2017 (2) TMI 164 - AT - Income Tax

Reopening of assessment - Disallowance of undervaluation of stock - assessee of following FIFO method for valuation of inventory - Held that - We find that the assessee had submitted complete details showing summary of fabric purchased and sold specifically showing the quantity, rate and value of the opening stock, purchases and closing stock before the authorities below and as such no defect has been pointed out by Revenue accept that FIFO method of valuation of inventory is followed by the assessee on cost basis while the AO followed average method for valuation of inventory. The Revenue has accepted the method followed by the instant assessee consistently for past several years and also for succeeding year and per-se no such contrarian stand of the Revenue was brought on record except for the impugned assessment year by learned DR or authorities below to disprove this contention of the assessee , and also more-so the tax impact is revenue neutral as the closing stock/inventory of the relevant previous year is opening stock/inventory of the immediately succeeding financial year. The assessment order dated 30-11-2010 passed u/s 143(3) of the Act for assessment year 2008-09 in the case of instant assessee wherein no addition has been made by Revenue on account of method of valuation of inventory is placed on record in file. Revenue has not been able to bring on record that how by following FIFO method of valuation of inventory based on cost, the profits of the assessee could not be computed correctly so as that it infringes on Section 145/145A of the Act. Appeal filed by the assessee is allowed.

Issues Involved:
1. Disallowance of ?38,87,031/- due to alleged undervaluation of stock.
2. Failure to specify the section of the Income Tax Act under which the disallowance was made.
3. Misunderstanding of the concept of AS 2, Valuation of Inventories under FIFO basis of Accounting.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of ?38,87,031/- due to alleged undervaluation of stock:
The assessee's return for the assessment year 2007-08 was initially assessed under section 143(3) and later reopened under section 147 due to a perceived undervaluation of closing stock. The Assessing Officer (AO) observed that the closing stock was valued at ?119.69 per meter while the opening stock and purchases were made at higher rates of ?160.44 and ?149.78 per meter respectively. The AO concluded that the closing stock was undervalued by ?38,87,031/-. The assessee argued that it followed the FIFO method, valuing inventory based on the cost of the most recent purchases, which averaged ?119.69 per meter. The AO rejected this explanation, leading to the disallowance.

2. Failure to specify the section of the Income Tax Act under which the disallowance was made:
The assessee contended that the CIT(A) erred by not quoting the specific section of the Income Tax Act under which the amount was disallowed. This procedural lapse was highlighted as a ground for appeal.

3. Misunderstanding of the concept of AS 2, Valuation of Inventories under FIFO basis of Accounting:
The assessee maintained that it consistently followed the FIFO method for inventory valuation as per AS-2, which was accepted by the Revenue in previous years. The CIT(A) and AO, however, did not accept this method for the assessment year in question. The CIT(A) relied on Supreme Court judgments, emphasizing valuation at cost or market price, whichever is lower, and supported the AO's use of an average rate for valuation. The assessee argued that the FIFO method was a recognized and consistently applied accounting practice, and the valuation should not be altered.

4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961:
The assessee also contested the initiation of penalty proceedings under section 271(1)(c), which pertains to concealment of income or furnishing inaccurate particulars. The assessee argued that there was no intention to evade tax and that the valuation method used was legitimate and consistently applied.

Tribunal's Findings:
The Tribunal considered the assessee's consistent use of the FIFO method for inventory valuation and noted that the Revenue had accepted this method in previous and subsequent years. The Tribunal referenced a similar case (ACIT v. Dinesh V. Bahirwani) where the FIFO method was upheld, emphasizing that the closing stock of one year becomes the opening stock of the next, making the tax impact revenue-neutral. The Tribunal found no deficiencies in the assessee's method of accounting and concluded that the FIFO method was appropriate and correctly applied.

Conclusion:
The Tribunal allowed the appeal, overturning the disallowance of ?38,87,031/-. It recognized the FIFO method as a valid accounting practice consistently followed by the assessee and accepted by the Revenue in other years. The appeal was allowed, and the disallowance was deleted. The Tribunal did not find merit in the Revenue's contentions and emphasized the consistency and correctness of the FIFO method for inventory valuation. The initiation of penalty proceedings under section 271(1)(c) was also implicitly addressed by validating the assessee's accounting method.

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