R D GOLDEN JEWELS PRIVATE LIMITED,SURAT vs. DY. COMMISSIONER OF INCOME TAX, WARD - 2(1)(1), SURAT

The grounds of appeal

1. In view of the facts and circumstances of the case, the Ld. CIT(A), NFAC, New Delhi erred in law and in facts, in retaining the addition of sum of Rs.12,60,672/- to the value of the closing stock and hence Your Appellant PRAYS that the same be deleted. ALTERNATIVELY: The appellant should be allowed to substitute the value of opening stock in the subsequent year by this sum as this is the addition on account of the rate R D Jewel Pvt. Ltd. adopted for valuation and there is no defect/deficiency/shortfall in the quantity account for the year under appeal.”

Brief facts of the issue in dispute are stated as under. The assessee before us is a Private Limited Company and filed its return of income for A.Y.2013-14 on 02.02.2014, declaring total income at Rs.29,47,590/-. The return of income for A.Y. 2013-14 was selected for scrutiny; accordingly notice u/s, 143(2) of the I.T. Act was issued on 02.09.2014 and duly served upon the assessee on 04.09.2014. Subsequently, a notice u/s. 143(2) r.w.s. 129 of the I.T. Act along with questionnaire was issued on 01.07.2015 and duly served upon the assessee. On perusal of the profit and loss account for A.Y.2013-14, it was observed by the assessing officer that the assessee had shown Closing stock of finished goods at Rs.9,24,19,364/-. The assessee was requested to furnish the complete details of the Closing Stock and the valuation thereof. The assessee submitted that the Closing Stock was valued at the average rate per gram instead of the cost price of the fine gold. The assessee- company was asked to furnish the justification of the adoption of average cost instead of the cost price. The assessee failed to furnish any justification, as per the accounting standards, the Closing Stock is to be valued at cost price rather than the average cost adopted by the assessee. Thus, the Closing stock was suppressed by the assessee- company during the year under consideration.

During the assessment proceedings, the assessee furnished its reply in response to the show cause notice and stated that valuation made by the assessee-company was as per accounting standards issued by the ICAI. However, assessing officer rejected the contention of the assessee and held that stock should be valued at lower of cost or net realizable value at the end of financial year i.e. 31.03.2013. As on 31.03.2013, market price of the fine gold was Rs. 2,961/- per gram.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has partly deleted the addition made by assessing officer, observing as follows: “3. The facts of the case are that assessee was engaged in the business of trading in gold ornaments. The return of income was filed on 02.02.2014 declaring a total income at Rs.29,47,590. The case was selected for scrutiny and thereafter order u/s 143(3) was passed making an addition of Rs.50,16,960/- on account of difference in the valuation of closing stock of gold ornaments and another sum of Rs.1,12,330 u/s 40(a)(ia) for not depositing the TDS before filing the return of income. 4. The assessee filed the return showing the value of closing stock at Rs.7,11,63,648, whereas the AO calculated the value at Rs.7,61,80,608. The details are summarised in the table below for easy reference Particulars Assessee AO Difference Closing stock of Gold 25728 25728 0 (24K fine) (gms) Rate(Rs/g) 2766 2961 195 Value of the closing 7,11,63,648 7,61,80,608 50,16,960 stock (Rs) As evident from the table above, assessee calculated the closing stock by reckoning the rate of gold@ Rs.2,766 per gram while the AO adopted the rate @ Rs.2,691 per gram resulting the difference in valuation of Rs.50,16.960. The AO added this difference to the total income declared by the assessee. 5.0 I have perused the assessment order and the submission of the assessee. The assessee considered the following values for arriving at the closing stock as on 31.3.2013 R D Jewel Pvt. Ltd. Particulars per gm of fine gold Rupees Cost of the closing stock - average purchase 2815 rate(from Jan 2013 to March 2013 The average realisation rate of the closing 2736 stock in the next year (from Apr 2013 to Aug 2013) Market Quoted rate as on 31-03-2013 2961 The average market rate in the next year for the 2766 period by which time the closing stock of 2766 25728 gms was sold. 5.2 As per the assessee, the average cost of purchase during the period Jan 2013 to March 2013 was Rs.2,815 per gram. In comparison, average of the market rate in the next year i.e. from 1.4.2013 onwards, by which the closing stock of 25,728 gms was sold was Rs.2,766 per gram. Therefore, he contended, the stock was valued as per the accounting standards at the market rate of Rs.2,766 per gram which was lower than the purchase cost of Rs.2,815 per gram. 5.3 To begin with, there was no dispute on the quantitative details of purchase and sale of gold ornaments or deriving the rates per gram of gold at different periods as above. The only dispute was about which rate to adopt to arrive at the value of closing stock as on 31.3.2013. While the assessee adopted Rs.2766 per gram, the AO adopted the rate of Rs.2,961 per gram. 5.4 Considering the facts of the case, I believe that there is no justification in assessee adopting the rate of gold @Rs.2766 per gram based the average of the market rate in the next year i.e., from 1.4.2013 onwards. The accounting standards clearly specify that valuation should be done by taking lower of the cost price or the market price at the end of the accounting year. Therefore, the assessee, valuing the closing stock of the impugned year based on the sale transaction of the next year is not tenable. At the same time, the action of the AO in adopting the rate of Rs.2,961 for valuing the stock was also not correct. The purchase cost in last quarter of the year ranged from Rs 2400 to more than Rs 3000 per gram and the assessee purchased 25799.150 grams of gold for Rs.7,26,46,122 at an average purchase cost of Rs.2,815 per gram. Since assessee follows FIFO method for valuation, the working of average purchase cost of Rs.2,815 per gram was acceptable. In such circumstances, adopting the market rate of Rs.2,961 per gram which was higher than the average purchase cost of Rs.2,815 per gram was not correct. In view of this, I direct the AO to adopt the rate of Rs.2,815 per gram for valuing the closing stock as on 31.3.2013. In the result, the appeal is partly allowed.”

Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before us.

On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that only dispute is about which rate should be adopted to arrive at the value of closing stock as on 31.3.2013. We note that assessee has adopted Rs.2,766/- per gram to value the closing stock. However, the assessing officer (AO) adopted the rate of Rs.2,961/- per gram to value the closing stock as on 31.3.2013. Therefore, the difference in valuation of closing stock as per assessee and AO comes to Rs.195/- per gram (Rs.2,961 - Rs.2,766). On appeal by assessee, the ld CIT(A) adopted the rate Rs.2,815/- per gram after considering average market price, therefore ld CIT(A) provided part relief to the assessee Rs.146/- per gram (Rs.2,961- Rs.2,815). The assessee is in appeal before us that balance addition of Rs. 49/- per gram (Rs.2,815 - Rs.2,766) for valuation of closing stock should also be deleted.

We note that Ld CIT(A), considering the facts of the assessee`s case, observed that there is no justification in assessee`s adopting the rate of gold @Rs.2,766/- per gram based the average of the market rate in the next year i.e., from 1.4.2013 onwards. The accounting standards clearly specify that valuation should be done by taking lower of the cost price or the market price at the end of the accounting year. Therefore, the assessee, valuing the closing stock of the impugned year based on the sale transaction of the next year is not tenable. The ld CIT(A) also noted that the action of the AO in adopting the rate of Rs.2,961/- for valuing the stock was also not correct. The purchase cost in last quarter of the year ranged from Rs. 2400/- to more than Rs. 3000/- per gram and the assessee purchased 25799.150 grams of gold for Rs.7,26,46,122/- at an average purchase cost of Rs.2,815 per gram. Since assessee follows FIFO method for valuation, the working of average purchase cost of Rs.2,815 per gram was acceptable. In such circumstances, adopting the market rate of Rs.2,961/- per gram which was higher than the average purchase cost of Rs.2,815/- per gram was not correct. In view of this, the ld CIT(A) directed the AO to adopt the rate of Rs.2,815 per gram for valuing the closing stock as on 31.3.2013. We have considered the FIFO method for valuation of closing stock and relevant accounting standard issued by Institute of Chartered Accountants of India (ICAI) and above mentioned findings of ld CIT(A) also and noted that there is no infirmity in the conclusion reached by the ld CIT(A). A sufficient and reasonable relief has already been given by ld CIT(A), therefore assessee does not deserve further relief. The conclusions arrived at by the CIT(A) are, therefore, correct and admit no interference by us. We, approve and confirm the order of the CIT(A) and dismiss both grounds raised by the assessee.