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TMI Blog2018 (4) TMI 1625X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the wish list of the jeweller. We find that the aforesaid valuation exactly fits into the accepted method of valuation for a jeweller as approved in the case of Cochin Tribunal in the case of ITO vs Sree Padmanabha Jewellery Mart[1986 (8) TMI 120 - ITAT COCHIN ] In any event, we hold that no addition could be made towards value of stock because the closing stock cannot be construed as a source of profit for the assessee - assessee has been consistently following LIFO method of accounting for valuation of its closing stock of gold which has been accepted by the department in the earlier years even in scrutiny assessment proceedings of the assessee. Then there is no justifiable reason to reject the same method during the year under appeal. - Decided against revenue Addition towards making charges included in valuation of closing stock - Held that:- We find that the assessee had stated that it had included making charges in the closing stock. But this statement made by the assessee has been accepted by the CITA without verifying the said fact. Thus remand this issue to the file of the AO, with a direction to verify the fact of inclusion of making charge in the valuation of closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ISPUTE IN VALUATION OF CLOSING STOCK Ground No. 1 of Revenue Appeal The brief facts of this issue are that the assessee is engaged in the business of manufacturing and selling of Gold & Diamond Studded Gold Jewellery and had filed its return of income for the Asst Year 2010-11 on 23.9.2010 declaring total income of ₹ 6,10,961/-. During the year under consideration, the assessee company has also done job work of other parties. The assessee has shown turnover of ₹ 6.10 crores and contractual receipt for manufacturing of jewellery of ₹ 38.46 lacs. The ld AO observed that vide Column 12 (a) of the Audit Report of the assessee, the method of valuation of closing stock adopted by the assessee is as under:- Gold : At cost including making charges under LIFO method Diamond : At cost or net realizable value whichever is lower under LIFO method Pearl & Emerald : At cost under LIFO method 4.1. The ld AO vide notice u/s 142(1) of the Act dated 1.10.2012 asked for monthly statement of stock mentioning month, item wise details of jewellery, opening balance, purchase / production , consumption / sale and closing balance . The assessee company filed its details by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee." 4.4. The assessee stated that it had applied the same method regularly, since inception of the business from the year 1994 and the same method of accoutnign have been followed year to year and every year and have been accepted by the department. The method followed was to take the value of the opening stock as per the earlier years closing stock and for addition in the value of stock every year, the yearly average rate is applied for addition in the stock over and above last year stock. For the purpose of valuation under LIFO method, the aforesaid method is proper and well recognized method. 4.5. The ld AO observed that the inventories are to be valued in accordance with the method prescribed under Accounting Standard (AS) -2 issued by the Institute of Chartered Accountants of India (ICAI). He observed that AS-2 prescribes valuation of inventories should be valued on First in First Out (FIFO) method or weighted average method and LIFO method is not permitted. Since the assessee is a company, it has to mandatorily follow the AS-2 issued by ICAI. He observed that though the choice of the method of accounting lies with the assessee, but in the case of company, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FO method is not justified. 4.6. The ld AO observed that in the absence of records to indicate as to whether the sales were out of the jewellery of the opening stock or out of the purchases made during the year, an estimate of the cost of gold, which may be charged as an expense in arriving at the profit for tax purposes, has got to be made. The question is whether these expenses should be, determined on the basis of LIFO assumption, as made by the assessee, or FIFO assumption. The ld AO observed that FIFO assumption approximates more closely to the reality. He observed that LIFO method adopted by the assessee is not giving true profit of the year and hence method adopted by the assessee company is rejected. The ld AO accordingly adopted the weighted average method as prescribed in AS-2 of ICAI to reach nearer to true profit. The ld AO arrived at the closing stock by adopting the weighted average cost as under:- Value of Gold (24K,22K,20K and 18K) 8,77,57,418.38 Value of Diamonds 3,44,98,469.46 Value of Stones 18,91,090.62 Making Charges as taken by the assessee 14,82,741.00 Total Value 12,56,29,719.46 The assessee had declared the value of closing stock at ₹ 8,64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructure Pvt Ltd in IT(SS) A No. 450/Ahd/2011 dated 31.10.2011 It was further pleaded that there would be no revenue effect when the closing stock is revalued since if the AO had revalued the closing stock for the assessment year in question then he will be duty bound to increase the value of the opening stock in the next year. Therefore such addition becomes revenue neutral. Moreover, the opening stock of this year which is claimed as deduction should also be revalued by the ld AO using weighted average method, which in turn would go to increase the expenditure thereby reducing the profit of the year. 6. The ld CITA appreciated the aforesaid contentions of the assessee and the case laws relied upon by it and deleted the addition made by the ld AO in the sum of ₹ 3,91,71,167/- towards valuation of closing stock. Aggrieved, the revenue is in appeal before us on the following ground:- I.T.A. No. 828/Kol/2015 for the assessment year 2010-11 1. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 3,91,71,167/- in the valuation of stock. Method of valuation of closing stock (LIFO) adopted by the assessee is not giving true pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assigned by using the first-in, first-out (FIFO) , or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. 7.1. The ld AR pleaded before us that the LIFO method is also recognized in AS-2 and in this regard , he placed reliance on the decision of Pune Tribunal in the case of Sandvik Asia vs DCIT reported in 69 ITD 59 wherein it was held : "18. Lastly, we shall deal with the contention of the learned Senior Departmental Representative that true profits cannot be deduced on the basis of LIFO method and, therefore, the same should be rejected despite the fact that the same was being consistently followed by the assessee in the past. Such a contention has been raised in view of the Hon'ble Supreme Court decision in the case of British Paints India Ltd. (supra). We have given our deep thought to this contention but we are unable to accept the same. The LIFO method is one of the recognized method of valuation of closing stock as per Accounting Standard 2 laid down by the Institute of Chartered Accountants of India and para 26 of the Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re him at the time of assessment proceedings. Infact no discrepancy was noticed on the quantity of gold and other jewellery by the Learned AO. We find that the Learned AO had not recorded any clear finding in his order that the LIFO method of accounting followed by the assessee for valuing its closing stock was such that correct profit could not be deduced from the books of account maintained by the assessee. In these circumstances, it would not be justified in rejecting the closing stock valuation regularly adopted by the assessee. Reliance is also placed on the decision of the Hon'ble Calcutta High Court in the case of British Paints India Ltd vs CIT reported in (1978) 111 ITR 53 (Cal). We also find that the reliance placed by the Learned AR on the co-ordinate bench decision of Cochin Tribunal in the case of jeweller in ITO vs Sree Padmanabha Jewellery Mart reported in 19 ITD 816 is directly on the point involved in this appeal. In the said case, it was held that :- The manner of valuation of closing stock by the assessee is as under:- "The quantity of stock left at the end of any years is first ascertained by reference to the detailed books of accounts maintained by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a jeweler and had declared closing stock of ₹ 3,79,84,232/- as on 31.3.2007. The contention of the assessee was that it was valuing the closing stock at cost. Out of the total closing stock of 54,756 gms, the assessee claims that gold weighing 31,905 gms was its opening stock valued @ ₹ 482/- per gram. The balance stock available out of the purchases made during the year was 22850 gms which was valued at cost price of ₹ 905/- per gram. The contention of the assessee was rejected by the Assessing Officer as according to the Assessing Officer the assessee was not following one of the methods specified in accounting standard AS-2 issued by the Institute of Chartered Accountants of India for determining the cost of inventories. The explanation of the assessee in this regard was that the opening stock of 31950 gms was valued at ₹ 482/- per gram and similar value be adopted to work out the value of closing stock. It as further explained that the said jewellery being old conventional jewellery was not sold during the year and was available at the close of the year. The balance stock was out of the purchases made during the year less sales made by the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he principles were laid down for valuation of assets at page 366. We find that the following decisions also support the case of the assessee:- CIT vs Sant Ram Mangat Ram reported in (2005) 275 ITR 312 (P&H) CIT vs Ema India Ltd reported in (2006) 296 ITR 510 (All) CIT vs Jagatjit Industries Ltd reported in (2011) 339 ITR 382 (Del) CIT vs Shah Doshi & Co reported in (1982) 133 ITR 23 (Guj) 7.5. In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the various judicial precedents relied upon hereinabove, we do not find any reason to interfere with the order of the Learned CITA. Accordingly the grounds raised by the revenue are dismissed." 7.3. Similar decision was rendered by this tribunal in the very same case for the Asst Year 2011-12 in ITA No. 202/Kol/2015 dated 4.10.2016. The facts of that case and decision rendered thereon are squarely applicable to the facts of the instant case. Hence respectfully following the said decision of this tribunal, we hold that the ld CITA had rightly deleted the addition made in the sum of ₹ 3,91,71,167/- and hence no interference is warranted in the same. Accordingly, the Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ₹ 7,80,544/- adding up to ₹ 10,96,584/-. The appellant, on the other hand, has denied the allegation, that making charges were not included in the valuation of stock. It is seen from the schedule-(vi) to the balance sheet, that in the valuation of inventory there is a specific item for making charges amounting to ₹ 14,82,742/-. The appellant has given a working of wastage allowed to the karigars which was considered as part of making charges. Applying the rate of wastage and the amount paid in money, it has worked out total making charges at ₹ 1,26,29,511/- for the entire production of 180147.79 gram during the year. Accordingly, the average rate comes to ₹ 70.11 per gram. If one applies this rate to the increase in stock during the year taken by the assessing officer in his computation, the making charges imbedded in increase in stock come to ₹ 8,77,340/-. In the assessment order, the assessing officer has computed such making charges at ₹ 10,96,584/-. As against that, the appellant has included making charges of ₹ 14,82,742/- in the closing stock and ₹ 11 ,59,646/- in the opening stock as per schedule-(vi) to the balance s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges to karigars including for the portion of wastage. Accordingly, the grounds raised by the assessee and revenue as above are allowed for statistical purposes. 9. ADDITION OF ₹ 4,02,67,751/- U/S 115JB OF THE ACT Ground No. 3 of Revenue Appeal The ld AO observed that the assessee company had not prepared its profit and loss account according to Part II and Part III of Schedule VI of the Companies Act and notified accounting standards, in view of the fact that the assessee had followed LIFO method for valuation of closing stock which is not in accordance with AS-2 issued by ICAI. He said that since the assessee had not prepared the profit and loss account by following the notified accounting standards, the ld AO is empowered to make alterations to the book profits reported by the assessee. Accordingly, the ld AO made an addition of ₹ 4,02,67,751/- ( 3,91,71,167/- towards closing stock valuation and ₹ 10,96,584/- towards making charges not included in closing stock) to the book profits computed u/s 115JB of the Act. The ld CITA deleted the said addition in view of the fact that he had deleted the addition made towards valuation of closing stock in the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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