The DCIT, Cirlcle-1(1), Baroda V. Shri Chimanlal H.Soni, Baroda

ITA 1663/AHD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60483 (ITAT-AHMEDABAD)
• Duration Of Justice: 42 year(s) 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2012
• Appeal Filed By: Department
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Department Lawyers: B K S PADYA
• Assessee Lawyers: S N SOPARKAR
• Keywords: Rule of consistency; Cost of acquisition
• Section: 143(3)

Judgement Text

ITA NO.1663 /AHD/2009. A.YR. 2006- 07 1 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH , AHMEDABAD (BEFORE SHRI MUKUL KR.SHRAWAT JM & SHRI ANIL CHATUR VEDI A.M.) I.T.A. NO. 16 63/AHD/2009 (ASSESSMENT YEAR: 2006-07) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1), AAYAKAR BHAVAN, NEAR RACE COURSE CIRCLE, BARODA. (APPELLANT) VS. SHRI CHIMANLAL H.SONI PROP. C.H. JEWELLERS, 8, ALKAPURI, CONCOREDE LANE, BARODA. (RESPONDENT) PAN: AJKPS 6990C APPELLANT BY : MR. B.K.S. PADYA, CIT (D. R.) RESPONDENT BY : MR. S.N.SOPARKAR, SR. ADV. ( )/ ORDER DATE OF HEARING : 25-4-201 2. DATE OF PRONOUNCEMENT : 31-5-2012 PER: SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER OF LD. CIT (A)-I, BARODA DATED 12-3-2009 FOR THE ASSESSMENT YEAR 2006 -07. 2. THE REVENUE IN ITS APPEAL HAS RAISED FOLLOWING G ROUNDS OF APPEAL:- 1(A). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN ALLOWING THE VALUATION OF CLOSING STOCK AS CALCULATED BY THE ASSESSEE WITHOUT CONSIDERING THE ACCOUNTING STANDARD-1 AND DECISION IN THE CASE OF DCIT VS. SAM IR DIAMONDS EXPORTS LTD. (71 ITR 75) THROUGH WHICH THE A.O. CAL CULATED THE UNDER VALUATION OF CLOSING STOCK AT RS.2,50,63,437/-. ITA NO.1663 /AHD/2009. A.YR. 2006- 07 2 (B). ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT (A) ERRED IN DELETING THE ESTIMATED ADD ITION OF RS.10,00,000/- ON ACCOUNT OF DEFECT FOR OTHER KIND OF CLOSING STOCK. 2. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR A LTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. RELIEF CLAIMED IN APPEAL . THE ORDER OF THE CIT (A) TO THE ABOVE EXTENT MAY B E SET ASIDE AND THAT OF THE A.O. BE RESTORED. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E CARRIES ON BUSINESS OF JEWELLER UNDER THE NAME AND STYLE OF C.H. JEWELL ERS. THE ASSESSEE FILED RETURN OF INCOME ON 30-12-2006 DECLARING TOTAL INCO ME OF RS.1,66,24,850/-. THEREAFTER THE CASE WAS SELECTED FOR SCRUTINY. DURI NG THE ASSESSMENT PROCEEDINGS IT WAS NOTICED BY A.O. THAT IN THE MON TH OF MARCH,2006 THE ASSESSEE HAD PURCHASED 22 CT. NEW GOLD ORNAMENTS FR OM SOLANKI JEWELLERS, MUMBAI @ RS.870/- PER GRAM, WHEREAS THE MARKET RATE OF 22 C T. GOLD ON THE DAY OF SUCH PURCHASE WAS RS.790/- PER G RAM. IT WAS ALSO FOUND THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK OF 2 2 CT. NEWS GOLD ORNAMENTS @ RS.658.64 PER GRAM. THE ASSESSEE WAS CA LLED UPON BY THE A.O. TO EXPLAIN THIS APPARENT INCONSISTENCY. IN REP LY THE ASSESSEE CONTENDED THAT HE HAS ADOPTED THE WEIGHTED AVERAGE RATE FOR VALUATION OF CLOSING STOCK AS PRESCRIBED UNDER ACCOUNTING STANDA RD AS-2 ISSUED BY THE INSTITUTE OF CHARTERED OF ACCOUNTANTS OF INDIA (ICA I). THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY THE A.O. HE ACCORDINGL Y MADE ADDITION OF RS.2,50,73,437/- ON ACCOUNT OF VALUATION OF CLOSING STOCK. THE INCOME WAS FINALLY DETERMINED AT RS.4,26,88,290/- VIDE ORDER P ASSED U/S. 143(3) ON 30- 12-2008. THEREAFTER THE ASSESSEE PREFERRED APPEAL B EFORE THE CIT (A). ITA NO.1663 /AHD/2009. A.YR. 2006- 07 3 4. ON APPEAL, BEFORE THE CIT (A), THE A.R. OF THE A SSESSEE SUBMITTED THAT THE ASSESSEE HAS BEEN VALUING THE STOCK AT WEI GHTED AVERAGE COST CONSISTENTLY AND THE DEPARTMENT HAS ACCEPTED THE SA ME IN EARLIER YEARS AND THERE IS NO CHANGE IN THE METHOD OF VALUATION. THE METHOD OF VALUATION ADOPTED BY IT WAS IN CONSONANCE WITH THE INCOME TAX ACT. IT WAS FURTHER SUBMITTED THAT NOT ONLY THE VALUATION OF INVENTORIE S BUT THE COST OF SALES HAS ALSO BEEN WORKED OUT ACCORDINGLY. IT WAS ALSO P OINTED OUT THAT THE A.O. HAS ACCEPTED THE SAME METHOD OF VALUATION IN THE CA SE OF ITS SISTER CONCERN, NAMELY C.H. JEWELLERS (P) LTD. THE LD. CIT (A) ACCEPTED THE CONTENTIONS OF ASSESSEE AND DELETED THE ADDITION BY HOLDING AS UNDER:- 4.3.1 FROM A PLAIN READING OF THE SECTION IT I S SEEN THAT TWO THINGS MUST BE ENSURED (A) THAT VALUATION IS IN ACCORDAN CE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, A ND (B) THAT SUCH VALUATION HAS BEEN FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF TAX, DUTY, ETC. PAID OR INCURRED TO BRING THE GOODS TO T HE PLACE OF THEIR LOCATION AND CONDITION AS ON THE DATE OF VALUATION. SO FAR AS (A) ABOVE IS CONCERNED, IT IS SEEN THAT THE ASSESSEE HA S REGULARLY EMPLOYED THE WEIGHTED AVERAGE COST METHOD FOR VALUA TION OF INVENTORY. THIS METHOD HAS ALSO BEEN PRESCRIBED BY THE ICAI IN AS-2. PARA 5 OF THE ACCOUNTING STANDARD STATES THAT INVE NTORIES SHOULD BE VALUED AT THE LOWER OF COST AND NET REALIZABLE VALU E. IN PARA-16, IT IS FURTHER MENTIONED THAT THE COST OF INVENTORIES SHOU LD BE ASSIGNED BY USING THE FIFO OR WEIGHTED AVERAGE COST FORMULA. IN PARA-17, THE WEIGHTED AVERAGE COST FORMULA HAS BEEN FURTHER EXPL AINED AS UNDER:- UNDER THE WEIGHTED AVERAGE COST FORMULA, THE COST OF EACH ITEM IS DETERMINED FROM THE WEIGHTED AVERAGE OF THE COST OF SIMILAR ITEMS AT THE BEGINNING OF A PERIOD AND THE COST OF SIMILAR ITEMS PURCHASED OR PRODUCED DURING THE PERIOD. THE AVERAGE MAY BE CALCULATED ON A PERIODIC BASIS, OR AS EACH A DDITIONAL SHIPMENT IS RECEIVED, DEPENDING UPON THE CIRCUMSTAN CES OF THE ENTERPRISE. ITA NO.1663 /AHD/2009. A.YR. 2006- 07 4 4.3.2. A WORKING OF THE WEIGHTED AVERAGE COST HAS B EEN FURNISHED BY THE APPELLANT. IT IS SEEN THAT THE WEIGHTED AVERAGE COST OF 22 CT. GOLD ORNAMENTS COMES TO RS.658.64 PER GM. WHICH IS THE R ATE ADOPTED BY THE ASSESSEE. THIS RATE HAS BEEN ARRIVED AT AFTER T AKING INTO ACCOUNT EACH AND EVERY ITEM OF SALES AND PURCHASE DURING TH E YEAR. THE AMOUNT OF SALES-TAX /VAT EMBEDDED IN THE VALUE OF P URCHASE AND SALE HAS ALSO BEEN REFLECTED IN THE WEIGHTED AVERAG E COST. ACCORDINGLY, I AM OF THE OPINION THAT THE RATE OF R S.658.64 PER GM APPLIED BY THE ASSESSEE TO THE VALUATION OF ITS CLO SING STOCK OF 22 CT. NEW ORNAMENTS WAS CORRECTLY DETERMINED. 4.3.3. IT IS ALSO NOTEWORTHY THAT AFTER ELABORATELY DEALING WITH THE DEFINITION OF WEIGHTED AVERAGE COST, THE A.O. HAS T HEN PROCEEDED TO HIMSELF APPLY A SIMPLE AVERAGE RATE BETWEEN THE RAT E ADOPTED BY THE ASSESSEE AND RATE OF LAST PURCHASE OF ORNAMENTS. TH IS RATE OF RS.764/- PER GRAM IS ALSO NOT THE WEIGHTED AVERAGE RATE COMPUTED AFTER CONSIDERING ALL PERIODICAL TRANSACTIONS. HAVI NG REJECTED THE ASSESSEES RATE FOR VALUATION PURPOSES, IT IS THEN INCUMBENT UPON THE A.O. TO WORK OUT THE CORRECT WEIGHTED AVERAGE COST FOR EACH ITEM OF INVENTORY SEPARATELY, I.E. 22 CT. NEW JEWELLERY, 22 CT. OLD JEWELLERY AND 24 CT. NEW JEWELLERY, 24 CT. OLD JEWELLERY, ETC. TH IS HAS CLEARLY NOT BEEN DONE. MOREOVER THE BASIS FOR ARRIVING AT THE A DDITION-HOC ADDITION OF RS.10,00,000/- IN RESPECT OF OTHER STOC K OF ORNAMENTS IS NOT KNOWN. IT IS ALSO WORTH NOTING THAT NOT ONLY HA S THE ASSESSEES METHOD OF VALUATION BEEN CONSISTENTLY FOLLOWED AND ACCEPTED IN THE PAST, THE SAME METHOD APPEARS TO HAVE BEEN ACCEPTED IN THE CASE OF C.H. JEWELLERS PVT. LTD. ALSO. ACCORDINGLY, I AM OF THE OPINION THAT THE A.O. WAS NOT JUSTIFIED IN DISTURBING THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE WITHOUT BRINGING ON RECORD SUFFICIE NT MATERIAL TO SHOW HOW THE SAID METHOD WAS DEFECTIVE OR INCAPABLE OF P ROVIDING A PROPER COMPUTATION OF INCOME. ACCORDINGLY, THE ADDITION TO THE VALUE OF CLOSING STOCK OF RS.2,60,63,437/- IS DIRECTED TO BE DELETED. 5. AGGRIEVED BY THE DECISION OF CIT (A), THE REVENU E IS NOW IN APPEAL BEFORE US. ITA NO.1663 /AHD/2009. A.YR. 2006- 07 5 6. BEFORE US THE D.R., SUBMITTED THAT THE ASSESSEE HAD PURCHASED ORNAMENTS ON 3-3-2006 @ 870.603 GMS BUT WHILE VALU ING THE STOCK AS ON 31-3-2006, IT HAD VALUED THE STOCK AT RS.658.64 PE R GM AND THUS THE ASSESSEE HAD UNDERVALUED THE INVENTORIES AND THEREB Y PROFIT WAS UNDERSTATED. ACCORDING TO THE LD. D.R. THE PURPOSE OF CORRECT VALUATION OF STOCK IS TO DISCLOSE THE CORRECT PICTURE OF VALUE O F CLOSING STOCK, WHICH APPROXIMATES THE VALUE NECESSARY TO BRING THE SAID STOCK IN ITS PRESENT LOCATION AND CONDITION. THE LD. D.,R. RELIED ON T HE DECISION OF APEX COURT IN THE CASE OF BRITISH PAINTS INDIA LTD., VS. CIT ( 1978) 188 ITR 44 (SC) AND THE TRIBUNAL DECISION IN THE CASE OF DCIT VS. SAMIR DIAMONDS EXPORTS LTD. 71 ITD 75 (MUM.) 7. LD. A.R. ON THE OTHER HAND SUBMITTED THAT THE M ETHOD OF VALUATION OF STOCK ADOPTED BY ASSESSEE WAS WEIGHTED AVERAGE COS T AND NOT SIMPLE AVERAGE COST. THE METHOD HAS BEEN CONSISTENTLY FOL LOWED BY THE ASSESSEE AND THERE IS NO CHANGE IN THE METHOD. IT WAS FURTHE R SUBMITTED THAT THE DEPARTMENT HAS ACCEPTED THE VALUATION METHOD WHILE COMPLETING ITS VARIOUS ASSESSMENTS UPTO A.Y. 2005-06. THE ASSESSEE HAS CAL CULATED THE WEIGHTED AVERAGE COST BY DIVIDING THE TOTAL COST OF INVENTORY AND THE BEGINNING OF THE PERIOD AND PURCHASE COST BY TOTAL QUANTITIES OF INVENTORY AT THE BEGINNING AND PURCHASED DURING THE PERIOD. THE CONSIDERATION GIVEN TO THE TOTAL QUANTITIES PURCHASED BY THE ASSESSEE AND DIVISION OF TOTAL COST BY TOTAL QUANTITY ITSELF INDICATES THAT THE ASSESSEE H AS FOLLOWED WEIGHTED AVERAGE COST METHOD. THE METHOD FOLLOWED BY ASSESSE E IS IN CONSONANCE WITH THE INCOME TAX ACT. IT WAS FURTHER SUBMITTED T HAT THE ASSESSEE HAS WORKED OUT THE VALUATION OF INVENTORIES AND COST OF SALES AT WEIGHTED AVERAGE COST AND THEREFORE, IT HAS NOT ADOPTED TWO DIFFERENT STANDARDS ONE ITA NO.1663 /AHD/2009. A.YR. 2006- 07 6 FOR VALUATION OF CLOSING STOCK AND THE OTHER FOR CO ST OF SALES. IT WAS FURTHER SUBMITTED THAT THE VALUATION EXERCISE IS TO BE DONE ON YEARLY BASIS AND NOT ON A MONTHLY BASIS THERE IS NO LAW WHICH PRESCRIBES THAT VALUATION HAS TO BE DONE ON MONTHLY BASIS. THE ASSESSEE HAS BEEN FOLLOW ING THE METHOD OF VALUATION AS PRESCRIBED BY AS-2, ISSUED BY INSTITUT E OF CHARTERED ACCOUNTANTS OF INDIA WHICH STATES THAT INVENTORIES SHOULD BE VALUED AT THE LOWER OF COST AND NET REALIZABLE VALUE. IT WAS FURT HER SUBMITTED THAT THE SIMILAR METHOD OF VALUATION HAS BEEN ACCEPTED BY TH E DEPARTMENT IN THE CASE OF C.H. JEWELLERS (P) LTD., ITS SISTER CONCERN . THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS: (A) ACIT VS. JAGDISH CHAND (2004) 90 TTJ (CHD.) 943 (B) ACIT VS. SHANTILAL NAGARDAS & CO. (ITA NO.3362 /AHD/209). THE LD. A.R. THUS URGED THAT THE ORDER OF CIT (A) B E UPHELD. 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORDS. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS VALUED THE STOCK AT WEIGHTED AVERAGE COST IN THE CURRENT YEAR AND THE S AME METHOD WAS FOLLOWED BY ASSESSEE IN EARLIER YEARS AND IT WAS AC CEPTED BY THE DEPARTMENT WHILE FINALIZING THE ASSESSMENT U/S. 143 (3). THE ASSESSEE HAS ALSO ADOPTED THE SAME METHOD FOR ARRIVING AT THE C OST OF GOODS SOLD. THE METHOD OF VALUATION IS ALSO IN CONSONANCE WITH THE I.T. ACT AND THE ACCOUNTING STANDARDS PRESCRIBED BY ICAI. IT IS ALSO AN UNDISPUTED FACT THAT THE SIMILAR VALUATION METHOD OF STOCK HAS BEEN ACCE PTED BY THE DEPARTMENT IN CASE OF C.H. JEWELLERS (P ) LTD., ITS SISTER CON CERN. THE LD. CIT (A) HAS GIVEN A FINDING THAT WEIGHTED AVERAGE COST ADOPTED BY THE ASSESSEE FOR WORKING OUT THE VALUATION OF STOCK IS AFTER TAKING INTO EACH AND EVERY ITEM ITA NO.1663 /AHD/2009. A.YR. 2006- 07 7 OF SALES AND PURCHASE DURING THE YEAR. THE AMOUNT O F SALES TAX AND VAT EMBEDDED IN THE VALUE OF PURCHASE AND SALE HAS ALSO BEEN REFLECTED IN THE WEIGHTED AVERAGE COST. HE HAS ACCORDINGLY HELD THAT THE RATE OF RS.658.64 PER GM. APPLIED BY ASSESSEE TO VALUE ITS STOCK OF 2 2 CT. NEW ORNAMENTS WAS CORRECTLY DETERMINED. THE LD. CIT (A) HAS FURTHER GIVEN A FINDING THAT THE RATE OF RS.764/- GM IS ALSO NOT WEIGHTED AVERAGE RA TE COMPUTED AFTER CONSIDERING ALL PERIODICAL TRANSACTIONS. HE FURTHER GAVE A FINDING THAT THE BASIS OF AD-HOC ADDITION OF RS.10 LAC IS NOT KNOWN. THE FINDING OF CIT (A) HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT. NO MAT ERIAL HAS BEEN BROUGHT ON RECORD BY REVENUE BEFORE US TO CONTROVER T THE AFORESAID FACTS. IN THE CASE OF ACIT VS. SHANTILAL NAGARDAS & CO. (S UPRA) THE CO-ORDINATE BENCH HAS HELD WHEN REVENUE DEPARTMENT ACCEPTED A M ETHOD OF VALUATION OF CLOSING STOCK IN EARLIER YEARS, ON THE SAME SET OF FACTS AND CIRCUMSTANCES OF THE CASE OF THE BUSINESS OF ASSESS EE, THEN THE PRINCIPLE OF CONSISTENCY SHOULD BE FOLLOWED BY DEPARTMENT WHI LE MAKING THE ASSESSMENT THOUGH THE PRINCIPLE OF RES-JUDICATA DOE S NOT APPLY TO INCOME TAX PROCEEDINGS. NEVERTHELESS, WHATEVER THE SETTLED LAW IS APPLICABLE IN RESPECT OF VALUATION OF CLOSING STOCK BUT THE PECUL ARITY OF THIS CASE IS THAT THE A.O. HAS STARTED TO VALUE THE STOCK AT CLOSE IN TERVALS OF EACH MONTH BUT FINALLY THAT WAS NOT MADE THE BASIS OF ADDITION. TH E A.O. HAS LEFT THAT OBSERVATION/CALCULATION WITHOUT DRAWING A CONCLUSIO N HOWEVER FINALIZED THE VALUATION ON AN ADD-HOC BASIS. BECAUSE OF THIS PECU LIAR SITUATION WE ARE NOT INCLINED TO APPROVE THE SAID APPROACH OF ASSESSMENT OF THE A.O. IN VIEW OF THE FOREGOING FACTS AND IN THE CIRCUMSTANCES OF THE CASE WE ARE OF THE CONSIDERED VIEW THAT CIT (A) HAS RIGHTLY DELETED TH E ADDITION OF RS.2,60,63,437/- MADE TO CLOSING STOCK. WE ACCORDIN GLY UPHELD THE ACTION OF CIT (A) AND DISMISS THIS GROUND OF REVENUE. ITA NO.1663 /AHD/2009. A.YR. 2006- 07 8 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN OPEN COURT ON 31 -5- 2012. SD/- SD/- (MUKUL KUMAR SHRAWAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACC OUNTANT MEMBER AHMEDABAD. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS)-I, BARODA 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD. 1.DATE OF DICTATION 24 - 5 -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 25 / 5 / 2012 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S 26 - 5 -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 31 - 5 -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 31 - 5 -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 3 1 - 5 -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..