2022 (2) TMI 1152 - HC - Income Tax

Difference in stock valuation - valuation of the closing stock - LIFO or FIFO method - assessee unlawfully followed the Last In First Out (LIFO) method of accounting for valuation of closing stock in violation of the accounting Standard-2 - survey action conducted under Section 133A of the Act in the business premises of the assessee - HELD THAT - We find that the assessing officer could not have based his conclusion solely on the alleged admission of the director of the assessee during the survey operations Directive issued by the CBDT is a straight answer to the contention advanced by the learned standing counsel. Thus, if the report of the survey team is eschewed, then it has to be seen as to in what manner the assessing officer could have completed the assessment. The crux of the issue revolves around the valuation of the closing stock. The revenue faults the assessee for not adopting the FIFO method. The tribunal has considered the correctness of the submission and pointed out that the assessee has consistently adopted the LIFO method which has been accepted by the assessing officer in all the previous years and in the assessee s own case in the respect of the assessment year 2009-10, the matter travelled upto the tribunal and the method of valuation of closing stock adopting LIFO method was approved. Therefore, the tribunal concluded that consistency has to be maintained in the matter. Learned counsel for the appellant would vehemently contend that in terms of the statutory rule, the accounting standard as prescribed under the rule ought to have been followed. The learned counsel submits that it is mandatory for the assessee to follow the Accounting Standard 2 in terms of the relevant rules from the year 1999 and the relevant rules of the year 2006 is applicable. It is an admitted case that the assessee has been continuously adopting the LIFO method which has been accepted by the revenue for all the earlier assessment years and in respect of the assessment year 2009-10, the matter travelled upto the tribunal and the manner of valuation of the closing stock done adopting LIFO method was approved. Therefore, in our considered view, the tribunal was right in affirming the order passed by the CIT(A). An identical issue came up for consideration in the case of Commissioner of Income Tax vs. Sharad Mohanlal Shah 2018 (11) TMI 1331 - GUJARAT HIGH COURT wherein it was held that the assessee therein was following the LIFO method and the CIT(A) therein as well as the tribunal concurrently held that such method was already recognised in law and in any case consistently followed in several orders and, therefore, the appeal filed by the revenue was dismissed. The Special Leave Petition filed before the Hon ble Supreme Court was dismissed as reported in 2019 (7) TMI 1113 - SC ORDER - Decided against revenue.

Summary

Issues:
1. Valuation of closing stock using LIFO method instead of FIFO method.
2. Compliance with Accounting Standard-2 for inventory valuation.
3. Validity of assessment based on alleged admission during survey operations.

Issue 1: Valuation of closing stock using LIFO method instead of FIFO method:
The appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 challenges the order of the Income Tax Appellate Tribunal confirming the deletion of an amount due to the difference in stock valuation. The revenue contends that the assessee unlawfully followed the Last In First Out (LIFO) method of accounting for closing stock valuation, contrary to the Accounting Standard-2 which recommends FIFO or Weighted Average Method. The assessing officer initiated the assessment based on a survey action revealing a stock difference, leading to the application of the LIFO method. However, the CIT(A) allowed the appeal, emphasizing the consistency of the assessee's method over the years. The tribunal upheld this decision, emphasizing the need for consistency in valuation methods.

Issue 2: Compliance with Accounting Standard-2 for inventory valuation:
The appellant argues that the assessee's failure to follow the FIFO method as per Accounting Standard-2 is a violation of the statutory rule. However, Section 145 of the Income Tax Act allows for the adoption of accounting standards notified by the Central Government. The assessee consistently applied the LIFO method, which was accepted by the revenue in previous years and even approved by the tribunal in earlier cases. Citing a similar case precedent, the tribunal affirmed the CIT(A)'s decision, emphasizing the legality and consistency of the LIFO method in the assessee's case.

Issue 3: Validity of assessment based on alleged admission during survey operations:
The assessing officer's reliance on the alleged admission by the director of the assessee during survey operations was challenged. The CBDT circular cautioned against obtaining confessions without credible evidence during search and seizure operations. The tribunal found that the assessing officer's conclusion solely based on the survey report was unjustified. The tribunal emphasized the importance of evidence collection and consistency in assessment procedures, ultimately dismissing the revenue's appeal and upholding the order passed by the CIT(A).

In conclusion, the High Court of Calcutta dismissed the revenue's appeal, answering the substantial questions of law against the revenue. The tribunal's decision to affirm the CIT(A)'s order was upheld, emphasizing the legality and consistency of the LIFO method in the assessee's case.