2015 (12) TMI 1067 - HC - Income Tax

Addition made u/s 145(3) on account of valuation of closing stock - ITAT deleted the addition - whether invoking of provisions of Section 145(3) were validly invoked as the assessee had valued the closing stock on LIFO basis as per his previous practice? - Held that - We do not find any merit in the appeal. The assessee is engaged in the business of sale and purchase of jewellery. The Tribunal had noticed that the assessee was following LIFO method for valuing its closing stock from year to year which is one of the prescribed methods of accounting standards issued by the Institute of Chartered Accountants of India for valuation of inventory. The said method was also followed by the assessee in the assessment year 2007-08 and in the said year, the Assessing Officer had made an addition of ₹ 32,08,977/- on account of valuation of closing stock of gold ornaments. The Tribunal relating to the assessment year 2007-08 in the case of the assessee upheld the decision of the CIT(A) deleting the addition made by the Assessing Officer as on the basis of the doctrine of consistency in relation to method of calculation of inventory as also the decision of the jurisdictional High Court in assessee s own case, recorded findings in favour of the assessee.

Summary

Issues:
Valuation of closing stock using LIFO method under Section 145(3) of the Income Tax Act, 1961.

Analysis:
The appeal was filed by the revenue challenging the deletion of an addition made on account of undervaluation of closing stock by the Income Tax Appellate Tribunal. The Assessing Officer had added a substantial amount due to the difference in valuation of closing stock, which was based on the LIFO method adopted by the assessee. The CIT(A) partially allowed the appeal and deleted the addition after rejecting the books of account. The Tribunal dismissed the revenue's appeal and upheld the deletion of the addition, while allowing the cross-objections filed by the assessee against another addition. The revenue contended that the true value of the closing stock could not be ascertained using the LIFO method, citing a relevant judgment by the Apex Court.

The assessee argued that they had consistently followed the LIFO method for valuing closing stock in previous years as well. They referred to specific judgments to support their contention that the method of valuation should not be rejected if consistently followed. The Tribunal noted that the assessee had been following the LIFO method for valuing inventory, which was a prescribed method by the Institute of Chartered Accountants of India. The Tribunal also highlighted a previous case where the CIT(A) had upheld the decision of deleting an addition made by the Assessing Officer, based on the consistency of the method of valuation.

The Tribunal upheld the order of the CIT(A) in deleting the addition, emphasizing the importance of consistency in the method of calculation of inventory. The Apex Court's decision in United Commercial Bank's case was referenced, stating that a method consistently adopted by the taxpayer should not be discarded by the revenue authorities. The Court reiterated the principles of valuation of stock and the importance of following a consistent method of accounting. The Division Bench's decision in Sant Ram Mangat Ram's case further supported the assessee's position.

In conclusion, the Court found no merit in the revenue's appeal as the Tribunal's decision was based on the consistent application of the LIFO method by the assessee. The Court dismissed the appeal, stating that no substantial question of law arose in the case. The judgment in British Paints India's case, relied upon by the revenue, did not advance their case given the factual matrix of the present case.