RADHAGOBINDO ROY & CO.,CUTTACK vs ACIT, CIRCLE-2(1), CUTTACK

Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL,

Before: ARUN KHODPIA & ARUN KHODPIA & ARUN KHODPIA

For Appellant: Shri M.K.Sheth

For Respondent: Shri S.C.Mohanty

Pronounced: 18/10

O R D E R Per Bench This is an appeal filed by the assessee against the order of the ld This is an appeal filed by the assessee against the order of the ld This is an appeal filed by the assessee against the order of the ld CIT(A), Cuttack, , Cuttack, dated 31.5.2016 in Appeal No.639/2013 639/2013-14 for the assessment year assessment year 2011-12.

Shri M.K.Sheth, ld Shri M.K.Sheth, ld AR appeared for the assessee and Shri AR appeared for the assessee and Shri S.C.Mohanty, ld Sr DR appeared for the revenue. S.C.Mohanty, ld Sr DR appeared for the revenue.

It was submitted by ld AR that the only issue in assessee’s appeal It was submitted by ld AR that the only issue in assessee’s appeal It was submitted by ld AR that the only issue in assessee’s appeal was against the action of the ld CIT(A) in confirming the addition was against the action of the ld CIT(A) in confirming the addition was against the action of the ld CIT(A) in confirming the addition representing the revaluation of representing the revaluation of closing stock.

It was the submission by the ld AR that the assessee is a dealer in It was the submission by the ld AR that the assessee is a dealer in It was the submission by the ld AR that the assessee is a dealer in gold jwellery. It was submitted by the ld AR that the assessee was gold jwellery. It was submitted by the ld AR that the assessee was gold jwellery. It was submitted by the ld AR that the assessee was P a g e 1 | 10 following Last in First Out (LIFO) method for valuation of its closing stock. It was the submission that the Assessing Officer had, in the course of assessment proceedings, rejected the assessee’s method of valuation of closing stock by applying LIFO method and had adopted the ‘weighted average cost method’ to determine the valuation of closing stock. It was the submission that when the AO applied the ‘weighted average cost method’ to the closing stock, he did not apply the same method to the opening stock for the relevant assessment year. It was also the submission that the closing stock valuation, which was made by the AO, was not taken into consideration as the opening stock for the subsequent assessment year also. It was further submitted by ld AR that the applicability of LIFO method has been accepted by the Co-ordinate Bench of this Tribunal in assessee’s own case in dated 13.8.2019, wherein, in paras 12 to 19, the Co-ordinate Bench has held as follows:

“12. We have heard the rival submissions and perused the material placed on record of the Tribunal as well as the case laws referred to by the parties. The crucial question arising in this appeal for our consideration is whether the sales made during the year were out of the opening stock or the freshly purchased current stock, which led the AO to substitute the weighted average cost method for the assessee’s own method of valuation at cost.

13.

Ld D.R. relied on the decision of co-ordinate Bench of this Tribunal in assessee’s own case for the assessment year 2011-12 (supra), wherein, the Tribunal has confirmed the order of the orders of lower authorities on the ground that the assessee has not produced any material either before the AO as well as the CIT(A) or even before the Tribunal to show that the jewellery contains in the opening stock was still lying in the stock with the assessee as at the P a g e 2 | 10 end of the year as on 31.3.2011 and, therefore, the facts being similar in this year, the judicial discipline should be followed. Another point raised by ld D.R. is that the decision of Hon’ble Madhya Pradesh High Court in the case of J.P.Patel (Bombay) Pvt Ltd (supra) relied on by the CIT(A) supports the case of the revenue.

14.

As regards to the decision of the Tribunal in assessee’s own case (supra), we are of the view that it is well settled legal position that principle of res judicata does not apply to income-tax proceedings. Every year is separate and distinct to each other. We find from the order of the CIT(A) that the ornaments which are freshly added to the stock are the first ones to be sold in the market with the result that at the end of the year the closing stock consists of the oldest items in the assessee’s stock. The assessee has submitted that out of the closing stock of 15015 gms, 13221 gms consists of the opening stock itself and only remainder of 1794 gms of the closing stock is constituted out of the current year’s purchase. The assessee being engaged in converting the gold into ornaments, the LIFO method is normally followed in the manufacturing sector, which applies to the assessee’s case. As has been observed by Hon’ble High Court of Madhya Pradesh in the case of J.P.Patel (Bombay) (P) Ltd., (supra). The relevant observation in para 5 reads as follows: “5. To appreciate the rival submissions raised at the Bar, we have studiedly scrutinised the order passed by the AO as that was the trump card of the Revenue. We have also dissected the order passed by the appellate authority. On a scrutiny of both the orders it is perceivable that the first appellate authority had not accepted the method adopted by the AO as that was not a scientific method. The Tribunal has placed reliance on the earlier orders and ascribing reasons accepted the method adopted by the assessee. In the case of Bindal Jewellers (supra), the Division Bench was in seisin of the question. The Bench while dealing with similar question expressed the view that on the basis of the material brought on record the value may differ from place to place with different person and the value of the closing stock cannot be mathematically calculated. The money value attributed to the stock should be decided and estimated by the concerned authority in a reasonable and judicial manner on the basis of the facts and circumstances of the case available before him. If the aforesaid decision is appreciated it is crystal clear that a reasonable view has to be given acceptance. It is not disputed that the method adopted last in and first out is a recognised method of accountancy. Once a recognised method of accountancy has been taken recourse to and the method has been adopted and the same has been computed on the basis of average, in our considered opinion, no question of law arises for calling for the statement of the case from the Tribunal.”

P a g e 3 | 10

15.

Hence, in the present year, the assessee has furnished with facts and figures of opening stock with the assessee as at the end of the year. As regards to the decision of Hon’ble M.P. High Court in the case of J.P. Patel (Bombay) Pvt Ltd (supra), we find that the Honí’ble High Court held that the money value attributed to the stock should be decided and estimated in the concerned authority in a reasonable and judicial manner on the basis of the facts and circumstances of the case available before him. It is not disputed that the LIFO is a recognised method of accountancy and once a recognised method of accountancy has been taken recourse to and the method has been adopted, the AO cannot have a free hand to adopt his own rules and valuation. In the case at hand, the assessee has been consistently following a system of stock valuation which is similar to the widely accepted LIFO method. LIFO method was the recognised method of accountancy and there was nothing in accountancy or income-tax law which prohibited the assessee from adopting the LIFO method. The option was with the assessee to adopt any recognised method of valuation of stock. In case of bona fide change, it could not be rejected. One must follow the same method for opening and closing stock consistently. Therefore, the decision in the case of J.P. Patel (Bombay) Pvt Ltd (supra) is applicable to the case of the assessee.

16.

We also observe that from the copies of audit reports of present assessment year 2013-14, preceding assessment years 2008- 09 to 2012-13 and subsequent five assessment years 2014-15 to 2018-19, it is clearly discernible that the assessee is following ‘at cost’ method of valuing the closing stock by adopting LIFO method. The copies of trading account of the assessee for immediately preceding assessment year 2012-13 (F.Y. 2011-12) reveals that the assessee is consistently valuing the closing stock by adopting LIFO method and in the immediately preceding assessment year 2012-13, the closing stock of 13221.443 gms including opening stock of 10444.212 gms and remaining balance of new purchase i.e. 277723 has been brought forward to assessment year 2013-14. In the same manner, the closing stock of present assessment year 2013-14, 15015.834 gms includes opening stock of 13221.443 gms and remaining part of purchases of present year after sales of 1794.391 gms totalling to 15015.834 gma has been carried forward to the next financial year 2013-14 pertaining to succeeding assessment year 2014-15. This shows that the assessee is consistently valuing its closing stock ‘at cost’ by adopting LIFO method and the closing stock of one year is brought forward to the next year on the same value/cost. Hence, if at all the revenue authorities are permitted to P a g e 4 | 10 tinker with the amount of closing stock by following weighted average method, then, it would increase the amount of closing stock and the amount of opening stock would also increase in the subsequent assessment year resulting into reduction of profits of the assessee in the next financial year. Thus, this kind of exercise would be a futile exercise having revenue neutral effect, which is not permissible in view of the principles rendered by Hon’ble Supreme Court in the case of Radhasoami Satsang (supra). We also note that in the present case, there are two views before us viz; the first view taken by the Tribunal in the assessee’s own case for the assessment year 2011-12 (supra), based on the reasoning that the assessee has not produced any material to show that the opening stock was still lying in stock with him at the end of the year. Perhaps the assessee did not produce any documentary evidence as per the expectation of the revenue authorities in the case of preceding assessment year 2011-12. However, we cannot ignore the fact that the assessee has successfully demonstrated by way of submitting audit reports of 11 years which include five preceding assessment years and five succeeding assessment years including the present assessment year demonstrating that the assessee is consistently valuing ‘at cost’ method by adopting LIFO method and rule of consistently should be respected in the tax proceedings. At thus juncture, we cannot keep aside the principles rendered by Hon’ble Supreme Court in the case of Vegetable Products Ltd (supra) , where their Lordships have held that if two views are possible then the view which is favourable to the assessee should be adopted. In the present case, the CIT(A) has adopted the view in favour of the assessee by approving LIFO method for valuation of closing stock respecting the fact of consistently in the valuation of closing stock by the assessee and thus, we are unable to see any perversity, ambiguity in his findings to interfere with the same.

17.

The Hon’ble Supreme Court in the judgment in the case of Bannari Amman Sugar Ltd.,(supra) in para 7 has held that valuation of stock whatever be the method should be consistently followed. The method of valuation is generally at cost or the market value, whichever of the two is lower. This proposition also supports the findings arrived at by the CIT(A) keeping in view the LIFO method consistently adopted by the assessee for valuing its closing stock which is being brought forward to next year at the same cost as opening stock. In the order of the Tribunal, dated 14.12.2017, in the case of Khimji Dayabhai Jewellers (supra) as relied by the ld A.R., the Co-ordinate Bench of ITAT, Cuttack in para 5 in the case of Gold Jewellery held thus:

P a g e 5 | 10 “We have heard the rival submissions. On careful consideration of the facts and circumstances of the case, we are inclined to find the contention of the ld counsel of the assessee justified and reasonable to the extent that tinkering of the closing stock which consistently has been valued at lower of cost or market value was in accordance with the guidelines set out by the Institute of Chartered Accountants of India tried to be understood by the Assessing Officer that in view of the assessee having various items of jewellery and also that the price of the gold contet in the jewellery items ever increasing was a handi-work of the assessee to convert its valuation under LIFO was not proper. In other words, the learned CIT(A) confirmed the action of the Assessing Officer holding a view that the inherent profit had been already made by the assessee during the trading in the jwellery item in the course of the previous year relevant to the impugned Assessment Year. We are unable to satisfy ourselves to this proposition and logic considered by the authorities below insofar as the assessee cannot be said to be making profit as an investment in gold but valued its stock when the purchases and sales have been documented indicating the content of gold '.considered by the assessee after including making charges and alloy therein. Therefore, it was a half-hearted computation of the valuation by the Assessing Officer insofar as the learned Counsel of the assessee has already submitted the method of valuation as inscribed above insofar as the gold ornaments have been valued by the assessee at a rate which indicates the gold content to which making charges have been added in order to circumvent the item wise inventory to be valued at a particular value on the date of valuation. The date of valuation is 31st March, therefore, it was nobody's case that the assessee was to adopt LIFO to show the true profit or whether because it is "gold" was to apply FIFO method to hold back a profit if any remaining discreet in the ever increasing price of gold even after assuming but not accepting that the jewellery items remained unsold throughout the year was melted and was to be valued on FIFO method. Therefore, in any case, the Assessing Officer has adopted the value of the opening stock for the subsequent Assessment Year as the value returned by the assessee indicted the authorities below preference not to tax the same in the later year clinches the issue in favour of the assessee that inherent profit ought to have been earned during the year could not be taxed on the last day of the year. In this view of the matter, we find the contention of the ld counsel of the assessee justified and, therefore, we direct deletion of the addition of Rs.2,41,148/- made by the AO and sustained by the ld CIT(A) on this account.” This proposition also supports the findings of the CIT(A)

P a g e 6 | 10

18.

As regards to the decision of the Tribunal in the case of Parbati Das in relied on by ld D.R., we find that the appeal in the case of Parbati Das (supra) was decided exparte and the assessee was not allowed to furnish the reply or evidence in his favour. Moreover, from studiedly and carefully reading of this order, we find that the assessee in that case was dealing in silver articles. Hence, this decision cannot be taken as comparable case in the case at hand. In the instant case, the assessee valued the closing stock by applying weighted average method on the excess stock over the opening stock and the opening stock was valued at the same value treating the same as unsold gold for the reason that metal is metal whether as opening stock, purchase or sale the articles are sold on the price of gold irrespective of the design, or sack and by adding making charges to the cost of gold, the facts being akin to the decision of this Bench of the Tribunal in the case of M/s. Bhogilal & Co. in ITA No.407/CTK/2011 for A.Y. 2009-09 order dated 21.10.2011, which was followed by the CIT(A) in deleting the addition made by the Assessing Officer.

19.

In view of the above discussions, we are of the view that FIFO as well as LIFO methods are recognised methods for valuing closing stock ‘at cost’ and the assessee has the option to adopt either of them subject to the condition that it is adopted consistently. It is only in the year of change that IT authorities have to consider the bona fides of the assessee. Once the change has been accepted and the matter has reached to its finality and the changed method is being consistently followed then the Revenue should not be allowed to disturb the settled position. In the present case, the method is being adopted consistently by the assessee. In view of foregoing discussion and totality of the facts and circumstances of present case, we are of the considered and fortified view that the revenue authorities cannot be allowed to tinker with the method consistently followed by the assessee by valuing closing stock ‘at cost’ by adopting LIFO method. Even if they are allowed to do so, then it would be a revenue neutral and futile exercise and if the jewellery of one year is valued at higher cost then the value of opening stock of subsequent year would increase resulting into decrease in the net profit of the assessee. Undisputedly, the assessee falls in the higher tax slab thus ultimate tax would be revenue neutral. Hence, we affirm the order of the CIT(A) and dismiss the ground of appeal

of the revenue.”

5. In reply, ld Sr DR submitted that the assessee was asked to prove that he was following LIFO method and the assessee was unable to prove P a g e 7 | 10 the same with evidences. It was the submission that it is an admitted fact that the opening stock for the relevant assessment year has not been adjusted by applying weighted average cost method. In respect of opening stock for the subsequent assessment year, it was the submission that it was the assessee to adjust the opening stock for subsequent year and file his return. Ld Sr DR drew our attention to the assessment order page 4 para 4.2 to submit that the Assessing Officer has given valid reasons for rejecting the LIFO method for valuation of closing stock. He further placed reliance on the decision of Hon’ble Supreme Court in the case of C.K. Gangadharan vs CIT (2008) 304 ITR 61 (SC) and also in the case of BSNL, 282 ITR 272 (SC) to submit that the principles of res-judicata will not apply to income tax proceedings. He vehemently supported the order of the AO and ld CIT(A).

6. We have considered the rival submissions. At the outset, in regard to the issue of principles of res-judicata, we observe that the same has already been considered by the Co-ordinate Bench of this Tribunal in assessee’s own case for the assessment year 2013-14(supra). It is an admitted fact that a dealer in gold jewellery when gets old jewellery would melt the same and have a new design made. What is to be kept in mind is that, for the purpose of valuation, there are multiple methods of valuation of closing stock provided under the accounting standard such as LIFO, FIFO, Weighted average cost method and actual purchase less sales cost, etc. Once the assessee has adopted a particular method of accounting and P a g e 8 | 10 consistent approach has been followed by the assessee, then making modification to that method without showing that the method is erroneous or not applicable to the facts of the assessee’s case is absolutely not proper. The fact that in the present case, the AO had done adjustment to only closing stock clearly shows that the intention was only to create a demand on the assessee. All methods of valuation of closing stock contain a percentage of estimation. The fact that the Assessing officer, in the present case, has asked the assessee to prove his valuation of LIFO method is clearly with the knowledge that it would be impossible for the assessee to prove because the assessee being a jeweller would have melted the old jewellery and created new designs. The claim of ld Sr DR that it is for the assessee to adjust the opening stock for the subsequent year and file his return is absolutely frivolous insofar as the assessment year involved is 2011-12 and the assessment has been completed on 5.2.2014 much after the due date of filing of return for the assessment year 2012-13. In any case, the reworking of closing stock by adopting another method other than the consistent method followed by the assessee is nothing but an act in futility insofar as if the stock is adjusted for opening and closing stock for the earlier and subsequent years, the net addition would in fact be revenue neutral. This alongwith the fact that the Co-ordinate Bench of this Tribunal has in assessee’s own case for the assessment year 2013-14 upheld the valuation of closing stock by LIFO method, substantiate our reasons to hold P a g e 9 | 10 that the addition as made by the AO and also confirmed by the ld CIT(A) by applying the weighted average cost method to the closing stock of the assessee is unsustainable and is liable to be deleted and we do so. It may be mentioned here that for the assessment year 2013-14 also, the AO had applied the weighted average cost method and this was reversed by the Co- ordinate bench of this Tribunal by upholding the method of accounting being LIFO method of valuation of closing stock, as consistently followed by the assessee.

In the result, appeal of the assessee is allowed. Order dictated and pronounced in the open court on 18/10/2022.

Sd/- sd/- (Arun Khodpia) (George Mathan) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 18/10/2022 B.K.Parida, SPS (OS) Copy of the Order forwarded to : 1. The Appellant : Radhagobindo Roy & Co., Nimchouri, Cuttack-753002 2. The Respondent: ACIT, Circle-2(1), Cuttack 3. The CIT(A)-, Cuttack 4. Pr.CIT-, Cuttack 5. DR, ITAT, Cuttack 6. Guard file. //True Copy//

RADHAGOBINDO ROY & CO.,CUTTACK vs. ACIT, CIRCLE-2(1), CUTTACK