2017 (12) TMI 1704 - AT - Income Tax

Valuation of closing stock - assessee following weighted average method - AO rejected the valuation made by assessee and instead applied FIFO method - books of accounts have been rejected by AO to the extent of the valuation of stocks - HELD THAT - Statutory provisions for computation and disclosure of income chargeable under the head profit and gains of business or profession, we find that undisputedly assessee has been following weighted average method in valuing the closing stock in the previous years which has not been disturbed by revenue authorities. Weighted average method is also considered to be one of the method which reflects the fairest possible approximation of cost incurred, by the Institute of Chartered Accountants in their Accounting Standards. Therefore we do not find any justification in rejecting this method of valuation by AO. Moreover AO has also not furnished any reasonable explanation for rejecting the method consistently adopted by assessee. We are therefore inclined to allow this ground raised by assessee. As we have upheld the weighted average method for valuation of closing stock, we allow ground raised by the assessee wherein the books of accounts have been rejected by Ld. AO to the extent of the valuation of stocks.

Summary

Issues involved:
Appeal against order by Ld.CIT(A) for assessment year 2008-09 on grounds of law, natural justice, valuation of stock, and disallowance under Section 14A of the Act.

Analysis:

Grounds 1 and 6:
General in nature, not pressed.

Ground 2:
Not pressed.

Grounds 3 and 4 - Valuation of Closing Stock:
Assessee consistently used weighted average method, accepted by the Department in previous years. Ld. AO rejected this method, applied FIFO method. Assessee argued for acceptance of weighted average method citing Accounting Standard 2. Tribunal found weighted average method fair and consistent, upheld assessee's valuation method. Ld. AO failed to provide justification for rejecting the consistent method. Grounds 3 and 4 allowed in favor of the assessee.

Ground 5 - Disallowance under Section 14A:
Assessee did not press this ground due to the small amount involved.

The Tribunal upheld the weighted average method for valuation of closing stock, rejecting Ld. AO's decision to apply FIFO method. The consistent use of weighted average method by the assessee, accepted by the Department in previous years, was a key factor in the Tribunal's decision. The Tribunal emphasized the fairness and acceptance of the weighted average method in accounting standards. The Tribunal found no valid reason for Ld. AO to reject the established valuation method. As a result, the appeal was partly allowed in favor of the assessee.