2012 (12) TMI 658 - AT - Income Tax

Undervaluation of closing stock - Rate of rice bran Held that - In the remand report, AO did not brought any fresh material on the record to establish that the rate adopted by the assessee was not correct. The only basis of adopting enhanced rate of valuation was the report of Krishi Utpadan Mandi Samiti which cannot be considered as reasonable because these rates are determined in a particular manner which cannot be applied in all the circumstances and all the times for every quality of a particular product. The rates are dependent upon number of factors such as quality of produce, the prevailing rates in the market, content of moisture in the produce and demand in the market etc. Therefore, the observation of the A.O., that the rates fixed by Krishi Utpadan Mandi Samiti are reasonable and justified, do not have any rational or scientific basis. Thus the rate adopted by the AO is not justified - in favour of assessee.

Summary

Issues:
Undervaluation of closing stock

Analysis:
The appeal was filed by the Revenue against the order of the ld. CIT(A) regarding the deletion of an addition made by the Assessing Officer on account of undervalued closing stock. The Assessing Officer found that the closing stock of the assessee had been undervalued, leading to the addition of Rs.8,58,728. The dispute centered around the valuation of rice, rice bran, paddy husk, and paddy. The Assessing Officer relied on rates from Krishi Utpadan Mandi Samiti, Sitapur, while the assessee provided different valuation explanations. The ld. CIT(A) initially did not favor the assessee's contentions, leading to an appeal before the Tribunal. The Tribunal remanded the matter back to the ld. CIT(A) for a fresh adjudication, leading to a remand report from the Assessing Officer. The ld. CIT(A) ultimately accepted the valuation of closing stock as declared by the assessee and deleted the addition.

In the subsequent appeal before the ITAT, the Revenue heavily relied on the Assessing Officer's order. The ld. counsel for the assessee argued that the ld. CIT(A) appropriately considered the remand report, where the Assessing Officer accepted most contentions of the assessee except for the rate of rice bran, without providing a valid explanation for the discrepancy. The ITAT examined the facts and found that the ld. CIT(A) had rightly adjudicated the issue based on the available information. The ITAT noted that the rates provided by Krishi Utpadan Mandi Samiti were not definitive as agricultural produce rates vary day-to-day based on multiple factors. The ITAT upheld the ld. CIT(A)'s decision to delete the addition based on the valuation explanations provided by the assessee.

The ld. CIT(A) considered the remand report in detail, highlighting discrepancies in the Assessing Officer's valuation approach, especially concerning rice bran. The ld. CIT(A) found that the Assessing Officer's reliance on rates from Krishi Utpadan Mandi Samiti lacked a factual basis and scientific rationale, as these rates are not universally applicable due to market fluctuations and product quality variations. The ld. CIT(A) concluded that the Assessing Officer's valuation of rice bran was not justified, leading to the allowance of the ground of appeal in favor of the assessee. The ITAT confirmed the ld. CIT(A)'s decision, dismissing the Revenue's appeal and upholding the deletion of the addition related to the undervaluation of closing stock. The cross objection filed by the assessee in support of the ld. CIT(A)'s order was also dismissed as infructuous.

In conclusion, the ITAT affirmed the ld. CIT(A)'s decision to delete the addition made by the Assessing Officer regarding the undervaluation of closing stock, emphasizing the lack of factual basis for the Assessing Officer's valuation approach, particularly in the case of rice bran.