2005 (1) TMI 57 - HC - Income Tax

Valuation of stock - (1) Whether Tribunal was right in holding that ad hoc method of account is one of the recognised method of valuing stocks under the principles of accountancy? (2) Whether Tribunal was right in law in confirming the order of the Commissioner of Income-tax (Appeals) deleting the additions of Rs. 83,192 and Rs. 2,336 made by the IAC(I), Karnal, on account of undervaluation of closing stock of gold and silver, respectively? - The questions referred by the Tribunal are answered in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Recognition of ad hoc method of accounting for valuing stocks.
2. Legality of the Tribunal's confirmation of the deletion of additions made by the Inspecting Assistant Commissioner on account of undervaluation of closing stock of gold and silver.

Issue-wise Detailed Analysis:

1. Recognition of Ad hoc Method of Accounting for Valuing Stocks:
The primary issue was whether the ad hoc method of accounting is a recognized method for valuing stocks under the principles of accountancy. The Tribunal, supported by previous case law, held that the method adopted by the assessee, which was consistently and regularly followed over the years, could not be discarded by the Departmental authorities. The Tribunal emphasized that a taxpayer is free to employ his own method of keeping accounts and valuing stock, either at cost or market price, as long as it is consistently adopted. The Tribunal's decision was based on the principle that the method of accounting regularly employed can only be discarded if the income of the trade cannot be properly deduced therefrom.

2. Legality of the Tribunal's Confirmation of the Deletion of Additions:
The second issue was whether the Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) deleting the additions made by the Inspecting Assistant Commissioner on account of undervaluation of closing stock of gold and silver. The Tribunal found that the method employed by the assessee for valuing its closing stock had been accepted by the Department in previous years without objection. The Tribunal referred to the case of Gopi Chand Kishori Lal, where a similar method was upheld, and noted that the Department had not challenged the Tribunal's decision in that case. The Tribunal concluded that the Revenue had no justification to disturb the method consistently adopted by the assessee.

The Tribunal also referenced the Supreme Court's judgment in United Commercial Bank v. CIT, which held that the method of accounting consistently followed by the taxpayer could not be rejected by the assessing authority in a particular year. The Tribunal further cited the Division Bench of this court in CIT v. Fazilka Co-operative Sugar Mills Ltd., which supported the view that once a method of valuation of closing stock has been accepted by the Department, it cannot be questioned in subsequent years.

The Tribunal dismissed the Revenue's appeal, stating that the Inspecting Assistant Commissioner erred in rejecting the method adopted by the assessee for valuation of its stock and making additions to its income. The Tribunal also highlighted the lack of challenge by the Revenue in previous years and the case of Gopi Chand Kishori Lal, reinforcing the principle of consistency in the method of valuation.

The Tribunal distinguished the judgments of the Supreme Court in Sakthi Trading Co. and Indo Nippon Chemicals Co. Ltd., noting that these cases did not address the issue of rejecting a consistently adopted method of valuation for a particular assessment year.

Conclusion:
The Tribunal's decision was upheld, and the questions referred were answered in favor of the assessee and against the Revenue. The Tribunal recognized the ad hoc method of accounting as valid under the principles of accountancy when consistently applied, and confirmed the deletion of additions made by the Inspecting Assistant Commissioner on account of undervaluation of closing stock.