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2009 (8) TMI 127 - AT - Income TaxValuation of closing stock - change in method of valuation from actual cost to average cost method - difference in the closing stock - search proceedings u/s.153A - Whether change in the method of valuation is bona fide? - the assessee valued the closing stock of gold jewellery on average cost basis as against cost which resulted in lowering of income as compared to the original returns filed by the assessee. AO did not agree with that the method of change in valuation of closing stock and he added the difference in the valuation of closing stock. The CIT(A) on the basis of decision of Hon ble apex Court held that there was clear distortion of profits due to change in method hence accepted the method by Department should have been followed by the assessee. He accordingly upheld the stand taken by the AO. HELD THAT - Admittedly the assessee did not revise any of the returns for assessment years under consideration prior to date of search carried out in the case of the assessee. In the case of a person where a search is initiated u/s.132 or books of account other documents or any assets are requisitioned u/s.132A after the 31st May 2003 assessment has to be made u/s.153A. Sec. 153A(1) contains non obstante clause and hence provisions of this section will override the provisions of s. 139 s. 147 s. 148 s. 149 s. 151 and s. 153 of the Act. Under s. 153A(1) the AO is empowered to issue notices to the assessee searched for a period of six years in order to assess the income on the basis of material found during the course of search. The second proviso to s. 153A(1) provides that the assessment or reassessment if any relating to any assessment year falling within the period of six assessment years referred to in s.153A(1) pending on the date of initiation of search u/s.132 or making of requisition u/s.132A as the case may be shall abate. Therefore after initiation of search no assessment in respect of pending assessment shall be made and AO is empowered to issue notice u/s.153A to assess or reassess the total income of six assessment years immediately preceding assessment year relevant to the previous year in which such search was conducted or requisition was made. The assessee had valued the closing stock for asst. yrs. 2000-01 to 2005-06 on average cost method which has resulted in reduction of taxable income in all the years ranging from Rs. 8, 975 in asst. yr. 2001-02 to Rs. 9, 00, 797 in asst. yr. 2005-06. It is a fact that all the assessee are required to maintain the stock registers during the course of normal business activities. It is not difficult to identify the items purchased the date of purchase and their costs. Hence we do not find any substance in the argument of the assessee that it is impossible to value the closing stock at actual cost particularly in view of the fact that the assessee had been valuing the closing stock at cost price from very beginning of the business. The concluded proceedings cannot be reopened on the ground that the assessee had incorrectly valued the closing stock in those years. The assessee had filed returns of income for all the six assessment years u/s.139(1). The assessments or reassessments cannot be made in these years by invoking the provisions of s. 147 after initiation of search proceedings in view of second proviso to s.153A(1). From the facts it is clear that the assessee had changed the method of valuation of the closing stocks for six assessment years to reduce the profits and hence the change in the method of valuation is not bona fide. As regards the contention of the assessee that it is impossible to value the closing stock at cost price in the case of jewellers this is a sweeping generalization without having any material on records to prove. The assessee had not filed any evidence to support its contention and hence deserves to be rejected. The income for the purpose of reassessment cannot be reduced beyond the income originally assessed. In the assessment years before us returns of income for asst. yrs. 2000-01 to 2005-06 have been accepted u/s.143(1) and therefore in view of the decision of Hon ble Supreme Court in the case of Sun Engineering Works (P) Ltd. 1992 (9) TMI 1 - SUPREME COURT the assessee cannot be permitted to claim the benefit of closing stock by changing the method of valuation as it becomes favourable to the assessee. Therefore in view of the discussions in search proceedings u/s.153A which are for the benefit of the Revenue assessee is not permitted to value the closing stock for concluded years at average cost price. Accordingly the AO as well as CIT(A) was justified in rejecting the change in method of valuation adopted by the assessee for all these years. Hence we do not find any infirmity in the order passed by the CIT(A) confirming the additions made by the AO due to change of method of valuation.
Issues Involved:
1. Valuation of closing stock. 2. Change in the method of valuation of closing stock. 3. Legitimacy of revising returns under section 153A. 4. Application of legal precedents and principles. Detailed Analysis: 1. Valuation of Closing Stock: The primary issue across all six appeals was the valuation of closing stock. The assessee had initially valued the closing stock on an ad hoc estimate basis in the original returns filed under section 139(1). Upon a search and seizure operation under section 132, the assessee revised the valuation method to "average cost" in the returns filed under section 153A, resulting in a lower reported income. The Assessing Officer (AO) disagreed with this change, adding the difference in valuation back to the income. 2. Change in the Method of Valuation of Closing Stock: The assessee argued that the original valuation was ad hoc and that the "average cost" method was more accurate, citing difficulties in valuing jewellery stock at actual cost. However, the AO and CIT(A) maintained that the change was not bona fide and was aimed at reducing taxable income. The CIT(A) referenced the Supreme Court decision in CIT vs. Bilahari Investment (P) Ltd., emphasizing that a change in method resulting in profit distortion is not permissible. The Tribunal upheld this view, noting that the assessee had consistently used the cost method in the past and had not revised the returns within the allowable period. 3. Legitimacy of Revising Returns under Section 153A: The Tribunal examined whether the assessee could revise returns for the six assessment years under section 153A. It was noted that section 153A allows the AO to assess or reassess income based on search findings, overriding sections 139, 147, 148, 149, 151, and 153. The Tribunal found that the assessee's attempt to revise the valuation method post-search was not justified, as it was intended to reduce tax liability rather than correct an error. The Tribunal cited the Supreme Court decision in CIT vs. Sun Engineering Works (P) Ltd., which held that reassessment proceedings should not be used to claim benefits not originally pursued. 4. Application of Legal Precedents and Principles: The assessee relied on several judgments to support the change in valuation method, including Concordia Corporation Ltd. vs. CIT and CIT vs. British Paints India Ltd. However, the Tribunal found these cases distinguishable. The Tribunal emphasized that any change in the method of valuation must be bona fide and consistently applied. The Tribunal also cited the Supreme Court decision in Sanjeev Woollen Mills vs. CIT, affirming the recognized practice of valuing closing stock at cost or market price, whichever is lower. The Tribunal concluded that the assessee's change in method was not justified and upheld the additions made by the AO. Conclusion: The Tribunal dismissed the appeals, affirming that the assessee's change in the method of valuation of closing stock was not bona fide and was aimed at reducing taxable income. The original method of valuation at cost should be maintained, and the additions made by the AO were justified. The Tribunal's decision was based on the principles established in relevant legal precedents, ensuring that the assessment was fair and in accordance with the law.
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