2012 (11) TMI 898 - AT - Income Tax

Validity of re-assessment proceedings on the basis of audit objection under valuation of stock of rough diamonds and stock of cut and polished diamonds average method of valuation - Held that - If the closing stock is disturbed then corresponding adjustment has to be made to the opening stock - closing stock balance of this year becomes the opening stock balance of next year and therefore it becomes revenue neutral. Since the method followed by the assessee is an accepted method of valuation of closing stock and since the Revenue in the past as well as subsequent year has accepted the method followed by the assessee without disturbing the method of valuation of closing stock of rough diamonds and cut and polished diamonds and since the A.O. has not made corresponding adjustments for valuing the opening stock of rough diamonds and cut and polished diamonds, therefore average method of valuation followed by the A.O. in the instant case is erroneous and not in accordance with law - assessee succeeds on merit as per ground of appeal No. 2, the first ground of appeal challenging the validity of reassessment proceedings on account of audit objection becomes academic in nature in favor of assessee

Summary

Issues Involved:
1. Validity of reassessment proceedings based on audit objections.
2. Addition on account of under-valuation of closing stock of rough diamonds.
3. Addition on account of under-valuation of closing stock of cut and polished diamonds.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings Based on Audit Objections:
The assessee challenged the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, arguing that the reopening was based solely on audit objections without any new material or information. The assessee cited the decision of the Hon'ble Supreme Court in "Indian & Eastern Newspaper Society v. CIT" and other relevant case laws to support the argument that reassessment based on audit objections is invalid. The CIT(A) upheld the reassessment proceedings, stating that processing under Section 143(1) is not equivalent to assessment proceedings, thus validating the notice under Section 147/148. However, the tribunal did not adjudicate this issue separately, as it became academic in nature after deciding the merits of the case.

2. Addition on Account of Under-Valuation of Closing Stock of Rough Diamonds:
The A.O. issued a notice under Section 148 on the grounds of under-valuation of stock of rough diamonds. The A.O. noted that the assessee did not provide category-wise details of rough diamonds and rejected the assessee's valuation method, adopting an average rate per carat instead. The assessee argued that the rough diamonds included rejections from labourers and cutters, which were of negligible value, and that their valuation method was consistent and supported by purchase bills and vouchers. The CIT(A) upheld the A.O.'s action, stating that the valuation by the assessee was not based on any scientific basis or accounting principles. The tribunal found that the assessee maintained proper books of account, and the method of valuation at cost or market value, whichever is lower, was an accepted method consistently followed and accepted by the department in previous and subsequent years. The tribunal held that there was no justification for the A.O. to adopt the average cost method, and thus, the valuation of closing stock by the assessee should not have been disturbed.

3. Addition on Account of Under-Valuation of Closing Stock of Cut and Polished Diamonds:
Similar to the rough diamonds, the A.O. determined the value of cut and polished diamonds by applying an average rate per carat, resulting in an addition for under-valuation. The assessee contended that the valuation of polished diamonds varied widely based on various factors and that their method of valuation was consistent and accepted in previous assessments. The CIT(A) upheld the A.O.'s action, stating that the assessee's valuation was not based on any scientific basis or accounting principles. The tribunal found that the assessee provided detailed quantitative and valuation records, and the method of valuation at cost or market value, whichever is lower, was an accepted method. The tribunal held that the average cost method adopted by the A.O. was erroneous and not in accordance with the law, and the valuation of closing stock by the assessee should not have been disturbed.

Conclusion:
The tribunal allowed the appeal filed by the assessee, holding that the valuation method adopted by the assessee was consistent, accepted, and in accordance with the law. The reassessment proceedings based on audit objections were not adjudicated separately as the assessee succeeded on the merits of the case. The additions on account of under-valuation of closing stock of rough diamonds and cut and polished diamonds were deleted.