1986 (4) TMI 112 - AT - Income Tax

Summary

Issues: Valuation of closing stock of gold jewellery for asst. yr. 1981-82.

The judgment involves an appeal by the assessee against the order of the CIT(A) regarding the valuation of the closing stock of gold jewellery for the assessment year 1981-82. The assessee, a registered firm engaged in the manufacture of gold and silver ornaments, was found by the ITO to have valued the closing stock of gold jewellery in a manner that did not align with the purchases made during the year. The ITO contended that the assessee failed to provide a valid basis for valuing the stock, noting the absence of detailed individual item entries in the excise register. The ITO suspected that the assessee was arbitrarily valuing the gold jewellery without following any established principle, aiming to manipulate the gross profit percentage. The ITO calculated the average rate of gold jewellery to be Rs. 1,218 for 10 gms, contrasting it with the lower value declared by the assessee, resulting in an addition of Rs. 3,34,110 for undervaluation.

Upon appeal, the CIT(A) acknowledged the ITO's concerns about the valuation method employed by the assessee, rejecting the method of dividing the closing stock based on the years of acquisition. Instead, the CIT(A) proposed valuing the closing stock at an average rate derived from the opening stock and purchases made during the year, leading to a reduction in the addition made by the ITO. The assessee contended that their valuation method, based on the "Last in first out" principle, was consistent and recognized for stock valuation, challenging the rejection of this method by the ITO and CIT(A). The appellate tribunal emphasized the importance of ascertaining whether the assessee consistently followed a regular valuation system, citing the "Last in first out" method as acceptable unless it distorts the profit calculation. The tribunal directed the ITO to investigate the assessee's stock valuation practices over multiple years to determine the validity of the claimed method and instructed a fresh assessment based on established facts.

In conclusion, the appeal was allowed for statistical purposes, highlighting the necessity of a thorough examination of the assessee's stock valuation practices and the importance of adhering to recognized accounting principles for determining closing stock value in the assessment process.