2010 (2) TMI 1162 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are the deletion of additions made on account of undervaluation of closing stock of polished diamonds and rough diamonds, and the method of valuation of inventory for the purpose of income tax assessment.

Undervaluation of Closing Stock of Polished Diamonds:
The Assessing Officer valued the closing stock of polished diamonds at an average rate of opening stock and purchases made during the year, resulting in an addition to the income. However, the appellant contended that the valuation was done based on realizable value reduced by the approximate gross profit rate, following Accounting Standard-2 for inventory valuation. The CIT(A) found no basis for rejecting the appellant's valuation method, as it was supported by auditors and the AO's approach was deemed unrealistic and illogical. The CIT(A) directed the deletion of the addition to the closing stock of polished diamonds.

Undervaluation of Closing Stock of Rough Diamonds:
The Assessing Officer had averaged out the value of rough diamonds for the entire year, which was challenged by the appellant. The CIT(A) held that the appellant had valued the stock based on the last purchase in February, and therefore, the AO's method of averaging out the value was incorrect. The addition on account of undervaluation of rough diamonds was deleted by the CIT(A).

Valuation Method for Inventory:
The appellant, engaged in the business of manufacturing and exporting diamonds, did not maintain quality-wise stock register. The approved valuer's report did not provide a bifurcation of diamonds by quality, leading the AO to estimate the value using a weighed average price. The appellant valued the stock at market price and then reduced the profit element. The appellant argued that the valuation method was consistent and accepted, citing a previous ITAT decision. The ITAT found the valuation method appropriate, considering the nature of the diamond business and the impracticality of maintaining qualitative and quantitative records for each diamond. The ITAT dismissed the Revenue's appeal, upholding the deletion of additions made by the CIT(A).