2010 (7) TMI 1069 - AT - Income Tax

Valuation of closing stock of gold jewellery - LIFO or FIFO method - accounting standard - Present appeal is with regard to the valuation of closing stock. the AO had changed the value of closing stock but not that of opening stock. In view of the declaration of additional income by the assessee during survey. it was held that further addition in the year would result in double addition. Accordingly, the AO was directed to delete the addition of ₹ 52,23,753/-. Revenue is in appeal against the said order. HELD THAT - we find support from the ratio laid down in Chainrup Sampat Ram Vs. CIT 1953 (10) TMI 2 - SUPREME COURT wherein it has been held that the value of stock cannot be appreciated higher than the cost because the closing stock is not the source of profit for the assessee. In the facts and circumstances of the present case, we are in conformity with the order of CIT(A) and uphold the same. There is no merit in adopting the weighted average cost method for valuation of inventory of stock in the circumstances of the case. We confirm the deletion of addition made by the AO totaling ₹ 52,23,753/-. The ground of appeal raised by the Revenue is thus dismissed

Summary

Issues:
Valuation of closing stock using LIFO method not specified by accounting standard.

Analysis:
The appeal dealt with the valuation of closing stock by the Revenue against the order of CIT(A) for the assessment year 2007-08 under section 143(3) of the I.T. Act. The Revenue challenged the deletion of an addition of Rs. 52,23,753 made by the Assessing Officer due to the valuation method used by the assessee for closing stock. The Assessing Officer revalued the closing stock using a weighted average cost method, which was not accepted by the assessee who followed the LIFO method. The CIT(A) upheld the assessee's method, stating that the consistent accounting practice of the assessee could not be disturbed. The CIT(A) also noted that any change in valuation would require a corresponding adjustment in the opening stock value, which was not done by the Assessing Officer. The CIT(A) highlighted that the closing stock valuation should not result in double taxation, especially considering the additional income declared by the assessee during a survey. The Tribunal agreed with the CIT(A) and dismissed the Revenue's appeal, confirming the deletion of the addition.

The key contention revolved around the method of valuing the closing stock by the jeweler assessee. The Assessing Officer rejected the LIFO method used by the assessee, citing the accounting standard AS-2, which did not specify LIFO as an acceptable method for inventory valuation. The assessee argued that it consistently followed the LIFO method for valuing its stock, which was accepted in previous assessments. The Tribunal noted that the Assessing Officer revalued the stock based on a higher figure than disclosed by the assessee, without any discrepancy in the quantity of stock. The Tribunal emphasized the principle that closing stock should be valued at cost or market value, whichever is lower, as established by the Supreme Court. The Tribunal found no merit in the Assessing Officer's addition and upheld the CIT(A)'s decision to delete the Rs. 52,23,753 addition, dismissing the Revenue's appeal.

The case highlighted the importance of consistent accounting practices and the principle of valuing closing stock at cost or market value. The Tribunal's decision emphasized the need for Assessing Officers to respect the methods regularly followed by taxpayers unless there are valid reasons to deviate from such practices. The judgment provided clarity on the application of accounting standards in inventory valuation and the limitations on tax authorities to revalue stock without proper justification or impact on the true profits of the assessee.