CIT not justified in disturbing consistent method of closing stock valuation by invoking revisionary jurisdiction

CIT not justified in disturbing consistent method of closing stock valuation by invoking revisionary jurisdiction u/s 263  

ABCAUS Case Law Citation:
ABCAUS 2526 (2018) 09 ITAT

Important Case Laws Cited/relied upon by the parties:
United Commercial Bank vs. CIT (1999) 240ITR 355 (SC),  CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), Chainrup Sampatram (1953) 24 ITR 481 (SC) , ACIT vs. M/s. Jewel India Jewellers, Rupam Jewellers vs. ACIT, CIT vs. J.L. Morrison (India) Ltd. (2014) 366 ITR 593 (Cal), CIT vs. Sunbeam Auto Ltd. (2011) 332ITR 167 (Del), Chroma Business Ltd. vs. DCIT (2004) 82 TTJ 540 (Cal), CIT vs. Vikas Polymers (2012) 341 ITR 537 (Del), Manisha Agri Biotech P. Ltd. vs. CIT (2014) 36 ITR (Trib.), Smt. Juthika Kar vs. ITO, CIT vs. Arvind Jewellers (2003) 259ITR 502 (Guj.), CIT vs. Krishna Capbox (P.) Ltd. (2015) 372 ITR 310 (All), CIT v. Fine Jewellery (India) Ltd. [2015] 372 ITR 303 (Bom)

The assessee has filed appeal against the order of the Pr. Commissioner of Income Tax (PCIT) in assuming jurisdiction u/s 263 of the Income Tax Act, 1961 (the Act) by holding that the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interests of revenue.

As per Tax Audit report in Form 3CD, method of valuation of closing stock employed for gold and silver jewellery was at cost price or net realizable value whichever is lower and there was no deviation from the method of valuation prescribed u/s 145 A of the Act.

From the details of closing stock as submitted by the assessee, the PCIT observed that the valuation of closing stock was made taking cost price as on 1st day of the relevant assessment year instead of taking the average of opening and purchase price.

According to the PCIT, the valuation of closing stock by taking the cost price of opening stock was not an acceptable method for valuation of closing stock, where purchases had been made during the year. Further, there was no material available on record to substantiate the basis on which the rates of closing inventory were arrived.

Thus, PCIT was of the view that while completing the assessment, the AO failed to properly examine the above issue. Hence, proceedings u/s 263 of the Act was initiated and a show cause was issued to the assessee.

The assessee submitted that there was no deviation from the method of valuation of the stock prescribed u/s 145 of the Act.

It was stated that the closing stock was valued at cost price or at net realizable value whichever was lower. It was explained that from last five preceding financial years, the closing stock was almost the same since the designs were very old and could not be sold. The sales made during the financial year was out of the purchases of that relevant year.

The assessee furnished year-wise opening and closing stock value, purchases and sales along with quantitative details. Also the copies of returns of income for last five Assessment years were furnished alongwith tax audit reports with schedules besides tax audit report with schedules.

However the PCIT was not convinced with the submissions of the assessee and set aside the the assessment order to the file of the Assessing Officer on the ground that the AO failed to examine the issue of valuation of closing stock properly and directed him to examine the issue afresh and do the assessment denovo.

The assessee approached the Tribunal and contended that the consistent followed system of valuation of closing stock at cost or net realisable value, whichever is less, cannot be disturbed merely because in the opinion of the PCIT, the weighted average of opening stock and purchase should have been adopted for valuing the closing stock.

It was also contended that it was not a case of lack of enquiry and, therefore, no order u/s 263 of the Act could have been validly passed.

The Tribunal observed that Hon’ble High Court had held that where the records of the assessment including the order sheets to go to show that appropriate enquiry was made and the assessee was heard from time to time, the court has to bear in mind the presumption in law laid down in section 114 clause (e) of the Evidence Act “that judicial and official acts have been regularly performed:”

The Hon’ble High Court opined that therefore the court has to start with the presumption that the assessment order was regularly passed. When the AO had required the assessee to answer-17 questions and to file documents in regard thereto, it was difficult to proceed on the basis that the those questions raised by him did not require application of mind.

Further it was noted that the Tribunal had held that section 145A of the Act mandates that the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be in accordance with the method of accounting regularly employed by the assessee.

The Tribunal opined that the section 145A overrides section 145 of the Act. The act mandates that the valuation of inventory should be made in accordance with the method of accounting regularly employed by the assessee.

The Tribunal had held that the AO, was wrong in disturbing the method of accounting regularly employed by the assesee for valuation of closing stock. The opening stock of the assessee should also be valued in the same manner in which the closing stock of the assessee is valued. By not valuing the opening stock of the assessee by employing weighted average stock method, the revenue authorities, committed a mistake.

The Tribunal observed that in the instant case, it was not in dispute that the assessee was consistently following the same method of valuation of closing stock which was also followed in the year under consideration. The profit was deduced in accordance with the method adopted by the assessee. Therefore, view, the PCIT was not justified in disturbing the consistent method of valuation.

The Tribunal also observed that the Hon’ble Supreme Court had held that It is a misconception to think that any profit “arises out of the valuation of the closing stock” and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the “source” of such profits.

The Tribunal held that the impugned order passed by PCIT could not be sustained. Accordingly, it set aside the same and allowed the ground of appeal of the assessee.

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