2017 (6) TMI 456 - HC - Income Tax

Revaluation of closing stock of the polished diamonds - addition to income - rectification application - as per assessee the Revenue as well as the Tribunal having discarded the assessee s method of valuing closing stock and substituted such methodology by another formula, same principle must apply for valuing the opening stock - Held that - This was a case where the Revenue s contention about correct formula for valuing closing stock became final. If that be so, the same principles would apply also for valuing the opening stock. Only then the correct tax liability of the assessee could be ascertained. Merely decreasing the closing stock valuation by ₹ 66.90 lakhs, the Revenue cannot categorize it as the additional income of the assessee. In plain terms, same exercise would have to be undertaken for revaluing the opening stock and whatever the difference would reflect the true computation of the assessee s income for the year under consideration. when the Revenue or the Tribunal was modifying or substituting the method of valuation of closing stock of the assessee in a particular year as a necessary corollary, the same methodology would have to be applied for the purpose of computation of the opening stock for that year also. The issue being absolutely clear, perhaps the Tribunal on its own, could also have provided for it while disposing of the Tax Appeal itself whether specifically so argued by the assessee or not. When the assessee therefore applied for rectification at that stage, at least, the Tribunal could have accepted the request of the assessee. The Tribunal therefore, committed the serious error in rejecting the rectification application on the ground that no such argument was advanced at the time of hearing of the appeal. Thus impugned order of the Tribunal dated 09.02.2012 is set aside. Petitioner s request for rectification of the Tribunal s order dated 30.04.2008 is granted to the extent of directing that valuation of the opening stock of polished diamonds of the assessee for the assessment year 2003-04 shall be done on the same basis as the Assessing Officer has applied for the purpose of valuation of the closing stock of that year.

Summary

Issues:
1. Valuation of closing stock of polished diamonds challenged by the assessee.
2. Tribunal's rejection of rectification application regarding valuation of opening stock.

Issue 1: Valuation of closing stock of polished diamonds challenged by the assessee

The petitioner, a partnership firm trading in diamonds, disputed the Income Tax Appellate Tribunal's order regarding the valuation of its closing stock of polished diamonds for the assessment year 2003-04. The Assessing Officer revalued the closing stock, adding a sum to the income of the assessee due to discrepancies in the valuation method used by the petitioner. The Commissioner of Income Tax (Appeals) and the Tribunal upheld the Assessing Officer's decision, emphasizing the importance of maintaining accurate stock registers for proper valuation. The Tribunal highlighted that the valuation of closing stock should be based on cost price or market price, whichever is lower, and consistent valuation methods should be followed in the books of account. The Tribunal dismissed the assessee's appeal, leading to a further application for rectification. The Tribunal's rejection of the rectification application was challenged by the assessee, arguing that the principles of valuing opening and closing stock should align to determine the accurate tax liability.

Issue 2: Tribunal's rejection of rectification application regarding valuation of opening stock

The Tribunal rejected the assessee's rectification application concerning the valuation of the opening stock of polished diamonds, citing that the issue was not raised during the original appeal hearing. The petitioner contended that if the method of valuing the closing stock changed, the same principle should apply to the opening stock to avoid taxing unaccrued income. The petitioner relied on the Supreme Court's decision in Commissioner of Income Tax v. British Paints India Ltd., emphasizing the need for consistency in stock valuation methods. The Tribunal's rejection was based on the absence of specific arguments regarding the opening stock valuation during the initial appeal. However, the High Court emphasized that the correct methodology for valuing the closing stock should also be applied to the opening stock to accurately determine the assessee's income for the year. Referring to the decisions in British Paints India Ltd. and Mahavir Alluminium Ltd., the High Court reiterated the necessity of adjusting both opening and closing stock valuations when changes are made to ensure a true reflection of profits.

In conclusion, the High Court set aside the Tribunal's order and granted the petitioner's request for rectification, directing that the valuation of the opening stock of polished diamonds should align with the methodology applied by the Assessing Officer for the closing stock valuation in the assessment year 2003-04. The judgment highlighted the importance of consistency in stock valuation methods and the need to adjust both opening and closing stock valuations when changes are made to ensure accurate computation of taxable income.