1987 (5) TMI 45 - AT - Income Tax

Summary

Issues Involved:
1. Justification of the assessee's method of valuing closing stock using the LIFO (Last In, First Out) assumption.
2. The power of the CIT to revise the ITO's assessment under Section 263 of the Income-tax Act, 1961, especially when the assessment was made based on directions from the IAC under Section 144A.

Issue-wise Detailed Analysis:

1. Justification of the Assessee's Method of Valuing Closing Stock Using LIFO Assumption:

The primary issue in this appeal is whether the assessee was justified in valuing its closing stock using the LIFO assumption. The assessee, a registered firm engaged in the business of Sarrafa, had shown gold jewellery in its closing stock valued at Rs. 44.86 per gram for 4217 grams, which was the value of the opening stock, and the remaining 152 grams at the average purchase rate of Rs. 100.96 per gram. The ITO had accepted this method of valuation. However, the CIT held that this method was erroneous and prejudicial to Revenue, directing the ITO to reassess the value of the closing stock at the average purchase rate for the year.

The assessee argued that it maintained stock details in terms of weight only and not in terms of individual pieces or items, making it impossible to determine whether the items sold during the year were from the opening stock or purchases made during the year. The assessee assumed that the jewellery purchased last was sold first (LIFO method), a recognized method of stock valuation. The assessee contended that it had consistently followed this method, and the CIT's objection was unjustified.

The CIT, however, contended that the entire closing stock should be valued at the average purchase rate for the year, rejecting the LIFO assumption. The Departmental Representative supported this view, arguing that courts had held that valuing closing stock on LIFO assumption was not justified.

The tribunal considered whether the LIFO method conformed to the prescriptions of the Income-tax Act. It emphasized that the method of accounting must help in determining the true profits for the year. The tribunal referred to Supreme Court observations in CIT v. A. Krishnaswami Mudaliar and S.N. Namasivayam Chettiar v. CIT, which stressed that the method of accounting must be such that true profits can be correctly determined.

The tribunal concluded that the LIFO assumption did not give a true picture of the profits earned by the assessee during the year. It reasoned that normally, stock already at hand would be sold before new purchases were made (FIFO assumption). The tribunal found that the FIFO assumption was more likely to give a true picture of the profit earned by the assessee during the year. It noted that the assessee's method of valuation was a device to suppress true profits and that the ITO should adopt a method that helps in determining true profits.

2. The Power of the CIT to Revise the ITO's Assessment Under Section 263:

The assessee raised an objection that the CIT had no power to cancel the ITO's order under Section 263 because the assessment was made based on directions from the IAC under Section 144A. The assessee argued that Section 263 only speaks of the revision of the ITO's order.

The tribunal rejected this contention, referring to the Explanation to Section 263 introduced by the Taxation Laws (Amendment) Act, 1984, effective from 1-10-1984. The Explanation clarified that an order passed by the ITO includes an order of assessment made based on directions issued by the IAC under Section 144A. Since the CIT's order under Section 263 was passed on 30-3-1985, after the insertion of the Explanation, the tribunal held that the CIT had the power to revise the impugned order.

Conclusion:

The tribunal upheld the CIT's order passed under Section 263, dismissing the assessee's appeal. The tribunal found that the LIFO method did not provide a true picture of the profits and that the CIT was justified in directing the ITO to reassess the value of the closing stock at the average purchase rate for the year. The tribunal also confirmed the CIT's power to revise the ITO's order under Section 263, even when the assessment was based on directions from the IAC under Section 144A.