2014 (5) TMI 267 - AT - Income Tax

Deletion made - Undervaluation of closing stock Held that - The assessee has valued the stock at -weighted average cost in the current year and the same method was followed by assessee in earlier years and it was accepted by the Department while finalizing the assessment u/s. 143(3) - The assessee has also adopted the same method for arriving at the cost of goods sold . The method of valuation is also in consonance with the IT. Act and the Accounting Standards prescribed by ICAI - No material has been brought on record by Revenue to controvert the facts - the AO has started to value the stock at close intervals of each month but finally that was not made the basis of addition - The AO has left that observation/calculation without drawing a conclusion however finalized the valuation on an ad-hoc basis - CIT (A) has rightly deleted the addition made to closing stock Decided against Revenue. Rejection of books of accounts u/s 145(3) of the Act Failure to include making charges in the value of closing stock Held that - CIT(A) had deleted the entire addition of Rs. 40 lacs made by the AO which also included the under valuation on account of non-inclusion of making charges which was surrendered and accepted by the assessee during the course of assessment proceedings - the addition can be sustained only with respect to the under valuation for making charges amounting to Rs. 3,31,266/- which was accepted by Assessee out of the total addition of Rs. 40 lacs which was deleted by CIT(A) Decided partly in favour of Revenue.

Issues Involved:
1. Deletion of addition made on account of undervaluation of closing stock.
2. Rejection of book results under Section 145(3) of the Income Tax Act.
3. Consistency in the method of accounting and valuation of inventory.
4. Inclusion of making charges in the valuation of closing stock.

Detailed Analysis:

1. Deletion of Addition Made on Account of Undervaluation of Closing Stock:
The Revenue appealed against the CIT(A)'s order, which deleted the addition of Rs. 40,00,000/- made by the Assessing Officer (A.O.) due to undervaluation of closing stock. The A.O. had determined the total income at Rs. 1,08,58,800/- by rejecting the valuation method employed by the Assessee, which was "Average Cost" instead of "Weighted Average Stock" or "Cost" on FIFO basis. The A.O. believed the Assessee's valuation contravened Accounting Standard 2 (AS-2) prescribed by the Institute of Chartered Accountants of India (ICAI). However, the CIT(A) found that the Assessee had consistently employed the weighted average cost method, which is in accordance with AS-2, and thus directed the deletion of the Rs. 40,00,000/- addition.

2. Rejection of Book Results Under Section 145(3) of the Income Tax Act:
The A.O. rejected the book results under Section 145(3) because the Assessee had not included making charges in the valuation of 22 ct gold ornaments and did not have the weighted average cost available for silver stock. The A.O. estimated the total undervaluation at Rs. 40,00,000/- after considering various defects, including the non-inclusion of making charges. The CIT(A), however, noted that the Assessee's valuation method had been consistently followed and accepted in the past, and the A.O. did not provide sufficient material to justify the rejection of the Assessee's method. Thus, the CIT(A) deleted the addition.

3. Consistency in the Method of Accounting and Valuation of Inventory:
The CIT(A) emphasized the importance of consistency in the method of accounting, noting that the Assessee had regularly employed the weighted average cost method for inventory valuation, which is also prescribed by ICAI in AS-2. The CIT(A) pointed out that the A.O. failed to compute the correct weighted average cost for each item of inventory separately and instead applied an incorrect simple average rate. The CIT(A) concluded that the A.O. was not justified in disturbing the Assessee's valuation method without adequate evidence.

4. Inclusion of Making Charges in the Valuation of Closing Stock:
The A.O. noticed that the Assessee had not considered making charges for 10455.23 gms of standard gold converted into 22 ct gold ornaments, leading to an undervaluation of Rs. 3,31,266/-, which the Assessee later accepted and revised. However, the CIT(A) deleted the entire addition of Rs. 40,00,000/-, including the Rs. 3,31,266/- for making charges. The Tribunal, while agreeing with the CIT(A) on the valuation method, sustained the addition only for the making charges amounting to Rs. 3,31,266/- and directed its inclusion.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the Rs. 40,00,000/- addition, except for the Rs. 3,31,266/- related to making charges, which was sustained. The appeal for A.Y. 2006-07 was partly allowed, and the appeal for A.Y. 2007-08 was dismissed, as the facts were identical except for the agreed addition on account of making charges.

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