2019 (9) TMI 456 - AT - Income Tax

Addition towards concealed Gross Profit in Gold and Silver - method of accounting - addition on account of alleged suppression of value of closing stock - AO had proceeded to estimate the closing stock by adopting average weighted method as against the LIFO method adopted by the assessee - HELD THAT - Assessing Officer had not pointed out any defects in the method of accounting followed by the assessee nor disputed the quantity of purchases and sales. The Assessing Officer only estimated the gross profit by adopting weighted average cost method of the stock only because the profits shown or the value of the closing stock is less. As a part of exercise to arrive at the value of the closing stock, assessee can adopt any of the following method. (i) LIFO (ii) FIFO and (iii) Weighted average cost method. It is normal practice in the business of trading in jewellery to follow LIFO method wherein last bought items were sold first, which results in the value of goods lying closing the stock was shown much less than the prevailing market value. This would enable the assessee to keep accumulating the old jewellery and enable the assessee not to pay tax on appreciated value of the gold , which is permissible under law. Having regard to the ratio decision in the case of United Commercial Bank 1999 (9) TMI 4 - SUPREME COURT AO is bound to accept this method of accounting preferred by the assessee and he cannot impose another method on the assessee, in the absence of any defects in the method of accounting followed by the assessee. Addition made by the Assessing Officer cannot be sustained in the eyes of law, viewed from any angle - Decided in favour of assessee

Summary

Issues:
- Appeal against order of CIT(A) for AY 2011-2012 regarding addition towards concealed Gross Profit in Gold and Silver.

Analysis:

1. The Revenue raised various grounds of appeal against the order of CIT(A), challenging the deletion of the addition towards concealed Gross Profit in Gold and Silver. The key contentions included the rejection of the historical cost method in favor of the weighted average method, the significance of sales tax assessment versus income tax assessment, and the alleged suppression of gross profit by the assessee.

2. The case involved M/s. Khazanchi Jewellers Pvt Ltd, a company engaged in manufacturing and trading gold and silver jewelry. The initial assessment by the Assessing Officer resulted in a total income of J15,05,49,619/-. Subsequently, after an appeal to the Principal Commissioner of Income Tax, the assessment was revisited, leading to a revised total income of J7,76,85,214/- with an addition of J7,20,59,374/- towards gross profit.

3. The Assessing Officer alleged that the assessee suppressed the value of closing stock, leading to the addition in gross profit. However, the CIT(A) allowed the appeal, emphasizing that the additions were based on assumptions and presumptions without rejecting the books of accounts. The Revenue contended that the valuation of closing stock is crucial for accurate assessment and argued for the adoption of the weighted average method.

4. Upon detailed examination, the Tribunal found that the Assessing Officer had not identified any defects in the assessee's accounting method or disputed the quantity of purchases and sales. The Assessing Officer's estimation of gross profit solely based on the application of the weighted average cost method was deemed unjustified. The Tribunal highlighted that the choice of accounting method lies with the assessee, and the Assessing Officer cannot impose a different method without valid reasons.

5. Citing legal precedents, including decisions by the Supreme Court and High Courts, the Tribunal emphasized that the Assessing Officer must accept the method of accounting regularly employed by the assessee unless it distorts the true profit. In this case, since no defects were found in the assessee's accounting method, the addition made by the Assessing Officer on grounds of suppressed value of closing stock was deemed unsustainable.

6. Consequently, the Tribunal dismissed the appeal of the Revenue, affirming the order of the CIT(A) in favor of the assessee. The decision was based on the principles of accounting method choice, the absence of defects in the assessee's method, and the impermissibility of the Assessing Officer to impose a different method without valid justification.