2008 (7) TMI 622 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under section 35D(2)(c)(iv) of the Income-tax Act.
2. Addition on account of under-valuation of closing stock of polished diamonds.

Issue-wise Detailed Analysis:

1. Deduction under section 35D(2)(c)(iv) of the Income-tax Act:

The CIT(A) directed the Assessing Officer to allow a deduction of Rs. 3,30,500 under section 35D(2)(c)(iv) of the Income-tax Act. The Assessing Officer had disallowed this amount during the assessment proceedings, consistent with disallowances made in previous years. The Tribunal referenced its earlier decisions in the assessee's own cases (ITA 5671/M/2000 for assessment year 1997-98 and ITA 120/M/2003 for assessment year 1996-97), where similar disallowances were dismissed, upholding the assessee's claim. The Tribunal emphasized the rule of consistency and found no reason to interfere with the CIT(A)'s order. Consequently, Ground 1 of the revenue's appeal was dismissed.

2. Addition on account of under-valuation of closing stock of polished diamonds:

The CIT(A) deleted an addition of Rs. 5,68,89,526 made by the Assessing Officer due to alleged under-valuation of the closing stock of polished diamonds. The assessee valued its closing stock of 11869 carats at Rs. 13,26,80,565 as on 31-3-1998, using the net realizable value method. The Assessing Officer rejected the books of account without referencing section 145 of the Act and applied the FIFO method, valuing the closing stock at Rs. 18,96,70,253, thus making the addition.

The assessee argued that the valuation was done by experienced directors and consistently followed the net realizable value method. The CIT(A) found that the Assessing Officer lacked understanding of the diamond trade and justified the assessee's valuation method. The CIT(A) also noted that the addition had no tax implications due to the assessee's substantial losses.

The Tribunal analyzed the scope of section 145, which allows the Assessing Officer to reject accounts if not satisfied with their correctness or completeness. The Tribunal found that the assessee failed to maintain or furnish documents supporting the valuation of closing stock and relied on subsequent year's sales values, which was against the declared method of valuation.

The Tribunal concluded that the assessee's accounts were not incomplete or incorrect but failed to comply strictly with the declared method of accounting. The Tribunal directed the Assessing Officer to re-examine the valuation of closing stock based on the value of the last sale of the year, rather than the subsequent year's sales values, and not to adopt the FIFO method.

Conclusion:

The appeal of the revenue was allowed for statistical purposes, with instructions for the Assessing Officer to re-evaluate the closing stock valuation as per the Tribunal's directions.