2016 (9) TMI 1544 - AT - Income Tax

Valuation of closing stock - Survey u/s 133A - Difference between the value of stock arrived at by survey team and that of value calculated by assessee on the basis of Trading Account as on the date of survey by applying G.P. rate of previous year - HELD THAT - Assessee is in the business of Cloth and Garments and its qualities are numerous and it is also a fact that the prices mentioned on the Slips attached on such cloths does not necessarily realize the same value as during bargaining the business man has to give some discount therefore the valuation by survey team at highest prices was not justified. AO has not made out a case that assessee had not been valuing its stock at sale prices as normally the stocks are valued at cost prices or market prices whichever is less. Therefore valuation of inventory at the time of survey at sale prices is not at all justified. The assessee had submitted that the gross profit ratio earned by it for the last five years and has also filed the gross profit earned by assessee in the same trade by its competitors and had requested the AO to consider the gross profits of these firms also but AO did not consider the submissions and neither rebutted any of the submissions made by assessee - addition made by AO and further upheld by CIT(A) is not justified specifically in view of the fact that they did not find any discrepancy in the books of account nor the books of account were rejected. In view of the above the grievance of the assessee is justified and we delete the addition. - Decided in favour of assessee

Summary

Issues:
Appeal against CIT(A) order for Asst. Year: 2009-10 - Addition made on stock valuation discrepancy.

Analysis:
The appeal was filed against the CIT(A)'s order upholding the addition made by the Assessing Officer regarding the alleged difference in stock valuation. The Assessing Officer had added an amount based on the variance between the stock value determined by a survey team and the value calculated by the assessee using the Gross Profit (G.P.) rate of the previous year. The assessee argued that the stock valuation based on the G.P. rate applied by the survey team was not justified, as it did not reflect the actual realization value due to bargaining practices in the business. The assessee also presented the G.P. ratio earned over the last five years and the gross profits of competitors in the same trade to support its valuation method. However, the Assessing Officer did not consider these submissions or provide any rebuttal. The tribunal found that the addition made by the Assessing Officer and upheld by the CIT(A) was not justified, especially since there were no discrepancies in the books of accounts, and the books were not rejected. Consequently, the tribunal ruled in favor of the assessee and deleted the addition.

The tribunal noted that the prices mentioned on slips attached to the garments did not necessarily reflect the actual value realized due to potential discounts during bargaining. The tribunal emphasized that stocks are typically valued at cost prices or market prices, whichever is lower, and not at sale prices. The assessee had submitted detailed information on its gross profit ratios over the years and the gross profits of competitors in the same trade, requesting the Assessing Officer to consider these factors. However, the Assessing Officer failed to address these submissions or counter them. Given the absence of discrepancies in the books of accounts and the failure to reject the books, the tribunal concluded that the addition made by the Assessing Officer was unjustified. Therefore, the tribunal allowed the appeal filed by the assessee, leading to the deletion of the additional amount imposed on stock valuation discrepancy.

The tribunal's decision highlighted the importance of considering the actual realization value of stocks in business transactions, especially in industries where bargaining and discounts are common practices. It also underscored the significance of assessing stock valuation based on cost prices or market prices, rather than sale prices. Additionally, the tribunal emphasized the need for Assessing Officers to thoroughly review and address submissions provided by taxpayers, especially when they present relevant data and comparisons to support their valuation methods. The tribunal's ruling ultimately favored the assessee, emphasizing the importance of fair and justified assessments in tax matters.