2014 (4) TMI 1155 - AT - Income Tax

Addition on account of under valuation of stock by adopting FIFO method - clinching evidences regarding unaccounted purchases were found during the course of search action - Held that - Respectfully following the decision of the Coordinate Bench of the Tribunal in the case of the sister concern under identical circumstances and in absence of any contrary material brought to our notice we find no infirmity in the order of Ld.CIT(A) deleting the addition to held that there was no reason to reject the method of valuation of stock and the addition made was thus not justified. Also undisclosed income has to be worked out on the basis of seized papers and since in the present case no such incriminating evidence was found regarding method of valuation of stock as the A.O. tried to adopt, the Learned CIT(A) was justified in deleting the addition - Decided against revenue

Summary

Issues involved:
Valuation of stock using FIFO method, under-valuation of stock, application of average cost method, deletion of addition by CIT(A), appeal by Revenue against CIT(A) order.

Analysis:
1. Valuation of stock using FIFO method:
The Revenue appealed against the CIT(A) order deleting an addition of Rs. 12,37,818 made by the Assessing Officer due to under-valuation of stock by adopting the FIFO method. The Assessing Officer found discrepancies during a search action regarding unaccounted purchases and sales by the Ranka group. The AO contended that the average cost method used by the assessee for stock valuation was inaccurate in the presence of unaccounted transactions. The CIT(A) upheld the assessee's method, citing past acceptance by the department and legal precedence. The Tribunal dismissed the Revenue's appeal, following a similar decision in a related case.

2. Deletion of addition by CIT(A):
The CIT(A) deleted the addition based on the argument that the average cost method was a valid approach for stock valuation and was historically accepted by the department. The CIT(A) emphasized the lack of incriminating evidence during the search related to stock valuation discrepancies. The Tribunal supported the CIT(A)'s decision, stating that undisclosed income should be determined based on seized evidence, which was absent in this case. The Tribunal upheld the CIT(A)'s order, citing consistency with past legal decisions and the absence of contradictory evidence.

3. Application of average cost method:
The assessee argued that the average cost method was a regular practice and had been disclosed to the department in previous returns. The Assessing Officer, however, insisted on the application of FIFO method due to unaccounted transactions. The CIT(A) and the Tribunal supported the assessee's use of the average cost method, emphasizing its historical acceptance and the absence of incriminating evidence supporting the AO's position.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 12,37,818. The Tribunal found no fault in the application of the average cost method for stock valuation, citing past acceptance and lack of evidence supporting the AO's contention. The decision was consistent with legal precedents and the absence of any contradictory material.