CHANDRA BROS.,KOLKATA V. I.T.O., WARD - 37(1), KOLKATA, KOLKATA

ITA 1572/KOL/2024

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Chandra Bros., a partnership firm engaged in the manufacture and sale of gold and silver ornaments, appealed against the order of the Addl/JCIT(A)-3, Chennai, which confirmed an addition of Rs. 11,467,009 to their income for the assessment year 2022-23. This addition was based on the undervaluation of closing stock as per the Tax Audit Report, which applied the Last In First Out (LIFO) method contrary to the Income Computation and Disclosure Standards-II (ICDS-II) mandating the Weighted Average Cost Method. The Tribunal found merit in the assessee's contention that both opening and closing stocks should be valued using the same method and directed a recomputation of profits for the assessment year 2022-23 alone, with a similar approach to be applied retrospectively for past years.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 711887 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2022-2023
• Other Referred Cases: ALA Firm Vs. CIT, Chainrup Sampatram Vs. CIT, PCIT vs. Escorts Limited, P.A. Jose vs. Union of India
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Set aside; Business income; Retrospective amendment; Capital asset converted into stock in trade
• Section: 148; 145

Judgement Text

"आयकर अपीलीय अधिकरण कोलकाता 'बी' पीठ, कोलकाता में IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘B’ BENCH, KOLKATA श्री प्रदीप क ुमार चौबे, न्याधयक सदस्य एवं श्री राक ेश धमश्रा, लेखा सदस्य क े समक्ष Before SRI PRADIP KUMAR CHOUBEY, JUDICIAL MEMBER & SRI RAKESH MISHRA, ACCOUNTANT MEMBER I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Vs. I.T.O., Ward-37(1), Kolkata (Appellant) (Respondent) PAN: AADFC9064B Appearances: Assessee represented by : I. Banerjee, AR. Department represented by : Kapil Mandal, Addl. CIT (DR). Date of concluding the hearing : 23-April-2025 Date of pronouncing the order : 22-July-2025 ORDER PER RAKESH MISHRA, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of the Addl/JCIT(A)-3, Chennai [hereinafter referred to as Ld. ‘Addl/JCIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2022-23 dated 27.05.2024, which has been passed against the intimation order u/s 143(1) of the Act, dated 15.06.2023. 2. The assessee is in appeal before the Tribunal raising the following grounds of appeal: Printed from counselvise.com Page | 2 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 2 of 18 “1. That on the facts and circumstances of the case and in law, the Appellate Order, passed by the Ld. Addl/JCIT(A), whereby he has dismissed the Appeal and therefore, confirmed the addition of Rs.11467009.00 concerning the valuation of Closing Stock, for being based on superficial, cursory, irrational and arbitrary perceptions and reasonings, would be liable to be nullified, reversed and therefore, substituted by a judicious and analytical verdict. (Issue: Confirmation of Addition of Rs.11467009.00, attributable to undervaluation of closing stock). 2. That on the facts and circumstances of the case, the Ld. Appellate Authority ought to have appreciated, from the specific ground taken, that Last in Fast Out Method (LIFO) of valuation for being consistently followed for both and Opening and Closing Stock, then Unilateral and thus, Asymmetrical application of a different method of Valuation, i.e., Average Cost Method, prescribed under Income Computation and Disclosure Standards-II (ICDS-II)/ Sec. 145(2), amounting to Rs.11467070.00 to the Closing Stock alone, would lead to distorted, fictional and unrealized Income. (Issue: Confirmation of Addition of Rs.11467009.00, contrary to consistent valuation practice and causing generation of fictional income) 3. Even otherwise, without prejudice to the Ground No. 1, if the closing stock valuation is to be subjected to principles of valuation i.e., Weighted Average Cost Method/WACM of Valuation, prescribed by ICDS-II/Section 145(2), for the sake of consistency, evenness and prevention of origin of any fictional income, therefrom, the Opening Stock, valued on LIFO basis, would call for valuation on same basis, i.e., WACM. (Issue: The valuation of Opening and Closing Stock needs to be on same basis).” 2.1. The assessee has also raised additional grounds of appeal which are as under: “1) Even Otherwise, without prejudice to the foregoing Grounds, the Appellant for having maintained necessary records of two categories of stock i.e. Slow Moving/virtually Stagnant Ornaments with old designs (Old Ornaments) and Fast Moving newly manufactured Ornaments with current designs (New Ornaments), due to their distinct characters, qualities, especially their widely disparate cost structure, even under ICDS-II (Para 17) both these categories of ornaments would constitute items of different categories, and therefore, call for separate and corresponding determination of Weighted Average Cost, for valuation purposes. Printed from counselvise.com Page | 3 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 3 of 18 (Issue: The Appellant having maintained two categories of Stock, Old and New ones, separate determination of weighted average cost of valuation, would be necessary, under ICDS). 2) The Appellant craves leave for going for additional grounds, modification of one or more of the foregoing grounds, not press for one or more of the foregoing grounds, as the merit and the situation would so warrant, either before or during the Appeal Hearing. (Issue: Reservation of the Option for effecting necessary modification in the existing Appellate Grounds).” 3. Brief facts of the case, as culled out from the appeal order of the Ld. CIT(A) are as under: “The Appellant is a Partnership Firm, engaged in the business of manufacture and sale of Gold and Silver Ornaments. Alongside, it also sells precious and semi-precious stones, either after setting them in the manufactured ornaments or separately. Regular Books of Accounts are maintained and duly subjected to Audit in adherence to sec. 44AB of the Income Tax Act, 1961. The Taxable Income is determined and thereafter, incorporated in the Income Tax Return, in the light of the Audited Accounts, information contained in the Tax Audit Report and other pertinent provisions of the said Act. After the Return of Income for the relevant assessment year, under the present appeal, had been filed, the processing of the said return, under sec. 143(1)(a) had been carried out by the CPC, Bangaluru/Ld. Respondent. In the said Intimation, the Returned figure comprised by Business Income only, amounting to Rs.928670/- had been enhanced to Rs.12395680/-, signifying an addition of Rs.11467009/-, effected to the former. This has consequently given rise to an additional tax liability of Rs.4825150/-, inclusive of all interests attributable to the alleged defaults with regard to the Advance Tax payment liabilities. In the clarificatory cum adjustment note, appended to the Intimation, so raised, it has been conveyed that the aforementioned amount of Rs.11467009/- had been added based on the information appearing in the Tax Audit Report, vide clause 13(e) thereof, indicating the understatement of valuation of closing inventory, within the meaning of Sec. 145(2) of the Act. The Appellant is preferring the present appeal challenging the said addition as Arbitrary, Excess and lastly, the one leading to taxation on unrealized income rather than on real income. The Appellant pleads that the addition should have been kept confined to either of the following two amount. a) Rs. 5096384/- Out of the Total Amount 11467009/-, so disallowed, a sum of Rs.6370625/-, represents the amount of undervaluation as on Printed from counselvise.com Page | 4 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 4 of 18 01/04/2021. This figure had, in view of current transactions, culminated in the year end difference of Rs.11467009/-. As a result, the differential amount of Rs.5096384/- only (after exclusion of the opening balance) for being attributable to the current year's transaction and accordingly, of current origin, would deserve addition. b) Alternatively, considering the introduction of Income Computation and Disclosure Standards, 2016, with effect from the initial Assessment Year of 2017-18, the addition needs to be restricted to Rs.2236207/- only, after eliminating from the current difference of Rs. 11467009/-, so added, the initial undervaluation of Rs.9230802/-, prevailing as on 31/03/2016 that had remained in the current undervaluation. In order to desire that the addition is kept confined only to the undervaluation of current origin, after the elimination of undervaluation brought forward from pre-ICDS period or the prior year, this appeal is being preferred seeking the lawful modification of the concerned addition.” 4. Aggrieved with the intimation issued u/s 143(1) of the Act, the assessee filed an appeal before the Ld. Addl/JCIT(A) who, vide order dated 27.05.2024, dismissed the appeal of the assessee. Further, aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before this Tribunal. 5. Rival submissions were heard and the details and the paper book filed have been examined. It was submitted by the Ld. AR before us that on account of change in the accounting standards and introduction of Income Computation and Disclosure Standards-II (in short ‘ICDS-II’), the addition was made. The method of valuation followed by the assessee earlier for the valuation of stock was on the basis of ‘Last In First Out’ (LIFO) which was no longer an approved method on introduction of introduction of ICDS and the amendment in the Act as the inventory is now required to have been valued as per ICDS-II. As per the Ld. AR, for the AY 2022-23, the addition was made on the basis of the Tax Audit Report in which the variation of valuation was pointed out by the Auditor on account of application of ICDS-II. The Ld. DR drew Printed from counselvise.com Page | 5 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 5 of 18 our attention to para 4.5 of the order of the Ld. CIT(A) and stated that LIFO is not prescribed under the ICDS-II and the adjustment in the intimation issued u/s 143(1) of the Act was made as per the report by the Auditor, who did not revise the Tax Audit Report. No scrutiny was done in the earlier years. The Ld. AR submitted that in case ICDS-II is to be applied and not LIFO which was the method of valuation followed by the assessee, then the same should be applied to the opening stock as well as to the closing stock. The written submission filed by the assessee in this regard are as under: “The Appellant is a Partnership Firm, engaged in the manfac(sic). The present Appeal was filed against the Appellate Order, passed by the Ld. Faceless Appellate Authority, confirming the addition of Rs.11467009/- (inadvertently, written as Rs.11467070/- in the Appellate Ground No. 2) pertaining to valuation of Closing Stock. After the Return of Income had been filed along-with the Audited Statement of Account (PB-2 to 10) and the corresponding Tax Audit Report in 3CB/3CD (PB-11 to 37), the Return disclosing a Total Income of Rs.928672.00, vide Computation (PB - 1), had been subjected to processing u/s 143(1) by the CPC Unit, Bangaluru. The CPC. However, while determining the Total Income, the CPC had added a sum of Rs. 11467010/- to the Returned Income of Rs 928672.00 (PB-1) so as arrive at the Total Income of Rs.12395680.00 (vide CPC, Sl. No 14/17). Consequent upon such higher reckoning of Total Income, there had arisen an additional Tax Demand (inclusive of all consequential interests) of Rs.4825150.00, vide CPC. The CPC had effected such addition of Rs.11467010/- on the basis of informative note, displayed by Clause 13(e) of Tax Audit Report in Form 3CD (PB-15). It had been disclosed, vide Clause 13 (f) -2 of the Tax Audit report, vide PB - 16) that in terms of Sec. 145(2) r.w ICDS -II, Valuation of Inventory for being made on LIFO Basis, contrary to ICDS-II mandating, inter alia, Weighted Average Method, there had been an undervaluation of Closing Stock to the extent of Rs.11467010/-. In the Appeal filed against such addition, the Appellant had challenged the said addition by contending that: a) Vide the Gold Account (PB-3) the Year end (31/03/2022) stock, valued on Last In Fast Out /LIFO basis, had been as under: Weight (in Grams) Value Rs. Printed from counselvise.com Page | 6 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 6 of 18 22835.810 27845424.00 b) However, as against such valuation at Rs.27845424.00, the Tax Auditor in the Audit Report of Form 3CD, vide clause 13(e)/13(f) thereof (PB-15,16) had commented that as one of the two mandatory stock valuation methods (Weighted Average valuation method), prescribed under paragraphs 16 and 17 of the Income Computation and Disclosure Standards /ICDS-II, had been not been followed and given effect to while valuing Stock of Gold as above, there had arisen an under-valuation of stock of Rs.11467009/-. The CPC, while processing the return had, vide Sl.14/17 thereof, added the same sum and determined additional tax in consequence thereof. c) The Appellant had, by means of Written Submission, presented before the Ld. Appellate Commissioner contended that: By The abrupt enhancement of Stock Value by a completely different method would give rise to abnormal and unattainable profit A study of the Gold Account forming part of the Audited Accounts (PB-3) would reveal that Gold Manufacturing Activity had given rise to a Gross Profit of 33.58 lacs on a sale of Rs.223.15 Lacs. As such the Rate of GP had worked out at 15%. If on the other hand, the Stock Value is enhanced by Rs.11467010.00/114.67 lacs to apply the Weighted Average Value, the resultant GP amount of Rs.148.25 lacs pertaining to the same sale amount of Rs.223.15 Lacs, would hike the corresponding rate to 66.43%. Such an exercise would indisputably lead to an absurd, fictional and unachievable result. Consequently, it would defy and violate all conventions, time honoured practices and the settled laws that no fictional income could be transformed into real income. A chart of GP rates would bring clarity to this contention (PB-47). From the Gross Profit Tabulation, vide PB-47, it could be conveniently appreciated that due to consistent practice of application of LIFO Method, as against the current years 15% GP Rate, while in the immediately preceding year a GP Rate of 23.89% had been achieved, the Average GP Rate in the four preceding years had been 16.77%. So, for the sake of justice, fairness and also reasonableness, in the light of the GP Tabulation, vide PB-47, either the Gross Profit (Gold Trading Account, PB-3) be kindly upheld or alternatively, be increased by 8.84% to the level of 23.89% (GP on Sales achieved in immediately preceding F.Y. 2020-21 the immediately preceding year) as against the current year's corresponding rate of 15.05%. In such a case the addition would remained confined to 8.84% of Sales amount of Rs.223.15 Lacs (Gold Trading Account - PB-3) i.e., Rs. 1972646.00. Printed from counselvise.com Page | 7 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 7 of 18 2. Such enhancement of stock value would inevitably inflate the profit to the same extent, which would give rise to only fictional income and thus, violate the \"Real Income Principle\" that forms the core of the Income Tax Law. The Income Tax Law provides that only the Real Income and as such, unless specifically provided in the statute, no fictional/notional/hypothetical income could be brought within the tax net. Accordingly, Income could be said to have come into being or materialised when the Assessee becomes the beneficiary of some right or privilege that originates from external sources (dealing with some different person). Accordingly, unless there is some income generating process, no income could be said to have originated from mere revaluation of assets. In this connection the following observation of the Hon'ble Apex Court in the case of ALA Firm Vs. CIT 189 ITR 285 is worth noticing and attention. \"......it is possible to have a revaluation of the assets, for example, stock-in- trade before dissolution, any excess which arises on the revaluation is only an imaginary or notional profit and cannot be brought to tax for the following reasons: (i) As a result of such revaluation, there can be no profit, because the firm cannot make a profit out of itself: vide Kikabhai Premchand vs. CIT (1953) 24 ITR 506 (SC). (ii) The process of revaluation of stock by itself cannot bring in any real profits: vide CIT vs. K.A.R.K. Firm (1934)2 ITR 183 (Rang); Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) and CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157: (1972) 83 ITR 211 (SC); and iii) It is well settled that what is taxable under the income-tax law is only real income vide CIT vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) and CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349: (1973) 89 ITR 266 (SC). There is, therefore, no principle by which the stock-in-trade can be valued at market price so as to bring to tax the notional profits which might in future be realised as a result of the sale of the stock-in-trade. In the present case, if the valuation of closing stock is changed from LIFO to Weighted Average Basis, it will invariably signify a mere revaluation of asset, and in the absence of any sale or transfer whatsoever, no real income from such revaluation could arise. The incorporation of such change in the valuation of stock alone would cause the regular GP, as a corollary thereof, to multiply by more than times, i.e., from 15% to 66% and such increased profit has originated not from any usual sale transactions but from putting more value on the credit side of the Trading Account. The stock has not changed hands like regular business transactions. Printed from counselvise.com Page | 8 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 8 of 18 It is also contended that only because Paragraph 22(ii) of ICDS-2, stipulates that Value of Opening Inventory as on the close of the immediately preceding previous year is to be taken, that does not mean that the method of valuation in respect of opening and closing stock could differ from each other, so as to give rise to some anomalous and abnormal result. This is because in the preamble of ICDS-2, entitled Income Computation and Disclosure Standard -II, Relating to Valuation of Inventories it is clearly and explicitly mentioned that \"In the case of conflict between the provisions of the Income-tax Act, 1961 ('the Act') and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent\". 6. The assessee has relied upon the following case laws: i) Chainrup Sampatram Vs. CIT - 24 ITR 481 (SC) ii) PCIT vs. Escorts Limited IT Appeal No. 961 of 2018 (Delhi High Court) iii) P.A. Jose vs. Union of India – Writ Petition No. 30318/30340/30354 etc. of 2021 and 1529 of 2024/(2024) 8 NYPCTR 689 (Ker) (Kerala High Court) 7. We have heard the submissions made and have also gone through the cases relied upon and the paper book filed. The case laws relied upon all do not support the case of the assessee as in the case of ALA Firm (supra) the issue related to chargeability of the income on account of revaluation on dissolution of the firm. The facts were that the assessee-firm was carrying on in Malaya, a money-lending business and, as part of and incidental to the said business, a business in the purchase and sale of house properties, gardens and estates. The firm's accounts for the year 1960-61, which commenced on 13-4-1960, would normally have come to a close on or about 13-3-1961. However, the firm closed its accounts as on 13-3-1961 with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62 the assessee filed on 10-4-1962, filed a profit and loss account and certain other statements. In the profit and loss account, a sum was shown as 'difference on revaluation of estates, gardens and house properties' on the dissolution of the firm on 13-3-1961. In the memo of Printed from counselvise.com Page | 9 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 9 of 18 adjustment for income-tax purposes, however, the above sum was deducted on the ground that it was not assessable either as revenue or capital. The ITO issued a notice under section 23(2) of the 1922 Act on the same day viz., 10-4-1962 posting the hearing for the same day and completed the assessment also on the same day. Thereafter, the ITO reopened assessment under section 147(6) taking the view that the revaluation difference should have been brought to tax in the assessment year 1961-62 in view of the decision of the Madras High Court in G.R. Ramachari & Co. v. CIT [1961] 41 ITR 142 and completed the reassessment. The assessee's successive appeals to the AAC and the Appellate Tribunal and a reference, at its instance, to the High Court failed. On appeal to the Hon’ble Supreme Court, it was held as under: No doubt, in the face of all the details and statement placed before the ITO at the time of the original assessment, it was difficult to take the view that the ITO had not at all applied his mind to the question whether the surplus was taxable or not. It was true that the return was filed and the assessment was completed on the same date. Nevertheless, it was opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It was not as if the assessments record contained a large number of documents or the case raised complicated issues rendering it probable that the ITO had missed these facts. It was a case where there was only one contention raised before the ITO and it was impossible to hold that the ITO did not at all look at the return filed by the assessee and the statements accompanying it. The more reasonable view to take would be that the ITO looked at the facts and accepted the assessee's contention that the surplus was not taxable. But in doing so, he obviously missed to take note of the law laid down in G.R. Ramachari & Co.'s case (supra) and there was nothing to show that that case had been brought to his notice. When he subsequently became aware of the decision, he initiated proceedings under section 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in G.R. Ramachari & Co.'s case (supra). This material was not considered at the time of the original assessment. Though it was a decision of 1961 and the ITO could have known of it had he been diligent, the obvious fact was that he was not aware of the existence of that decision Printed from counselvise.com Page | 10 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 10 of 18 then and, when he came to know about it, he rightly initiated proceedings for assessment. As regards the question as to whether the assessment of the impugned amount as the revenue profit was justified, there can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. The real rights of the partners cannot be mutually adjusted on any other basis. This is what happened in G.R. Ramachari & Co.'s case (supra). Indeed, this was exactly what the partners in this case had done and, having done so, it was untenable for them to contend that the valuation should be on some other basis. Once this principle was applied and the stock-in-trade was valued at market price, the surplus, if any, had to get reflected as the profits of the firm and had to be charged to tax. Thus, the order of the High Court was to be upheld. 8. Similarly in the case of Chainrup Sampatram v. Commissioner of Income-tax [1953] 24 ITR 481 (SC) the facts were that the assessee- firm was resident and ordinary resident of Calcutta, a place in British India, and was carrying on business as bullion merchants dealing mainly in silver and kept its books of account on the mercantile basis. In the relevant previous year, some bars of silver (some from the old stock in hand at Calcutta and some purchase elsewhere during the year) were sent to Bikaner, the then Indian State, where the partners resided, and value of such bars at cost was credited in the books of the firm. In the assessment of the firm, it was alleged that the said silver bars had been sold to the partners for their domestic use but the income-tax authorities held that the alleged sale was not genuine and that the said silver bars still formed part of the stock-in-trade of the firm at the close of the previous year, and they accordingly included in the taxable profits a sum as the excess arising from the valuation of the said bars at market price on the closing day. They were valued at market rate at which the rest of the closing stock at Calcutta was valued in the books of the firm. On appeal, the Tribunal upheld the assessment. On Printed from counselvise.com Page | 11 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 11 of 18 reference, the assessee contended that even on the finding of the income-tax authorities that the silver bars in question formed part of the stock-in-trade of the business at Calcutta and their removal to Bikaner had been effected only for reasons of security, the said bars having remained there during the rest of the accounting year, their value at the market rate at the close of the year being an increment to the goods at Bikaner, the profit accrued at Bikaner with the result that it was exempted under section 14(2)(c) of the 1922 Act. The High Court rejected this contention on the ground that the \"notional profit\" represented by the appreciation in value of the stock-in-trade emerges out of the valuation and only when it so emerges it arises or accrues; that the source of the profit is thus the valuation, and its situs is where the valuation is made. On appeal to the Supreme Court, it was held that: It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bring into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the years trading. In the instant case, although the cost price of part of the silver dispatched to Bikaner was less than the market price at the end of the year, the reference did not raise any question regarding the basis on which the amount in dispute, was arrived at. On the other hand, the question referred assumed that the said sum was correctly computed and put in issue only its assessability in law on a true construction of section 4(1)(b) and section 14(2)(c) of the 1922 Act. Again, it was a misconception to think that any profit \"arises out of the valuation of the closing stock\" and the situs of its arising or accrual is where the valuation is made. As already stated, valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the \"source\" of such profit. Nor can the place where such valuation is made be regarded as the situs Printed from counselvise.com Page | 12 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 12 of 18 of their accrual. The source of the profits and gains of a business is indubitably the business, and the place of their accrual is where the business is carried on. As such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exists, the whole of the profits must be taken to accrue or arising at the place of carrying on the business. On the finding of the income- tax authorities that the bars of silver lying at Bikaner had not been really sold but remained part of the unsold stock of the firm's business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. The appeal was accordingly dismissed. 9. Now the issue relating to valuation of closing stock needs to be examined and the legal provisions in this regard need to be noted. The provisions of section 145 are as under: Method of accounting. 145. (1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2), the Assessing Officer may make an assessment in the manner provided in section 144. 10. The amendment relating to ICDS has been substituted for “accounting standards” by the Finance (No. 2) Act, 2014, w.e.f. 1-4- 2015. The provisions of section 145A are as under: Method of accounting in certain cases. 145A. For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”, - Printed from counselvise.com Page | 13 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 13 of 18 (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145: Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard: Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise. Explanation 1.-For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. Explanation 2.-For the purposes of this section,- (a) “public financial institution” 83 shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013); (b) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (c) “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36. 11. The issue in the present case arose because the Auditor had pointed out the net effect on account of increase in profit of ₹1,14,67,009/- as per ICDS-II – valuation of inventories in Column- 13(e) of the Audit Report. Accordingly, the adjustment was made to the returned income u/s 143(1) of the Act. The assessee contends that in Printed from counselvise.com Page | 14 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 14 of 18 case the ICDS-II is to be applied to the closing stock, the same should also be applied to the opening stock. Reliance was placed upon the case of P.A. Jose (supra) order dated 20.05.2024 which relates to the assessment year 2017-18 in which the respondents were directed to either accept the valuation based on the LIFO method or permit the assessees to value their stocks by applying the FIFO or weighted average cost method. It has been held in that case as under: “The result of the substitution in s. 145A with retrospective effect from 1st April, 2017 would be the regularly adopted method of accounting and valuation of stock/inventory of the assessee, wherein the 'cost' of the inventory used to be arrived by applying LIFO, is now invalidated and the assessee would be required to revalue its closing stock for the asst. yr. 2017-18, applying FIFO based on the retrospective substitution of the provisions of s. 145A vide Finance Act, 2018 after the date of the filing of the return of the income for the said year. (Para 6.3) It is no matter of doubt that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory. The assessee was applying the LIFO method of accounting as the standard for valuing the closing and opening stock up to 1st April, 2017. Before 1st April, 2017, there was no mandatory provision for adopting one or another method of Accounting Standards. The Statute also did not mandate only one method of valuing the closing and opening stock. The assessees were free to adopt any one of the AS as notified by the ICAI. The Parliament, after a wide range of consultation from all stakeholders and based on the recommendations of the Committee to maintain uniformity in accounting the income and valuing the stock, has made cl. 16 of ICDS (II) mandatory for the adoption of FIFO or weighted average cost method. This mandatory provision applies to all assessees, and, therefore, there is no substance in the submission of the counsel for the assessees that making cl. 16 of ICDS (II) mandatory for adopting FIFO or weighted average cost method as the only method valuing the stock/inventory suffers from any vires of unreasonable classification or manifest arbitrariness as violative of Art. 14 of the Constitution of India. (Para 12) In the present case, the assessee had been following the LIFO method to value its closing and opening stock and the same had been accepted by the Revenue upto 1st April, 2017. It is also a well-settled law that the closing and opening stock are to be valued by applying the same method of valuation. The valuation Printed from counselvise.com Page | 15 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 15 of 18 of closing and unsold stock is not the source of income in the hands of the assessee. However, by applying the method of FIFO w.e.f. 1st April, 2017, the income of the assessee has increased to the tune of Rs. 51.07 crores without any real income. It is relevant to note that the substitution of s. 145A with retrospective effect from 1st April, 2017 by the Finance Act, 2018 is to give relief to those assessees who had adopted the FIFO to value their stock in the asst. yr. 2017-18 and to save their returns from being declared as incorrect/invalid. This retrospective operation is with said purpose and objective. However, if an assessee did not apply the FIFO to value its opening and closing stock as it was not mandatory, requiring such an assesses to apply FIFO to value their stocks for the asst. yr. 2017-18 would result in an uncalled-for outcome. Therefore, the retrospective amendment in substituting s. 145A would not apply to those assessees who had not applied FIFO for valuing their stock in the asst. yr. 2017- 18, as these assesses have been following LIFO consistently and had filed their returns before the Finance Act, 2018 was enacted. Therefore, in the case of the assessees, the stipulation under cl. 16 of the ICDS (II) for the adoption of FIFO or weighted average cost for valuation of the stock/inventory cannot be applied in the asst. yr. 2017-18 for the valuation of the opening stock, as the opening and closing stock of the year is to be valued by applying the same methodology. (Paras 14 to 17) All the writ petitions are partly allowed, and the impugned notices in all the writ petitions are quashed. The respondents are directed to either accept the valuation of both opening and closing stock, for the asst. yr. 2017-18, based on the LIFO method or permit the assessees to value their stocks by applying the FIFO or weighted average cost method. All Interlocutory Applications as regards interim matters stand closed. (Para 18) Conclusion: There is no substance in the submission of the counsel for the assessees that making cl. 16 of ICDS (II) mandatory for adopting FIFO or weighted average cost method as the only method valuing the stock/inventory suffers from any vires of unreasonable classification or manifest arbitrariness as violative of Art. 14 of the Constitution of India; however, by applying the method of FIFO w.e.f. 1st April, 2017, the income of the assessee has increased to the tune of Rs. 51.07 crores without any real income; respondents are directed to either accept the valuation of both opening and closing stock, for the asst. yr. 2017-18, based on the LIFO method or permit the assessees to value their stocks by applying the FIFO or weighted average cost method; all Interlocutory Applications as regards interim matters stand closed.” 12. It was conveyed to the Ld. AR that in case the opening stock is to be disturbed, the same will have a cascading effect on the closing stock Printed from counselvise.com Page | 16 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 16 of 18 of the immediately preceding assessment year i.e. AY 2021-22 as well, which will go on till the A.Y. relating to the date of introduction of the ICDS-II. The assessee has furnished a chart during the course of the assessment proceedings in which the impact of ICDS-II has been demonstrated by adopting the gp rate for the past assessment years. 13. In the case of the assessee, the provisions of section 145A mandate the valuation of the inventory as per the ICDS-II, which is part of the statute. LIFO is no longer an applicable method for valuation of the inventory as per the ICDS-II. However, there is merit in the contention of the assessee that both the opening as well as the closing stock should be valued on the basis of the same method as has been held in the case of P.A. Jose (supra) for ascertaining the profits during the year. This would entail a cascading effect on both the opening as well as closing stock up to the year of introduction of ICDS-II and the impact on the income in the earlier years would have to be assessed in the relevant assessment years concerned instead of adding the entire increase in profit in the year under consideration as the income of the concerned A.Y. has to be assessed in that year otherwise the gross profit rate in the current year becomes abnormally high as the entire impact has been considered in this year alone. Therefore, both the intimation as well as the order of the Ld. CIT(A) are hereby set aside and the Ld. AO is hereby directed to recompute the profit arising on account of ICDS-II by following the method described in the ICDS-II for valuation of inventory and add the corresponding increase in profit pertaining to the impugned year alone and take recourse to the provisions of section 148 as per law in respect of the past years as the surplus arising on account of application of ICDS-II does not pertain to A.Y. 2022-23 alone but is the accumulated profit on accounting of valuation as per the Printed from counselvise.com Page | 17 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 17 of 18 applicable ICDS-II over the years starting from the year in which ICDS- II was made applicable. The assessee may furnish the calculation chart relating to the Assessment Year wise impact on account of adoption of ICDS-II in the past years and the valuation of closing stock in the past years on applying ICDS-II and the Ld. AO shall carry out this exercise uniformly for all the assessment years as the same method of valuation of inventory will have to be followed even for the past years when ICDS- II was applicable. With these directions the appeal of the assessee is partly allowed for statistical purposes including the additional grounds of appeal raised. 9. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 22nd July, 2025. Sd/- Sd/- [Pradip Kumar Choubey] [Rakesh Mishra] Judicial Member Accountant Member Dated: 22.07.2025 Bidhan (Sr. P.S.) Printed from counselvise.com Page | 18 I.T.A. No.: 1572/KOL/2024 Assessment Year: 2022-23 Chandra Bros. Page 18 of 18 Copy of the order forwarded to: 1. Chandra Bros., 125B, B.B. Ganguly Street, Kolkata, West Bengal, 700012. 2. I.T.O., Ward-37(1), Kolkata. 3. Addl/JCIT(A)-3, Chennai. 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File. //True copy // By order Assistant Registrar ITAT, Kolkata Benches Kolkata Printed from counselvise.com "