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2017 (1) TMI 1253 - AT - Income TaxRevision u/s 263 - whether the closing stock valued are proper and if so, how it is prejudicial to the interests of revenue - Held that - Looking at the business model of the assessee, he procures the leaves and process the leaves. Based on the result of processing, it sells the same to the vendors. The valuation of stock depends on the results of the processing. The assessee will adjust the standard loss on the marketable products and the balance of the cost will be appropriated to the balance of the inferior quality of the leaves, which are also marketable, but, not at the same at par with the superior quality. This is nothing but the actual result of the processing. What is left after selling to vendors are valued at market price or cost, whichever is less. The closing stock submitted before the AO on the same principle. The stock left over cannot be equated with the purchase price. We observe that the AO has recorded the business of the assessee as engaged in business of procurement, processing and selling of tobacco products , which is matching with the 3CD report submitted by the assessee. Whereas the CIT recorded as engaged in the business of purchase and selling of tobacco and tobacco products . There is difference of perception in the mind of CIT. CIT has found out that the order passed by the AO is erroneous, but, could not be quantified how it is prejudicial to the interests of revenue. The assessee has bought the tobacco leaves and sold the leaves as per the processing result. That means the cost of the purchase was apportioned and adjusted in the selling price. The left over of the stock was valued as per market price. This will be the opening value for the following year. There is no loss to the revenue as presumed by the ld. CIT. In the absence of any finding as loss to the revenue, we find it appropriate to adjudicate that the order of the AO is not prejudicial to the revenue and accordingly the order of CIT is quashed. - Decided in favour of assessee.
Issues Involved
1. Condonation of Delay 2. Valuation of Closing Stock 3. Application of Section 263 of the Income Tax Act Detailed Analysis Condonation of Delay The first issue pertains to the 334-day delay in filing the appeal. The assessee filed a petition for condonation of delay, arguing that the delay was beyond their control and unintentional. The Revenue objected, stating that the assessee had not proven the bona fides and that ignorance of the law was not a valid excuse. The Tribunal referenced the case of M/s Virupa Township and the Hon’ble Bombay High Court’s decision in Remex Constructions, which emphasized that the ends of justice should not be defeated due to procedural lapses. Consequently, the delay was condoned, and the appeal was admitted for hearing. Valuation of Closing Stock The core issue in the appeal was the valuation of closing stock. The assessee, engaged in the business of buying, processing, and selling tobacco, filed its return for AY 2007-08. The CIT noticed discrepancies in the valuation of closing stock, which was not thoroughly examined by the Assessing Officer (AO). The CIT argued that the AO's failure to verify the closing stock valuation rendered the assessment order erroneous and prejudicial to the interests of the revenue. The CIT issued a notice under Section 263, pointing out that the closing stock was undervalued, leading to an inflated cost of goods sold and an understatement of total income. The assessee contended that the valuation was consistent with the principle of 'cost or market price, whichever is lower,' and that the AO had already verified the purchase cost and closing stock during the regular assessment. The assessee provided detailed stock reports, which the CIT did not find any discrepancies in. The AR argued that the CIT could not equate the purchase price with the processed price, as the latter undergoes changes based on the types of tobacco leaves processed. Application of Section 263 of the Income Tax Act The Tribunal examined whether the CIT was justified in invoking Section 263, which allows for revision of orders that are erroneous and prejudicial to the interests of the revenue. The Tribunal noted that the AO had recorded the business of the assessee as involving procurement, processing, and selling of tobacco products, aligning with the 3CD report. The CIT, however, perceived the business as merely purchasing and selling tobacco products. The Tribunal found that the AO had considered the business model and the valuation principles applied by the assessee. The stock valuation was based on market price or cost, whichever was lower, and any leftover stock was valued accordingly. The Tribunal concluded that the CIT had identified the AO's order as erroneous but failed to quantify how it was prejudicial to the revenue. The Tribunal determined that there was no loss to the revenue, as the valuation principles were correctly applied, and the order of the AO was not prejudicial to the interests of the revenue. Conclusion The Tribunal allowed the appeal, quashed the order of the CIT, and concluded that the assessment order passed by the AO was not prejudicial to the interests of the revenue. The appeal was pronounced in the open court on 28th October 2016.
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