1988 (3) TMI 156 - AT - Income Tax

Summary

Issues Involved:
1. Under-valuation of closing stock of silverware and raw silver.
2. Method of valuation of base stock.
3. Change in the constitution of the firm.
4. Consistency in the method of accounting.
5. Revaluation of opening stock.

Issue-wise Detailed Analysis:

1. Under-valuation of closing stock of silverware and raw silver:
The Revenue made an addition of Rs. 7,51,629 on account of under-valuation of closing stock of silverware and raw silver. The assessee had been valuing the base stock of silverware and raw silver at Rs. 694 and Rs. 550 per kg, respectively, for several years. The IAC did not accept this method as he believed there was no basis for maintaining the same value over time and no conclusive evidence that the base stock remained in the closing stock. The IAC revalued the stocks at current rates, resulting in the addition.

2. Method of valuation of base stock:
The CIT(A) accepted the assessee's method of valuation, which had been consistently followed since the asst. yr. 1974-75 and previously accepted by the Department. The CIT(A) held that there was no necessity for revaluation as there was no dissolution of the firm, only a change in its constitution. The Tribunal, however, found that the base stock method did not reflect the true income, profits, and gains for the year under appeal, citing various legal precedents that supported the Revenue's contention to reject the base stock method.

3. Change in the constitution of the firm:
The IAC noted a change in the firm's constitution due to family disputes, suggesting that this necessitated a revaluation of the base stocks. The CIT(A) disagreed, stating there was no dissolution, only a change in partners, and thus no need for revaluation. The Tribunal agreed with the CIT(A) that there was no dissolution, but still found the base stock method inappropriate for reflecting true income.

4. Consistency in the method of accounting:
The assessee argued that the method of accounting had been consistently followed and accepted by the Department in previous years. The Tribunal acknowledged this consistency but emphasized that consistency alone does not justify a method if it does not reflect true income. Legal precedents cited by the Tribunal supported the view that the Department could reject a method if it did not result in accurate profit determination.

5. Revaluation of opening stock:
The assessee alternatively suggested that if the base stock was to be revalued, the opening stock should also be revalued to avoid distortion of profits. The Tribunal found merit in this argument and directed the IAC to verify the correctness of the workings provided by the assessee and adjust the addition accordingly, ensuring the true income, profits, and gains were reflected.

Conclusion:
The Tribunal reversed the CIT(A)'s decision on the method of valuation of closing stock, agreeing with the Revenue that the base stock method did not reflect the true income. However, it accepted the assessee's alternative submission to revalue the opening stock similarly to ensure accurate profit determination. The appeal was thus partly allowed.