2003 (6) TMI 441 - AT - Income Tax

Assessment - Additions to income - enhancement of value of the closing stock - value of the closing stock - HELD THAT - It is clear from above that the assessee could not sell even the entire stock of gold ornaments lying with the assessee in the opening stock. A part of it was carried to the closing stock of the year under consideration. There is no justification for applying purchase rate to above stock as the assessee could not be said to have earned any profit from the above carry forward stock. But if average rate of purchases of this year is applied even to above stock then some addition automatically follows in the income of the assessee. It is not permissible and is contrary to the decision of Hon ble Supreme Court in the case of Chainrup Sampatram v. CIT 1953 (10) TMI 2 - SUPREME COURT . The average cost of opening and purchases is also an accepted method of valuation at cost approved by the accounting standards issued by the Institute of Chartered Accountants. In the present case it is further not contended by the revenue that similar method of accounting was following by the assessee in earlier years. For all the above reasons we are of the view that the method of valuation adopted by the assessee was correct and addition made on account of enhancement of value of closing stock is not justified. The learned Commissioner of Income-tax (Appeals) rightly deleted the addition. His action is hereby confirmed. In the result revenue s appeal is dismissed.

Issues involved: Appeal against deletion of addition on account of enhancement of value of closing stock for assessment year 1994-95.

Summary:
The appeal by the revenue was against the deletion of an addition made on account of enhancement of the value of the closing stock for the assessment year 1994-95. The Assessing Officer applied the average rate of purchases to value the closing stock, resulting in an addition of Rs. 2,68,357. The Commissioner of Income-tax (Appeals) deleted this addition, stating that the method of valuation followed by the assessee, based on the average of the rates of opening stock and purchases, was consistent and in line with judicial pronouncements. The Tribunal upheld the decision of the Commissioner, dismissing the revenue's appeal.

The Assessing Officer's action was based on the decision of the Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44, which justified the use of average purchase rates for valuing closing stock. However, the assessee argued that the "weighted average cost" method was recognized by accounting standards issued by the Institute of Chartered Accountants of India, providing the fairest approximation to cost incurred in bringing items to their present location and condition.

Upon careful consideration of the submissions, the Tribunal noted that the main item in the closing stock was plain ornaments of gold, and the assessee had not sold the entire stock of gold ornaments from the opening stock. Applying the purchase rate to this stock would result in an unjustified addition to the income of the assessee, contrary to established principles. The Tribunal found that the method of valuation adopted by the assessee, based on the average cost of opening and purchases, was correct and in accordance with accounting standards. As the revenue did not argue that a similar method was followed in earlier years, the Tribunal confirmed the deletion of the addition by the Commissioner of Income-tax (Appeals).

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the decision to delete the addition on account of the enhancement of the value of the closing stock for the assessment year 1994-95.

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