2014 (5) TMI 470 - AT - Income Tax

Valuation of closing stock Addition of proportionate transport charges Whether freight expenses incurred on account of purchases were to be included in the value of closing stock or not - Held that - Following Hero Motocorp Limited vs. ACIT 2013 (8) TMI 57 - ITAT DELHI - the Revenue has rejected the method of accounting which is consistently followed by the assessee on the ground that there may be chance where in a particular year, the method adopted by the assessee may result in underestimation of profits - the Revenue failed to demonstrate with facts and figures that the impugned method of accounting may result in material underestimation of profits - the assessee has demonstrated that the change in the method of accounting for year under appeal would result in loss to the revenue as the opening stock would also require similar adjustment and the cascading effect will be loss to revenue - in many of the additions made in this case by the revenue, the consistent method of accounting is unnecessarily disturbed, though it has been accepted in many years - such tinkering with the method is unjustified when the exercise does not materially alter the profits - such petty additions should be avoided on the ground of materiality, as AS-1 which talks about materiality, consistency, prudence etc. is part of the I.T. Act after it is notified u/s 145(2). Adjustment made to total value of closing stock and consumption of stock is uncalled for - If valuation of closing stock is changed then the value of opening stock should also be changed on the same basis or method - The closing stock of a particular year is the opening stock of the subsequent year - the method of valuation of closing stock is materially affecting the accounts and profits disclosed by the assessee the adjustment sought to be made is revenue neutral and at best may result in preponement or postponement of revenue - Accounting standards notified by the CBDT u/s 145(2) mandate that the concept of materiality be taken into consideration when finalizing the accounts of an assessee the addition made on account of proportionate inward transport charges is set aside Decided in favour of Assessee.

Summary

Issues Involved:
Appeal against CIT(A)'s order confirming addition of transport charges in valuation of closing stock.

Analysis:

Issue 1: Inclusion of transport charges in closing stock valuation
The Assessing Officer observed that the assessee claimed inward transport charges but did not include them in the closing stock valuation. The AO included proportionate transport charges in closing stock, leading to an addition to the assessee's income. The CIT(A) upheld this decision citing impact on profit in the year of accounting method change. The AR relied on a Tribunal decision stating the adjustment is revenue neutral. The Tribunal analyzed the facts, noting the consistent method followed by the assessee and the lack of demonstrated profit underestimation due to the accounting method. Citing various legal precedents emphasizing consistency and materiality, the Tribunal held the adjustment was unnecessary and revenue neutral. The Tribunal allowed the appeal, setting aside the addition of transport charges in the closing stock valuation.

Conclusion:
The Tribunal allowed the appeal, finding the adjustment of transport charges in closing stock valuation unnecessary and revenue neutral based on consistent accounting method and lack of demonstrated profit underestimation. The decision was supported by legal precedents emphasizing consistency and materiality in accounting practices.