Income Tax Appellate Tribunal (ITAT) Chandigarh in a recent judgment has held that nowhere in the Income Tax, FIFO method for valuation of stock is prescribed. The only requirement is to adopt a generally accepted accounting policy on a consistent basis.

Case Details:
ITA No. 775 and 778/Chd/2012 AY : 2008-09
M/s Khandelia Oil& General Mills (P) Ltd  (Appellants) vs ACIT (Respondent)
Date of Order: 06-11-2015

Brief Facts of the Case:
During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee company was valuing raw material and packing material at cost and the finished goods at estimated cost or net realizable value, whichever was lower . He also found that the assessee was not following any systematic method for valuation of closing stock, which should have been as per the FIFO (First in First out) method. He also noticed that a large number of expenses like, packaging, freight, faxes, etc. have not been loaded to the closing stock. After examining the sample of purchase and sale bills, the AO concluded that there is an average undervaluation of stock @ 11.76% and accordingly, he made an addition of Rs.61,53,868/-.

The assessee contested the assessment order before CIT (Appeals) by making detailed submissions and trying to explain the inappropriateness in the method adopted by the AO to calculate the undervaluation of stock. The contention of the assessee was that the AO had calculated valuation of stock on the basis of totally arbitrary and illogical assumptions whereas the assessee had been adopting the same method consistently over the past many years, which had been all along accepted by the Income Tax Department. The assessee also submitted explanation of each and every component of raw material and finished goods. However, CIT (Appeals) rejected all the contentions of the assessee and held that the assessee had not followed any method for the purposes of valuation of closing stock which should have been valued as per FIFO method. Further, he observed that the assessee had not been able to explain as to how the AO was not right in observing that the assessee had valued the closing stock of mustard seed @ Rs.2472 per qtl. as against Rs.2638 per qtl. as per the purchase bills in the month of March, 2008. Further referring to the detailed working done by the AO CIT (Appeals) conftrmed the addition made.

Contentions of the appellant assessee
Before ITAT, the assessee stated that it had been adopting the same method of valuing the stock consistently in the last many years and there is no law, which provides to value the stock mandatorily as per FIFO method. Controverting the method adopted by AO, it was submitted that the AO in the order had mentioned that the stock should have been be valued as per FIFO method, while he himself taken the average of the rates of last three bills and concluded the undervaluation. Further it was claimed with reference to documents filed that the expenses have been properly loaded in the valuation of closing stock.

Important Excerpts from ITAT Judgment
First of all, the premises upon which the issue was initiated by the Assessing Officer, that the assessee should follow FIFO system of accounting for valuing closing stock itself is not correct . Nowhere in the Income Tax any such method is prescribed. Only requirement is to adopt a generally accepted accounting policy on a consistent basis. The assessee has been following the practice of stock valuation consistently, which has been accepted by the department in earlier years also. We also observe a contradiction in the stand of the Assessing Officer. He himself mandates to follow the FIFO method. However, he himself takes an average of the last few bills for valuing the stock of raw material . Further, he takes the bill of oil dated 6.3.2008 and not of 31.3.2008. We have perused the details filed by the assessee, whereby it is seen that all relevant expenses have been considered for valuing stock. Therefore, the observation of the Assessing Officer that expenses have not been loaded is also not correct. Further, the difference worked out in respect of oil , has been applied to all categories of stock i.e. oil cakes, de-oiled cakes, stock in process etc. This all shows the lack-luster approach, which has been adopted by the Assessing Officer for working out the difference in valuation of stock. On the other hand, the assessee has filed before the lower authorities all details pertaining to basis of valuation of stock of various items. These basis have been explained to us during the course of hearing in great detail. We do not find any irregularity in the same. In view of this, the addition made by the Assessing Officer is hereby deleted.

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