Valuation of closing stock is revenue neutral – ITAT deleted addition on account of valuation of stock
In a recent judgment, ITAT has held that valuation of closing stock is revenue neutral. Even if it is enhanced for the year under consideration the same will reduce the profit of the assessee by same amount in the following Assessment Year
ABCAUS Case Law Citation:
ABCAUS 3899 (2024) (03) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming addition on account of stock valuation.
The case of the assessee was selected for scrutiny under CASS., During the course of the scrutiny assessment, the assessee did not cooperated and the Assessing Officer (AO) proceeded with best judgment u/s 144 of the Income Tax Act, 1961 (the Act).
The AO from the verification of soft copy of books observed that the valuation of closing stock as per stock summary, extracted from tally data, cost of freight inward and loading & unloading inward has not been added to work out actual landing cost of stock as the same expenses are debited in trading account at the time of purchase.
Hence, the AO concluded that there was suppression in the valuation of closing stock by which
the profitability of the assessee was reduced. Therefore, he made the impugned addition i.e. difference in the value of stock as per books of accounts and the value of stock shown in the audited balance sheet.
Before the Tribunal, the assessee submitted that method of stock valuation as per tally is weighed average cost and as per audit report & notes on accounts lower of cost or realizable value. Accountant could not change method. The assessee filed further details of stock, copies of bills & copies of excise R.G. 23 D which were regularly filed before excise department.
The assessee also filed computation for next 2 years to prove that valuation not done to reduce tax liabilities as the tax slab remains the same. It was contended that there was no corrosponding effect in the valuation of opening stock of the assessee made by the department, change in methodology of only closing stock without making necessary changes in the opening stock is not permissible.
The Tribunal observed that while commenting on the evidences submitted by the assessee before the CIT(A) in remand report, the AO had categorically accepted that the books of assessee are audited and value of stock is shown in the audited balance sheet, the assessee is an excise trader and the details of purchase and sale are properly maintained. The Tribunal further noted that additional evidence showed that the assessee was properly complying the excise provisions and accordingly maintaing the records.
The Tribunal further observed that admitted fact was that the assessee was following a particular method of valuation of stock i.e. lower of cost or realizable value, such valuation method cannot be tinkered with by the revenue authorities without assigning any cogent reason to do so.
The Tribunal opined that even while adopting a different method for valuation of closing stock, the valuation of opening stock needs to be amended accordingly, which apparently was not done in present case, such practice leads to improper and unfair determination of profit of the assessee, thus, such modified valuation of closing stock, disturbing the consistent method followed by the assessee without any reason, is not tenable in the eyes of law.
The Tribunal stated that this is an accepted fact that the valuation of closing stock even if enhanced for the year under consideration the same will reduce the profit of the assessee by same amount in the following AY, therefore, the same is revenue neutral.
The Tribunal held that the addition made on account of difference in value of closing stock was unsustainable, thus, the addition was directed to be deleted.
Accordingly, the ground of appeal was allowed.
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