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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER Per Shri Balaganesh, AM:
This appeal by revenue is arising out of order of CIT(A)-XXX, Kolkata vide Appeal No. 252/CIT(A)-XXX/R-43/20-11-12 dated 08.02.2013. Assessment was framed by Addl. CIT, Range-43, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2009-10 vide his order dated 27.12.2011.
The only issue to be decided in this appeal is as to whether the Learned CITA is justified in deleting the addition made by the Learned AO towards valuation of closing stock in the sum of Rs. 4,29,28,298/- in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a partnership firm engaged in the business of manufacturing of Gold, Diamond and other precious and semi precious stones. The assessee purchases Gold and stones, manufactures jewellery from such gold, also dismantles jewellery already manufactured and manufactures fresh jewellery out of the same since designs goes out of market within very short time. From the Tax Audit Report it was noted that the Value of Closing Stock has been taken as under: (i) Stock in Trade Rs.125,255,449/- (ii) Packing Materials Rs. 43,610/-
2 Jewell India Jewellers AY 2009-10 It was further noted that, as mentioned by the Tax Auditor, the above value is taken by the Auditor as Valued and Certified by the partner. As per the Tax Audit Report, Raw material was valued at cost or market price whichever is lower while the finished Goods was valued at estimated cost or market price whichever is lower. It was noted that the position of various stock of Raw materials and finished goods are reported in Schedule- IV of the Tax Audit Report. From the above position, it was appreciated that the above Stock in trade includes Closing stock of 13,775.925 of Raw materials covered under "Gold" which is reported to have been valued at Cost or Market price whichever is lower and Finished Closing stock of 97800.325 as covered under 'Finished Products of Gold which is also reported to have been valued at estimated cost or market price whichever is lower and the Closing Stock of Pearls of Gms. 5309.134, Closing stock of Diamonds of CT. 4775.490, Closing Stock of Colour Stone of Gms. 7267.039, closing Stock of Semi precious stone of Ct. 17549.760 and Closing Stock of Precious Stone of Ct. 18,804.200 covered under "Other Raw Material which was also reported to have been valued at Cost or Market price whichever is lower as per the version of the Tax Audit report.
3.1. The assessee filed the details of valuation of closing stock as on 31.3.2009 as under :- Value of Closing Stock of Gold Total value of stone Rs. 6,25,31,074 Add: Gold valuation Rs. 6,27,24,374 Total Value of Stock Rs. 12,52,55,448 Stock of Packing Materials Rs. 43,610 Total Gold Stock in terms of Pure Gold 96439.320 grams Less: Gold Deposit 22686.660 grams Net Gold Stock in terms of Pure Gold 73752.660 grams Weight Rate Amount (Rs) Value of Closing Stock of Gold As on 31.3.2007 69099.880 686.850 4,74,60,914 Value of Balance Stock of Gold Total Value of Gold 73752.660 5,21,39,703.04 Add: Value Addition 1,05,84,671.50 Total Value including Value Addition 6,27,24,374.54 Total Value Rounded Off to 6,27,24,374.00 The Learned AO worked out the average purchase price of Gold at Rs. 1288.41986 per gram.
3.2. The Learned AO observed that the assessed had produced Register GS -11 and GS -12 in respect of the movement of Gold for verification. During the course of hearing, the assessee was enquired about the various entries made therein. The assessee explained as below:- Register Received Issue GS-11-for Raw Materials of gold Direct Purchase: Issue to Gold Smith Received from Customer: Sale of Gold (i) As purchased (ii) For Remaking Received Issue GS-012-For Finished Gold Direct Purchase Issue for Sale Received from Karigarh Issue for Halmarking The Learned AO observed that on perusal of the above register, it appeared that the particulars mentioned against a receipt or issue is such as it is not sufficient to satisfy whether a particular item was ultimately sold out or remained in the closing stock at the end of the year. In other words, the Learned AO observed that there was no item wise break up maintained in the said register. Accordingly, he raised a query as to how it can be explained that the Stock of Gold is representing the Gold purchased in FY 2006-07 or FY 2007-08 when no other register is maintained in respect of movement of stock and no sufficient item wise details are available or maintained so as to trace it in sale or in stock.
4 Jewell India Jewellers AY 2009-10 3.3. The Learned AO observed that in the facts and circumstances of the case, the appropriate method for valuation of Gold is Last in First Out (LIFO) method. The assessee had valued its closing stock following LIFO method only. The Learned AO valued the closing stock of Gold of 73752.660 grams at the average purchase rate of Rs. 1288.41986 per gram and arrived at the closing stock of Gold at Rs. 10,56,09,063/- after adding the making charges of Rs. 1,05,84,671/-. The Learned AO accordingly made an addition of Rs. 4,29,28,298/- towards valuation of closing stock as on 31.3.2009 in the assessment.
Before the Learned CITA, the assessee explained that the addition was made by the Learned AO on account of revaluation of closing stock by discarding the LIFO method regularly followed by the assessee and by adopting average cost arrived at by taking the average cost of purchase for the Gold purchased during the year. The assessee argued that by adopting LIFO method , it had disclosed closing stock of Rs. 12,52,99,059/- which included closing stock of Rs. 43,610/- of packing material , Rs. 5,21,39,703/- of Gold and Rs. 6,25,31,074/- on account of Stone. The Learned AO had not disputed the closing stock value of the stone and packing materials though he had doubly added the value of packing materials while determining the closing stock. The Learned AO had adopted the value of Gold at Rs. 9,50,24,391/- as against the value of Rs. 5,21,39,703/- taken by the assessee. It was argued that the Learned AO had not disputed the value of addition of the making charges embedded in the ornaments which was Rs. 1,05,84,671/-. It was argued that the assessee has been consistently following LIFO method for valuation of closing stock since the inception of the business and such system was consistently followed and accepted in all earlier years including in the scrutiny assessment for the earlier years including in the year in which survey was conducted. It was argued further that the Learned AO while examining the books of accounts called for quantitative details which were filed by the assessee. The assessee never stated that it had followed First in First Out (FIFO) method for valuation of closing stock. In fact the assessee has always followed the LIFO method right from the beginning and the said fact was also clarified by the assessee to the Learned AO which was apparent from the order sheet entry. It was further argued that the Learned AO was 5 Jewell India Jewellers AY 2009-10 satisfied about the maintenance of books of accounts , stock details, purchase and sales of the assessee and no defect whatsoever was found either in maintenance of stock register or in the quantity of gold. The Learned AO had noted that the total quantity purchased by the assessee during the entire asst year was 50577 grams and that the closing stock was 73752 grams. This proved the fact that the closing stock included the opening stock of gold held by the assessee. The Learned AO however finally adopted his own method of valuation taking average cost price method for whole of the closing stock, rejecting the well recognized LIFO method consistently followed by the assessee and accepted by the department. It was also submitted that LIFO method is a recognized method for the purpose of valuation of closing stock. The assessee also placed reliance on the co-ordinate bench decision of Hyderabad Tribunal in the case of Ramesh Chandra Jewellers vs ITO in ITA No. 65/Hyd/06, wherein identical issue was considered by the tribunal. The Tribunal in this decision held that LIFO method consistently followed by the assessee was based on accepted principle of accounting and no defect was pointed out by the department in the books of accounts, the LIFO system should have been accepted. The assessee also placed reliance on the decision of the Hon’ble Madhyapradesh High Court in the case of CIT vs J.P.Patel reported in 263 ITR 421 (MP), wherein it was held that LIFO method is well recognized method and once a recognized method has been taken recourse to and method has been adopted, there is no reason to discard the same. It was argued that the gold available from earlier years as per LIFO method was continuing from year to year and has duly been accepted in all the earlier years. Reliance was also placed on the decision of Cuttack Tribunal in the case of Dwarka Jewellers vs ITO in ITA No. 03/CTK/2009 dated 23.7.2010 and Chandigarh Tribunal in the case of DCIT vs Vipin Aggarwal in ITA No. 450/Chd/2010 dated 23.7.2010 in support of its arguments.
The Learned CITA held that the Learned AO after detailed analysis had held that the appropriate method of value of gold is LIFO method which has been specifically mentioned by him in para 19 of the assessment order. The Learned AO had confused himself by first accepting the LIFO method but valuing the stock at purchase price of the current year worked out by him at Rs. 1288.41986 per gram which is the average
6 Jewell India Jewellers AY 2009-10 rate of purchase taken by him in respect of the purchases made during the current year of 50324.670 grams for Rs. 6,48,39,304.12. Therefore he held that the Learned AO had totally contradicted himself in the assessment order by taking the value of closing stock at the current rate, whereas he had earlier held that the appropriate method for valuation of gold would be LIFO method. The Learned CITA on going through the workings of valuation of closing stock of gold submitted by the assessee for the earlier years and for the current year observed that the assessee had been consistently following the LIFO method which is acceptable and recognized method of accounting and held that the same should be followed. He further held that the Learned AO had not given proper basis on which he had rejected the method of valuation followed by the assessee. He further held that no material evidence was brought on record to prove that the valuation method adopted by the assessee was incorrect or not justified. Moreover, no discrepancy was found in the books of accounts or the stock register maintained by the assessee. Accordingly he deleted the addition made by the Learned AO in the sum of Rs. 4,29,28,298/- towards revaluation of closing stock. Aggrieved, the revenue is in appeal before us on the following grounds:- “
1. For that the Ld. CIT(A) erred in deleting the addition of Rs. 4,29,28,298/- in the valuation of Closing Stock by changing the method regularly followed by the assessee being last in first out to first in first out.
2. For that the Ld. CIT(A) erred in deleting the addition in the valuation of Closing Stock when the assessee did not produce sufficient Register or sufficient records to ascertain whether a particular item was sold out or remained as Closing Stock at the end of the year. There was no such register was maintained which represents the gold purchase in the F.Yr. 2006-07 & 2007-08. In absence of proper and complete record the A.O. was justified in making assessment on the basis of available material and making addition to the valuation of Closing Stock as per views of Amba Rice Mills Vs CIT (2010) 325 ITR 33 (PUNJ. & HAR).
3. For that the Ld. CIT(A) erred in deleting the addition in the valuation of Closing Stock when the assessee valued the Closing Stock of F.Yr. 2008-09 in the value of F.Yr. 2006- 07 & 2007-08.”
The Learned DR reiterated the facts stated by the Learned AO in the assessment order. In response to this, the Learned AR reiterated the submissions made before the lower authorities and the findings given by the Learned CITA. In addition he placed reliance on the decision of the Cochin Tribunal in the case of ITO vs Sree Padmanabha
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 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 vs 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 vs 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 8 Jewell India Jewellers AY 2009-10 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 stock of FY 2004-05 25234.070 621.00 15670357 Value of Balance stock 31645.550 650.28 20578468 -------------- --------------- 56879.620 36248825 ------------- --------------- For 31.3.2007 Grams Rate Value Value of closing stock of FY 2005-06 56879.620 637.29 36248825 Value of Balance stock 12220.260 917.50 11212089 -------------- --------------- 69099.880 47460914 ------------- --------------- For 31.3.2008 Grams Rate Value Value of closing stock of FY 2006-07 69099.880 686.85 47460914 Value of Balance stock 6389.830 1005.59 6425549.15 -------------- --------------- 75489.710 53886463.15 ------------- --------------- For 31.3.2009 Grams Rate Value Value of closing stock of FY 2006-07 69099.880 686.85 47460914 Value of Balance stock rate of FY 07-08 4652.780 1005.59 4678789.04 -------------- --------------- 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 vs 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 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 Vs. 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 vs 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 10 Jewell India Jewellers AY 2009-10 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 vs 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 vs Sant Ram Mangat Ram reported in (2005) 275 ITR 312 (P&H) CIT vs Ema India Ltd reported in (2006) 296 ITR 510 (All) CIT vs Jagatjit Industries Ltd reported in (2011) 339 ITR 382 (Del) CIT vs 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.
In the result, the appeal of the revenue is dismissed.
Order is pronounced in the open court on 01.06.2016