2017 (6) TMI 1270 - AT - Income Tax

Addition on account of under-valuation of closing stock - difference in the valuation of closing stock of finished goods - as per assessee average selling price adopted by the Assessing Officer for working out the difference in the value of closing stock of finished goods was not correct - Held that - The working in this regard was furnished by the assessee to show the average selling price of the corresponding items of finished goods lying in the opening stock on the basis of sales made in the month of March. In the working so furnished, the gross profit @ 12% was reduced by the assessee from the average selling price worked out by it to show that the net realisable value so determined was correctly taken for the purpose of valuation of closing stock of finished goods. As rightly contended by the D.R., all these workings prepared and furnished by the assessee for the first time before the CIT(Appeals) in support of an altogether new stand taken to explain the difference in the valuation of closing stock of finished goods was not forwarded by him to the Assessing Officer for giving an opportunity to verify the same, as required by Rule 46A of the Income Tax Rules, 1962 and there is thus a clear violation of the said Rule by the ld. CIT(Appeals) while giving relief to the assessee on this issue. Both the sides have agreed that if the actual cost of the relevant finished goods lying in the opening stock can be ascertained from the relevant stock records, the same has to be adopted for the purpose of valuation of closing stock unless the assessee is in a position to show that in case of certain items of finished goods lying in the closing stock, the net realisation value is lower than the cost so ascertained. Keeping in view this submission made by both the sides, we set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh after verifying the actual cost of the relevant items of finished goods lying in the closing stock from the relevant stock record maintained by the assessee. Appeal of the Revenue and that of the assessee both are treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Addition on account of under-valuation of closing stock.
2. Adherence to Rule 46A regarding admission of fresh evidence during appellate proceedings.

Detailed Analysis:

1. Addition on Account of Under-Valuation of Closing Stock:

The primary issue in these cross appeals is the addition of ?48,00,000/- made by the Assessing Officer (AO) due to the alleged under-valuation of closing stock, which the Commissioner of Income Tax (Appeals) [CIT(A)] reduced to ?13,72,363/-. The assessee, a company engaged in the manufacturing and trading of chemical items, declared a total income of ?2,09,57,326/- for the relevant year. During the assessment, the AO found discrepancies in the valuation rates of finished goods in the closing stock compared to their average sale prices. The AO noted significant differences and provided a detailed tabular comparison of the items, quantities, rates, and values.

The AO called upon the assessee to explain the difference of ?56,96,795/- in the valuation of closing stock. The assessee explained that the discrepancies were due to the inferior quality of the finished goods, which were off-grade and, therefore, valued lower. However, the AO rejected this explanation as it lacked supporting evidence. The AO recalculated the value by deducting the gross profit (12%) and carriage inward expenses (4%) from the average sale price, resulting in an addition of ?48,00,000/- to the total income.

Upon appeal, the CIT(A) partially accepted the assessee's contention that the closing stock was valued at cost or net realizable value, following Accounting Standard 2. The CIT(A) noted that the AO's method of valuation was not aligned with standard accounting practices and found discrepancies in the AO's average selling price calculations. The CIT(A) agreed with the assessee's revised valuation and reduced the addition to ?13,72,363/-.

2. Adherence to Rule 46A Regarding Admission of Fresh Evidence:

During the appellate proceedings, the assessee presented new evidence and calculations to support their valuation method, which was not forwarded to the AO for verification, violating Rule 46A of the Income Tax Rules, 1962. The Tribunal observed that the CIT(A) had not given the AO an opportunity to verify the new evidence, constituting a clear violation of Rule 46A.

The Tribunal acknowledged that the actual cost of the finished goods lying in the closing stock should be ascertained from the stock records. Both parties agreed that if the actual cost could be verified from the stock records, it should be adopted for valuation unless the net realizable value was lower. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and remanded the matter back to the AO for fresh adjudication, ensuring proper verification of the actual cost from the stock records and providing the assessee a fair opportunity to be heard.

Conclusion:

The Tribunal allowed both the Revenue's and the assessee's appeals for statistical purposes, remanding the issue back to the AO for a fresh decision after verifying the actual cost of the finished goods from the stock records. The Tribunal emphasized the need for adherence to Rule 46A and proper verification of evidence before making any additions to the income.