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Issues: Valuation of closing stock based on cost of production and sale proceeds. Acceptance of consistent method by assessee vs. accountancy principles.
In this case, the assessee firm engaged in the publication and sale of school books valued its closing stock based on the difference between the cost of production and the sale proceeds of each book. The Income-tax Appellate Tribunal (ITAT) Hyderabad-A noted that if the sale proceeds exceeded the cost of production for a particular book, the closing stock was shown as nil. However, if the sale proceeds were less, the closing stock was calculated as the difference between the total cost and the sale proceeds. The Income-tax Officer rejected this method, adding Rs. 2,72,945 to the assessment, stating it did not align with accountancy principles mandating valuation at cost or market price, whichever is lower. On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) recognized that the assessee consistently followed this valuation method for all past years. The CIT(A) deemed it inappropriate to impose a general rule for stock valuation, considering the unique nature of the assessee's business. The CIT(A) emphasized that the Department had accepted the method in previous years, and therefore, the Income-tax Appellate Commissioner's (IAC) rejection was unwarranted. The CIT(A) concluded that the true profits were reflected accurately through the assessee's valuation method and deleted the addition of Rs. 2,72,945. During the proceedings, the departmental representative contended that the closing stock should adhere to accountancy principles by being valued at cost or market price, whichever is lower. The representative argued against accepting the assessee's method, claiming it did not reflect true profits. Conversely, the assessee's counsel supported the CIT(A)'s decision, highlighting the long-standing acceptance of the valuation method by the Department. The counsel emphasized the lack of demand for books by the end of the financial year and the necessity to wait for government recommendations for the next academic year to assign value to the closing stock. The ITAT, considering the arguments, emphasized the importance of consistently applied accounting methods. Referring to legal precedents such as Duple Motor Bodies Ltd vs. Indian Revenue Commissioners and British Paints Indian Ltd vs. CIT, the ITAT upheld the CIT(A)'s decision. The ITAT reasoned that the assessee's valuation method accurately reflected true profits, as evidenced by the gross profit percentage. The ITAT noted that changing the valuation method after consistent application for 20 years would lead to unnecessary complications. Ultimately, the ITAT dismissed the appeal, affirming the CIT(A)'s decision to delete the addition to the assessment, as the assessee's valuation method aligned with the principles of accounting and accurately represented the true profits.
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