2015 (10) TMI 946 - HC - Income Tax

Addition towards valuation of closing stock - ITAT deleted the addition accepting the plea of the Assessee that it has been consistently following the method of valuation of closing stock of levy sugar at its two factories at the market rate and valuation of the closing stock of the free sale sugar and Deoband unit at cost price and that of the Ramkola unit at market price - Held that - The Court finds that the Assessee was under a compulsion to maintain separate books for the supply of levy sugar to the Government and had consistently adopted different systems of valuation of the closing stock of levy sugar and free sale sugar manufactured at its two units. The closing stock as well as the opening stock would reflect this dual system of valuation followed by the Assessee and the net tax effect would be revenue neutral. Consequently, the Court agrees with the ITAT that there was no justification for the AO to have rejected the valuation of the closing stock of sugar as adopted by the Assessee. The addition made by the AO was rightly deleted by the ITAT. The question is answered in the affirmative i.e. in favour of the Assessee

Summary

Issues:
Appeal by Revenue against ITAT order on valuation of closing stock for AY 1990-91.

Analysis:
1. The appeal before the High Court was filed by the Revenue against the order passed by the Income Tax Appellate Tribunal (ITAT) regarding the valuation of closing stock for the Assessment Year (AY) 1990-91 under Section 260A of the Income Tax Act, 1961.

2. The main question of law framed by the Court was whether ITAT was correct in law in deleting the addition of the amount of Rs. 59,55,764 towards the valuation of closing stock.

3. The Assessing Officer (AO) had enhanced the income of the Assessee by Rs. 59,55,764 by rejecting the method of valuation of the closing stock of sugar. The Assessee, a sugar manufacturer, maintained separate books for 'levy' sugar and 'free sale' sugar as required by the prevailing statute in Uttar Pradesh.

4. The Assessee consistently valued the closing stock of sugar at cost or market rate, whichever was lower, for both 'levy' and 'free sale' sugar separately at its factories in Deoband and Ramkola. The AO contended that there was no justification for adopting different valuation methods for the same commodity.

5. The Commissioner of Income Tax (Appeals) agreed with the AO, leading the Assessee to appeal before the ITAT. The ITAT accepted the Assessee's method of valuation, noting the Department's past acceptance of this practice and citing the principle of consistency in accounting practices as established by the Supreme Court.

6. The ITAT found that the Assessee maintained separate books for levy and free sale sugar, reflecting a dual system of valuation. The Court concurred with the ITAT that the AO had no justification for rejecting the Assessee's valuation method, leading to the deletion of the addition made by the AO.

7. The Court upheld the ITAT's decision, emphasizing that the Assessee's valuation method was rational and in accordance with accounting principles. The appeal by the Revenue was dismissed, ruling in favor of the Assessee and against the Revenue.