2012 (7) TMI 684 - AT - Income Tax

Undervaluation of stock of silver - held that - It is not in dispute that the assessee did not make purchase of silver during the assessment year under appeal. The assessee had gained the silver while doing job work for others, part of which was sold and the balance was taken as part of the closing stock. Thus, the assessee is justified in contending that the cost in the hands of the assessee of gained silver was nil. The assessee followed the same method of accounting of closing stock of gained silver in earlier years as well as in assessment under appeal. It is well settled law that whenever the closing stock is disturbed, it would enhance the opening stock of the next year. Method of accounting adopted by the assessee consistently, should not have been disturbed by the AO without any just cause / reason.

Issues Involved:
1. Addition on account of undervaluation of stock of silver.
2. Consistency in the method of accounting for valuation of stock.
3. Treatment of notional profit versus real profit.

Issue-wise Detailed Analysis:

1. Addition on account of undervaluation of stock of silver:
The primary issue in this case revolves around the addition of Rs. 21,07,555/- made by the Assessing Officer (AO) due to the alleged undervaluation of the stock of silver. The assessee, involved in the manufacturing of silver chains and components, gained silver during job work and valued it at Rs. 6670 per kg, while the AO insisted on valuing it at the market rate of Rs. 11770 per kg as of 31.03.2004. The AO's addition was based on the premise that the gained silver should be valued at market price, leading to the disputed addition.

2. Consistency in the method of accounting for valuation of stock:
The assessee argued that the method of valuation adopted was consistent with previous years, where the stock was valued at cost or market price, whichever is lower. The assessee maintained that since there were no purchases of silver during the year, the valuation was based on the average cost of the opening stock. The assessee cited multiple judicial precedents to support the position that a consistent method of accounting should not be disturbed unless it leads to distortion of profits. The authorities below, however, upheld the AO's valuation at market price, leading to the addition.

3. Treatment of notional profit versus real profit:
The assessee contended that the addition made by the AO was notional and did not reflect actual profit. The argument was that the gained silver, valued at nil cost, should not result in notional profit being taxed. The assessee emphasized that actual profit would be realized and taxed upon the sale of the gained silver, which had been consistently accounted for in previous years. The contention was supported by judicial precedents, asserting that only real income should be taxed, and not notional income.

Judgment Analysis:
The Tribunal considered the facts and arguments presented by both parties. It was noted that the assessee did not purchase silver during the year and gained silver through job work, which was partly sold and partly included in the closing stock. The Tribunal acknowledged that the assessee consistently followed the same method of accounting for valuing gained silver, and no defects were pointed out by the AO in this method. The Tribunal emphasized that closing stock valuation impacts the opening stock of the subsequent year, and any enhancement in closing stock valuation would not benefit the Revenue in the long run.

The Tribunal referred to the principle that notional income should not be taxed and only real income should be brought to tax. It was held that the AO should not have presumed profit on the notional value of gained silver, especially when the assessee had been selling such silver periodically and offering the difference for taxation. The Tribunal concluded that the method of accounting adopted by the assessee consistently should not have been disturbed without just cause. Consequently, the Tribunal set aside the orders of the authorities below and deleted the entire addition of Rs. 21,07,555/-.

Conclusion:
The appeal of the assessee was allowed, and the addition on account of undervaluation of stock of silver was deleted. The Tribunal upheld the consistent method of accounting adopted by the assessee and ruled against taxing notional income, reinforcing the principle that only real income should be subject to tax.

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