2020 (6) TMI 664 - AT - Income Tax

Valuation of opening stock and/or closing stock - GP rate estimation - value of closing stock to be adopted in the case of the assessee - AO noted that the G.P. rate declared by the assessee in Assessment Year 2014-15 was 9.38% and in Assessment Year 2015-16 was 9.07% and adopting the average of 9.22%, the Assessing Officer worked out the value of closing stock at ₹ 16.68 crores (approx.) - HELD THAT - Assessee is unable to point out the basis for adopting 25% as the benchmark for working out the value of closing stock; though, the said benchmark was applied from year to year but the same has no basis. Accordingly, we find no merit in the methodology adopted by the assessee in valuing its closing stock. On the other hand, the Assessing Officer had applied the G.P. rate of 9.22% in order to compute the value of closing stock i.e. sale value less 9.22%. We are of the view that the value of closing stock as computed by the Assessing Officer needs to be accepted as such. However, same method is to be applied for valuation of opening stock, which is to be re-determined by reducing the value of opening stock by 9.22%. It is an admitted position that same rate needs to be applied to compute the value of opening stock and/or closing stock. It may also be pointed out that the value of closing stock as on the close of the year would be the value of opening stock as on the opening day of next Assessment Year. Accordingly, we hold so. The grounds raised by the assessee in this appeal are thus allowed.

Summary

Issues:
1. Valuation of closing stock
2. Method of valuation adopted by the assessee
3. Consistency in valuation method
4. Application of GP rate for computing closing stock value
5. Revaluation of opening stock based on closing stock valuation

Valuation of Closing Stock:
The assessee appealed against the addition of approximately ?2.90 crores due to the valuation of closing stock. The Assessing Officer revalued the closing stock using an average GP rate of past two years, resulting in the addition. The CIT(A) upheld this decision. The assessee argued that the method of valuation had been consistently followed and relied on a High Court decision. However, the Assessing Officer found no basis for the 25% discount applied by the assessee. The Tribunal held that the Assessing Officer's method was correct, and the closing stock value was to be accepted.

Method of Valuation Adopted by the Assessee:
The assessee valued finished goods at the sale price rate minus 25% for closing stock, while raw material was valued at cost. The Assessing Officer questioned this method, as the 25% discount lacked a valid basis. The assessee failed to justify the discount percentage. The Tribunal found the Assessing Officer's revaluation using the GP rate appropriate, rejecting the assessee's method.

Consistency in Valuation Method:
The assessee argued for consistency in valuation method application, citing past practices. However, the Tribunal emphasized the lack of a valid basis for the 25% discount consistently applied by the assessee. The Tribunal upheld the Assessing Officer's revaluation based on the GP rate.

Application of GP Rate for Computing Closing Stock Value:
The Assessing Officer applied an average GP rate of past two years to compute the closing stock value. The assessee contested this, emphasizing the consistency in their valuation method. The Tribunal upheld the Assessing Officer's decision, considering the GP rate appropriate for valuation.

Revaluation of Opening Stock Based on Closing Stock Valuation:
The Tribunal directed the revaluation of the opening stock based on the closing stock valuation method. It held that the same rate should be applied for both opening and closing stock valuation. The closing stock value at the end of the year would be the opening stock value at the beginning of the next assessment year.

The Tribunal allowed the assessee's appeal, concluding that the Assessing Officer's method for valuing the closing stock was correct. The Tribunal directed the revaluation of the opening stock based on the closing stock valuation method. The decision emphasized the importance of a valid basis for valuation methods and consistency in applying such methods.