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2018 (9) TMI 1744 - AT - Income TaxRevision u/s 263 - deviation from the method of valuation of the stock prescribed u/s 145 / 145A - CIT proposed the valuation of closing stock by taking the average of opening stock and purchase price. - Held that - In the instant case, we find that it is not in dispute that the assessee is consistently following the same method of valuation of closing stock which was also followed in the year under consideration. The profit was deduced in accordance with the method adopted by the assessee. Therefore, in our considered view, the Pr. Commissioner of Income Tax-1, Bhubaneswar was not justified in disturbing the consistent method of valuation. Further, we find that there is no direction in the impugned order to value the opening stock also by adopting the same method which was suggested in the valuation of closing stock. As in the case of Chainrup Sampatram 1953 (10) TMI 2 - SUPREME COURT has held that it is a misconception to think that any profit arises out of the valuation of the closing stock and the situs of its arising or accrual is where the valuation is made. Valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the source of such profits. Thus the impugned order passed by Pr. Commissioner of Income Tax-1, Bhubaneswar cannot be sustained - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act. 2. Method of valuation of closing stock. 3. Consistency in the method of valuation. 4. Adequacy of enquiry by the Assessing Officer. 5. Validity of the Principal Commissioner's order under Section 263. Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act: The primary issue was whether the Principal Commissioner of Income Tax (Pr. CIT) was justified in assuming jurisdiction under Section 263 of the Income Tax Act to revise the assessment order passed under Section 143(3). The Pr. CIT held that the order was erroneous and prejudicial to the interests of the revenue, alleging that the Assessing Officer (AO) failed to properly examine the method of valuation of closing stock. 2. Method of Valuation of Closing Stock: The assessee consistently followed the method of valuing closing stock at cost price or net realizable value, whichever is lower, as per Section 145A of the Act. The Pr. CIT argued that the valuation should be based on the average of opening stock and purchase prices, rather than the cost price of the opening stock. The assessee maintained that this method had been consistently applied and accepted in previous years. 3. Consistency in the Method of Valuation: The assessee argued that the method of valuation had been consistently followed since inception and accepted by the department in earlier and subsequent years. The Tribunal cited several judicial precedents, including United Commercial Bank vs. CIT and CIT vs. British Paints India Ltd., which support the principle that a consistent method of accounting cannot be discarded unless found defective. 4. Adequacy of Enquiry by the Assessing Officer: The Tribunal examined whether the AO conducted adequate enquiries during the assessment process. It was found that the AO had indeed made specific enquiries regarding the valuation of closing stock, as evidenced by the notice issued under Section 142(1) and the detailed responses provided by the assessee. The Tribunal referenced the case of CIT vs. J.L. Morrison (India) Ltd. to emphasize that the presence of detailed enquiries and the satisfaction of the AO should be presumed as regular and valid. 5. Validity of the Principal Commissioner's Order under Section 263: The Tribunal concluded that the Pr. CIT's order under Section 263 was not justified. It was held that disturbing the consistent method of valuation without pointing out specific defects was not permissible. The Tribunal also noted that the Pr. CIT did not direct the AO to revalue the opening stock using the same method, which would lead to an inconsistent and erroneous assessment. The Tribunal cited the Supreme Court's decision in Chainrup Sampatram to support this view. Conclusion: The Tribunal set aside the order of the Pr. CIT and allowed the appeal of the assessee. It was held that the consistent method of valuation adopted by the assessee was valid and could not be disturbed without specific findings of defects. The AO had conducted adequate enquiries, and the Pr. CIT's assumption of jurisdiction under Section 263 was not warranted. The assessment order passed under Section 143(3) was thus upheld.
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