2012 (8) TMI 462 - HC - Income Tax

Method of valuation of closing stock - assessee consistently following method of taking cost or market price whichever was lower - revenue seeks to arrive at value of the closing stock by adopting an average method by valuation while the assessee seeks to arrive at the valuation of closing stock on the basis of quality of the stent and its costs as available on actual basis - Held that - In the present case, assessee has adopted the method of valuing stock which gives the value of the closing stock depending upon the quality of the stents which are in its possession. The method adopted by the revenue of seeking to multiply the number of stent with the average costs by stents in the possession of the respondent would lead not only to estimated cost of closing stock but also distort the profit and/or loss obtained. This is so as the method employed by the revenue completely ignores the valuation of the individual stent. Therefore, on merits, we find no fault with the method adopted by the assessee of valuing closing stock which has been upheld by the CIT(A) and the Tribunal - Decided in favor of assessee.

Summary

Issues:
1. Valuation of closing stock based on cost or market price.
2. Imposition of interest under sections 243B and 234C.

Issue 1: Valuation of closing stock based on cost or market price:

The respondent, engaged in trading medical components, valued its closing stock for the assessment year 2003-04 by considering costs lower than net realizable value. The Assessing Officer, however, calculated closing stock using an average method, resulting in an increase in income. The Commissioner of Income Tax (Appeals) allowed the respondent's appeal, emphasizing the consistent application of the cost or market price method. The Tribunal upheld this decision, noting the respondent's detailed record-keeping and valuation process. The revenue argued for the average method due to the "first in first out" inventory system. The respondent contended that their method, based on individual stent costs, provided accurate valuation without estimation. The court held that the correct valuation of closing stock aims at determining profits accurately, emphasizing the cost or market price principle. It found the respondent's method appropriate, as it considered the quality and cost of each stent, unlike the revenue's averaging approach, which could distort profits. The court dismissed the appeal, stating no substantial question of law arose.

Issue 2: Imposition of interest under sections 243B and 234C:

Regarding the imposition of interest under sections 243B and 234C, both parties agreed that a previous court decision favored the respondent. The court noted this agreement, indicating that the issue was settled in favor of the respondent based on a prior judgment.

In conclusion, the High Court of Bombay dismissed the revenue's appeal challenging the valuation of closing stock and the imposition of interest under sections 243B and 234C. The court upheld the respondent's method of valuing closing stock based on cost or market price, emphasizing the accuracy of individual stent costs over the revenue's averaging approach. The judgment highlighted the importance of correctly determining profits through appropriate stock valuation methods, ultimately finding no substantial legal question to warrant interference with the lower authorities' decisions.