AO has simply presumed that the purchases made in the month of march only can remain as closing stock with out analyzing the factual position discussed above.
8 As far as the purchase of steel is concerned, the appellant has been consistently following the method of weighted average cost right from inception of the business. Further, as pointed out by the A.R. the A.O. has considered the purchases made only in the last month of the Financial year to arrive at the average cost.The relevant portion of the submission in this regard is reproduced as under:
As explained in the facts of the case, the appellant deals in variety of items of steel and hence the difficulty arises in maintaining the separate stock records for all the items and to value the closing stock by taking each item of stock separately and hence the stock was valued on the prices based on the average purchase price since inception and the same basis was accepted. There are certain stocks which are purchased against confirmed sales and delivered directly or within 2/3 days and such sales and purchases can be identified bill wise. Certain items we purchased in bulk but sold on regular basis. Hence, while valuing closing stock we have to consider the average period of holding ignoring the goods purchased and sold identifiable. And for this reason, we had valued the closing stock by taking average purchase price of last two months.
8.1 The appellant has also furnished the copy of the Form 3CD report to show that there is no adverse findings in respect of the value of closing stock by the auditor. It is also a fact that for over the last several years, the department has been accepting the closing stock valuation adopted by the appellant consistently. In support of this, the assessment order passed u/s 143(3) for the AYs. 2005-06 to 2007-08 were furnished. The perusal of which indicates that department has accepted the value adopted by the appellant for closing stock for AY. 2005-06 & 2006-07. During the AY. 2007-08, the Assessing Officer attempted to add proportionate amount of direct costs incurred such as transport charges and Octroi charges to the valuation of closing stock. Otherwise, the average cost of purchases adopted by the appellant to arrive at the value of the closing stock has not been disturbed by the Assessing Officer. The rule of consistency cannot be ignored by the Assessing Officer and hence the closing stock valuation adopted by Assessing Officer is not justified.
9 The general rule of FIFO method of valuation is not applicable to the steel items. As far as the steel and related items are concerned, whatever stock received earlier goes to the bottom of the stock and the recent ones comes to the upper layer of the stock and hence, last of the stock is disposed off first. and it is not the first of the stock which is received. This can be proved by the facts discussed in para -7 and what is evident is that most of the stocks purchased in March was sold in March itself and the conclusion drawn by the Assessing Officer is factually incorrect.
10 Moreover, Accounting Standard -2 recognizes the weighted average cost method for valuation of inventory. Para 16 of the AS - 2 is reproduced below:
"The cost of inventory to the other than those dealt with within para 14 should be assigned by using the first and first out are weighted average cost of the formula. The formula used reflect the fairness but possible proximisation to the cost incurred in bringing the items of inventory to their present location and condition:
AS-2 recognizes both FIFO as well as weighted average cost. The appellant has followed the later and there is nothing wrong in following the weighted average cost method.
Section 145A clearly stipulates that the valuation of the inventory should be in accordance with the method of accounting regularly employed by the appellant. When the appellant has been following consistently one particular method of valuation of inventory, the AO. cannot think of altering the same unless he is satisfied with the correctness or completeness of the accounts of the appellant.
12 In the case Chainrup Sampatram v. CIT [1953] reported in 24 ITR 481, the Hon'ble Supreme Court had laid down firstly, that profits do not arise out of valuation of closing stock. Secondly, that valuation of unsold stock at the close of the accounting period is a necessary part of the process of determining the trading results and it cannot be regarded as source of such profits. The addition made to the closing stock cannot be regarded as a source of profit which is nothing but a principle of balancing. The true purpose of crediting the value of unsold stock is to balance the cost entered on the other side of the account at the time of their purchase so that the cancelling out of entries relating to the same stock from both the sides of the accounts would leave only the transaction on which there has been actual sales to show the profit or loss actually realized. The revenue impact on such addition result in a revenue neutral situation. Whatever addition once made to the closing stock it is going to the opening stock in next year. In fact, there will not be any leakage of revenue. The above proposition has been laid down in the case of CIT vs. Indo Nippon Chemical Company Ltd. 245 ITR 384 (Born.).
13 The valuation of stock on the basis of average prices has been held as valid in the case of CIT vs. Fazilka Co.operative Sugar Mills Ltd. Reported in 255 ITR 411 ( P& H). The head note is as under:
"The assessee filed its return of income for the assessment year 1991-92. It declared a loss of Rs. 7,52,53,863. On December 7, 1992, the Assessing Officer completed the assessment and made an addition of Rs. 10,63,977 on account of revaluation of the closing stock. This addition was made on the hypothesis that the valuation of the closing stock had to be done on the basis of the average price for the month of March, 1991. Thus, the final figure of loss was fixed at Rs. 7,37,64,371/-. This addition was affirmed by the Commissioner of Income-tax (Appeals). The Tribunal, however held that there was no justification in the addition on account of valuation of closing stock. On further appeal to the High Court.
Held: dismissing the appeal, that a perusal of the order passed by the Tribunal showed that the respondent-assessee had followed a consistent practice of fixing the value of the stock on the basis of the average price for the assessment year. This practice had been accepted by the Revenue. It had been further found that despite having made an addition of more than Rs. 7,00,000 in the value of the stock in hand no corresponding benefit was given by the Revenue to the assessee for the assessment year 1992-93. This factual position had not been disputed. In fact, the addition to the value of the stock in hand had not resulted in any loss to the Revenue. The value which had been shown by the assessee has been carried forward to the next year. Thus, there was no loss of tax so far as the Revenue is concerned. In any case, the ultimate position was that the assessee had suffered loss. It had not been shown that the valuation shown by the assessee was less than the cost price. That being so, there was no infirmity in the view taken by the Tribunal.
No substantial question of law arose from its order."
14 The Assessing Officer had neither made any comment on the stock statement submitted by the appellant nor pointed out any defect in the audited books of accounts of the appellant and, therefore, the Assessing Officer has considered the stock of finished goods and raw-materials as has under valued based on some presumptions, surmises & conjunctures and without any evidence on record. This was held in the case of ACIT vs. Maitan Smelters reported in 307 ITR (AT) 225 (CaL).
The valuation of inventory as per average cost method has also been approved by the Himachal Pradesh High Court in the case of CIT vs. H.P. State Civil Supplies Corporation Ltd reported in 309 ITR 102 (HP) It was held in the case of CIT vs. Dewan Steel Ltd. reported in 311 ITR 161 that average cost method of valuation of closing stock consistently followed by the aooellant and accepted by the revenue in the earlier years cannot be rejected and the average cost method was in accordance with the well accepted accounting principles.
All the above decisions indicates that weighted average method of cost of valuation of inventory has been approved and it has been recognized by Accounting Standard 2. In the present case, the appellant has followed the well recognized method and the Assessing Officer cannot find fault with the same unless the Assessing Officer is not satisfied with the correctness and completeness of the method adopted by the appellant. The Assessing Officer has not made any adverse comments on the Audit Report also in this regard. Further, consistently the department has been accepting the above method of valuation and hence, it is not open to the Assessing Officer to suddenly change the method which has been regularly followed by the appellant. The AO has not given any reason as to why the consistent method followed towards valuation of the closing stock was disregarded by the Assessing Officer.
In this regard, I rely on the decision of Bombay High Court in the case of CIT v. Citibank N. A. reported in [1994] 208 ITR 930 (Born). The head note is as under:-
Held, dismissing the appeals, (i) that the system of accounting employed by the assessee was in consonance with the accounting standard prescribed in India and also outside India. The contract price was fixed under the contract and if, during the construction period, the cost incurred exceeded the contract price, loss accrued to the assessee to the extent of the excess expenditure. Such loss was not contingent because such escalation clause was not in every contract and wherever there was an escalation clause, the provision was made of such escalation price on estimate basis. Therefore, the system of accounting employed by the assessee consistently for decades could not be rejected."
I further rely on the decision of Jurisdictional ITAT in the case of Deputy Commissioner of Income-tax v. OTIS Elevator Co. (I) Ltd reported in 284 ITR (AT) 173(ITAT, MUMBAI). The Head note is as under:-
Method of accounting--Entirely within assessee's discretion--Power of Assessing Officer to invoke first proviso to section 145 only where system does not show true picture of profits and gains-- Income-tax Act, 1961, s. 145.
Method of accounting-Contractor--Contract completion method— Assessee accumulating expenditure year after year on each contract and crediting contract price in year in which contract completed and showing resultant profit in that year-- Expenditure exceeding contracted price-Shown as loss and only contracted price carried forward to next year -Loss in particular contract shown in more than one year-Provision for estimating escalation price in contract-Judicially recognized method - -Income-tax Act, 1961, s.
It is the duty of the Assessing Officer to compute the income of the assessee in accordance with the method of accounting regularly employed by the assessee. The only exception to the legal position is provided in the first proviso to section 145 of the Income-tax Act, 1961, i e., where true profits cannot be deduced from the method of accounting employed by the assessee. If such method of accounting depicts a distorted picture of the profits of business carried on by the assessee, then the Assessing Officer can invoke the first proviso to section 145 even though such method is being employed consistently. But the powers of the Assessing Officer under the first proviso are not arbitrary and must be exercised in a judicious manner. The Supreme court decision in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) followed.
The recent decision of Delhi High Court in the case of Commissioner of Income-tax v. Jagatjit Industries Ltd. reported in 339 ITR 382 is worth mentioning here. The findings of Hon.High Court was that when the Department has accepted a particular method of accounting system followed by the assessee consistently, then the same cannot be rejected without valid reason. The Assessing Officer has to follow the doctrine of consistency. The head note is as under:-
Method of accounting--Rule of consistency--Mercantile system of accounting-- Prior period expenses debited in following year-- Method consistently followed by assessee and accepted by Department--No evidence of distortion of profits—Method could not be rejected--Income-tax Act, 1961, s. 145.
If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, the doctrine of consistency would come into play. The method of accounting cannot be rejected.
The assessee was following the mercantile system of accounting. According to past business practice, the expenditure spilled over to the next year and was debited in the second year and was allowed by the Assessing Officer. The Assessing Officer for the assessment year in question disallowed RS.13,46,299 claimed as expenditure of prior period allowable in the current year. The Commissioner (Appeals) deleted the disallowance and this was upheld by the Tribunal. On appeal to the High Court :-
Held, dismissing the appeal, that the assessee had claimed prior period expenses on the ground that the vouchers for such expenses from the employees/branch employees were received after March 31st of the financial year. It had branch offices throughout the country. It debited the expenditure spill over the subsequent years and the Assessing Officer had been allowing it in the past. The accounting practice had been consistently followed by it and accepted by the Revenue. Nothing had been brought on record to show that there had been distortion of profits or that the books of account did not reflect the correct picture. In the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of the previous years. /I 17. To conclude the Assessing Officer has failed appreciate the actual facts brought out by me in paras 7 to 9 before making this addition and at the same time disregarded the Rule of consistency.
In view of the above discussion, the addition made Rs. 42,41,9461- by theAssessing Officer is hereby deleted. This ground of appeal is allowed.
6. We have considered the rival contention and carefully gone through the orders of the authorities below and find that after giving detailed findings CIT(A) reached to the conclusion that assessee has been consistently following the method of weighted average cost for valuation of closing stock and nothing has been brought on record to show that there has been distortion of profits or that the books of account did not reflect the correct picture. In these circumstances the CIT(A) concluded that there was no warrant or justification to depart from the previous accounting system which was accepted by the Department in respect of earlier years. The detailed findings so recorded by the CIT(A) has not been controverted by the Learned DR by bringing any positive material on record.
Accordingly we do not find any reason to interfere in the order of CIT(A) resulting into deletion of addition made on account of valuation of closing stock.
In the result appeal of the Revenue is dismissed.
Facts and circumstances in the AY 2009-10 are same. The Ld. CIT(A) after recording detailed findings in para 3.16 to 4.2, has deleted the addition which has not been controverted by the department. Accordingly following the reasoning given herein above in the AY 2008-09, we do not find any reason to interfere in the order of CIT(A).
In the result both the appeals of Revenue are dismissed.
Order pronounced in the open court on 19/10/2016.