ITO 23(2)(1), MUMBAI V. ARJUNLAL KHEMRAJ KOTHARI, MUMBAI

ITA 1771/MUM/2013

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0772 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN
• Assessee Lawyers: DEVENDRA H JAIN
• Section: 143(3)

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI A BENCH , , BEFORE S/SH. I P BANSAL,JUDICIAL ME MBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO. 1771 /MUM/2013, / ASSESSMENT YEAR - 200 9 - 10 INCOME TAX OFFICER - 23(2)(1) BLDG. - C - 10, 2 ND FLOOR, ROOM NO.201 PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E) MUMBAI - 400 051. VS SHRI ARJUNLAL KHEMRAJ KOTHARI PROPRIETOR:CHETAN JEWELLERS 9/10, BODKE BLDG., S.V.P. ROAD MULUND (W) , MUMBAI - 400 080. PAN: AABPK 7705 P ( / APPELLANT ) ( / RESPONDENT ) / ASSESSEE BY : SHRI DEVENDRA H. JAIN / REVENUE BY : SHRI ASGHAR ZAIN / DATE OF HEARING : 04 - 0 6 - 2015 / DATE OF PRONOUN CEMENT : 04 - 0 6 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 04.12. 2012 OF THE CIT(A) - 33 , MUMBAI, THE ASSESSING OFFICER(AO) HAS RAISED FOLLOWING GROUNDS OF APPEAL: I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO DELETE THE ADDITION OF RS.27, 71, 715/ - ON ACCOUNT OF VALUATION OF CLOSING STOCK OF JEWELLERY. . II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.27,71,715/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF VAL UATION OF CLOSING STOCK WITHOUT APPRECIATING THE FACTS THAT THE ASSESSEE FOLLOWED LIFO METHOD FOR VALUATION WHICH IS NOT AS PER ACCOUNTING STANDARDS AS - 2 AND IAS - 2. III) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT( A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS.27,71,715/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF VALUATION OF CLOSING STOCK BY ADOPTING CONTRADICTORY STAND FROM APPELLATE DECISION FOR A.Y. 2007 - 08. IV) WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN IGNORING HER DECISION ON THE SIMILAR ISSUE, SAME SET OF FACTS AND CIRCUMSTANCES FOR A.Y. 2007 - 08 AND HAS DECIDED THE ISSUE AGAINST THE REVENUE WITHOUT MAKING ANY REFERENCE TO EARLIER APPELLATE D ECISION. ASSESSEE , AN INDIVIDUAL, IS A JEWELLER AND HIS BUSINESS IS CARRIED OUT UNDER THE NAME AND STYLE OF CHETAN JEWEL L ERS. HE FILED HIS RETURN OF INCOME ON 15/9/2009, DECLARING TOTAL AT RS.4.16 LACS. THE AO COMPLETED THE ASSESSMENT U/S. 143(3) OF T HE ACT,ON 30.121.11, DETERMINING THE INCOME OF T HE ASSESSEE AT RS.26.68 LACS. 2. E FFECTIVE GROUND OF APPEAL IS ABOUT ADDITION OF RS.27.71 LACS MADE ON ACCOUNT OF VALUATION OF CLOSING STOCK OF JEWEL L ER Y.IN THIS CASE A SURVEY ACTION, U/S. 133(3)A OF THE ACT, WAS CARRIED ON 0 7.11.06. D URING THE COURSE OF SURVEY, CERTAIN DISCREPANCIES WERE DETECTED AND THE ASSESSMENT WAS COMPLETED ON 31.12.09 DETERMINING THE INCOME OF THE ASSESSEE AT RS.62.46 LACS AS AGAINST ITA/ 1771 /MUM/2013,AY. 09 - 10 - ARJUNLAL KHEMRAJ KOTHARI 2 RETURN OF INCOME OF RS.21.22 LACS. AMONG THE OTHER THIN GS MAJOR ADDITION WAS MADE IN THE SAID ASSESSMENT ON ACCOUNT OF VALUATION OF CLOSING STOCK, AS THE ASSESSEES METHOD OF VALUATION WAS REJECTED. THE AO WAS OF THE OPINION THAT THE ASSESSEE SHOULD HAVE ADOPTED THE FIFO METHOD IN PLACE OF LIFO METHOD. VIDE OR DER SHEET NOTING, DATED 2.11.2011, THE AO DIRECTED THE ASSESSEE TO SHOW CAUSE AS TO WHY HIS CLOSING STOCK SHOULD NOT BE VALUED BY ADOPTING THE METHOD OF FIFO. VIDE HIS LETTER DT.26.12.11 THE ASSESSEE OBJECTED TO APPLYING OF FIFO METHOD AND STATED THAT THE ASSESSEE HAD CHALLENGED THE VALUATION DONE BY THE AO AS PER THE FIFO METHOD FOR THE ASSESSMENT YEAR 20 07 - 08 , THAT THE TRIBUNAL HAD TO DECIDE THE ISSUE FILED BY THE ASSESSEE , THAT THE NATURE OF THE BUSINESS OF THE ASSESSEE WAS AS SUCH THAT JEWELLERY ITE MS COULD NOT BE SOLD ON LIFO OR FIFO, THAT ANY CUSTOMER COULD CHOOSE ANY ITEM AND THAT ITEM WOULD BE SOLD IRRESPECTIVE OF ITS DATE OF ACQUISITION. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE APPLICATION OF LIFO METHOD WAS UNREASO NABLE THAT THE SAME WAS PROHIBITED UNDER AS - 2 AND IAS - 2. FINALLY HE VALUED THE CLOSING STOCK BY ADOPTING FIFO METHOD AND DETERMINED THE NET PROFIT AT RS. 27, 71, 715/ - FOR THE YEAR UNDER CONSIDERATION. 3. A GGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA). BEFORE HIM, IT WAS ARGUED THAT THE METHOD OF VALUATION OF CLOSING STOCK ADOPTED BY THE ASSESSEE WAS COST OR MARKET VALUE WHICHEVER WAS LOWER, THAT THE NATURE OF HIS BUSINESS WAS MAINLY DEALING IN GOLD JE WELLERY, THAT THE ITEM OF JEWELLERY WERE NOT IN RAW FORM BUT WERE JEWELLERY FORM, THAT JEWELLERY COULD NOT BE SOLD ON FIFO OR LIFO METHODS, THE CUSTOMERS WOULD CHOOSE ANY ITEM AND IT WOULD BE SOLD IRRESPECTIVE OF DATE OF ACQUISITION OF JEWELLERY ITEM, THAT DUE TO SPECIFIC NATURE OF HIS BUSINESS THE ASSESSEE WAS NOT ADOPTING FIFO OR LIFO OR AVERAGE COST METHOD FOR THE PURPOSE OF STOCK VERIFICATION. HE ALSO MADE REFERENCE TO POINT. NO.14 OF AS - 2 (VALUA TION OF INVENTORIES). BEFORE HER, THE ASSESSEE RELIED UPO N THE CASE OF SREE PADMANABHA JEWELLERY MART (19 ITD 816), HARJIVANDAS J. ZAVERI (60 TTJ 115); BALJITSINGH JOGINDER SING (9 SOT 59).AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER THE FAA HELD THAT LIFO AND FIFO METHODS FOR VALUA TION OF STOCK WERE ACCEPTED AND USED AS PER THE NATURE OF BUSINESS, THAT THE ASSESSEE WAS RUNNING A JEWELLERY SHOP WHERE JEWELLERY OF VARIOUS DESIGNS WITH DIFFERENT PERMUTATIO NS AND COMBINATION WERE TRADED.SHE REFERRED TO THE OPINION OF ICAI - E XPERT COMMIT TEE WITH REGARD TO AS - 2 AND IAS - 2 AND HELD THAT THE LIFO METHOD WAS DISTINCT FROM STOCK METHOD, THAT IT COULD FOLLOW ANY METHOD PROVIDED SAME HAD BEEN ADOPTED CONSI STENTLY YEAR AFTER YEAR. THE FAA ALSO REFERRED TO THE J UDGMENTS OF O RNAMENTAL TRADING ENTERP RIS ES ( 47 ITD 416); RAMESHCHAND J EWE L LERS ( ITA/63/HYD./06 ASSESSMENT YEAR - 20 02 - 03); VIPIN A G GARWAL, A MBALA PROP. (ITA 450/CHD . /2010 ASSESSMENT YEAR - 20 07 - 08). FIN ALLY,S HE HELD THAT THE LIFO METHOD WHICH WAS NOT HAVING BASE STOCK AND WAS BEING FOLLOWED BY THE ASSESSEE CONSISTENTLY COULD NOT BE REJECTED AND SUBSTITUTED BY FIFO METHOD OF VALUATION OF CLOSING STOCK ON 31.3.2009. THE ADDITION OF RS. 27.71 LACS MADE BY THE AO BY ADOPTING FIFO METHOD WAS DELETED BY THE FAA. 4 . DURING THE COURSE OF HEARING BEFORE U S, DEPARTMENTAL REPRESENTATIVE ( DR ) SUPPORTED THE ORDER OF THE AO. THE AUTHORISED REPRESENTATIVE ( AR ) STATED THAT ASSESSEE WAS FOLLOWING SAME METHOD OVER THE YEARS. HE REFERRED TO THE JUDGMENTS RELIED UPON BY THE FAA. IT WAS STATED THAT THE TRIBUNAL HAD DE CIDED THE APPEAL FOR THE AY.2007 - 08 IN FAVOUR OF THE ASSESSEE. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS BEFORE US. WE FIND THAT THE ADDITION OF RS. 27.71 LACS WAS MADE BY THE AO, THAT HE SUBSTITUTED THE LIFO METHOD OF VALUATION BY FIFO METHOD, THAT THE ASSESSEE WAS DEALING IN JEWELLERY. IN OUR OPINION, JEWELLERY ITEMS COULD BE PURCHA SED BY THE CUSTOMERS ANYTIME, THEREFORE, LIFO OR FIFO METHOD COULD NOT BE RELEVANT FOR SUCH ITEMS. ITA/ 1771 /MUM/2013,AY. 09 - 10 - ARJUNLAL KHEMRAJ KOTHARI 3 CONSIDERING THE PECULIAR NATURE OF BUSINESS CARRIED OUT BY TH E ASSESSEE WE ARE OF THE OPINION THAT HE WAS CONSISTENTLY FOLLOWING A PARTICULAR METHOD OF VALUATION AS ON THE LAST DATE OF ACCOUNTING YEA AND THAT WAS VALUING THE INVENTORY AT LOWER OF THE MARKET OR COST VALUE .WE ALSO FIND THAT ISSUE OF APPLICATION OF LI FO/FIFO METHOD HAS BEEN DEALT EXTENSIVELY BY THE TRIBUNAL IN THE CASES RELIED UPON BY THE FAA. WE WILL LIKE TO REPRODUCE THE JUDG MENT OF VIPIN A G GARWAL(SUPRA) : 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE ISSUE ARISING IN THE PRESE NT APPEAL IS WITH REGARD TO THE VALUATION OF CLOSING STOCK. THE ASSESSEE IS A JEWELER AND HAD DECLARED CLOSING STOCK OF RS. 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 TO TAL CLOSING STOCK OF 54,756 GMS, THE ASSESSEE CLAIMS THAT GOLD WEIGHING 31,905 GMS WAS ITS OPENING STOCK VALUED @ RS. 482/ - PER GRAM. THE BALANCE STOCK AVAILABLE OUT OF THE PURCHASES MADE DURING THE YEAR WAS 22850 GMS WHICH WAS VALUED AT COST PRICE O F RS. 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 CHARTERE D ACCOUNTANTS OF INDIA' FOR DETERMINING THE COST OF INVEN TORIES. THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WAS THAT THE OPENING STOCK OF 31950 GMS WAS VALUED AT RS. 482/ - PER. GRAM AND SIMILAR VALUE BE ADOPTED TO WORK OUT THE VALUE OF CLOSING STOCK. I T WAS 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 ASSESSING OFFICER WH ILE RE - COMPUTING THE VALUE OF STOCK HAS ACCEPTED THE WEIGHTS IN GRAMS OF STOCKS BUT HAD ONLY REVALUED THE STOCK BY ADOPTING A FIGURE HIGHER THAN RATE DISCLOSED BY THE ASSESSEE. WE FIND NO MERIT IN THE SAID ADDITION BEING MADE BY THE ASSESSING OFFICER WHERE THE VALUATION OF CLOSING STOCK HAS BEEN CHANGED VIS - A - VIS ITS VALUE AND NOT BECAUSE OF ANY DIFFERENCE IN THE QUANTITY OF STOCK. THE ASSESSEE WAS CONSISTENTLY FOLLOWING A PARTICULAR METHOD OF ACCOUNTING WHICH IS BEING ACCEPTED FROM YEAR TO YEAR AND IN THE ABSENCE OF ANY CONTRARY FINDINGS BY THE ASSESSING OFFICER, THERE IS NO MERIT IN NOT ADOPTING THE METHOD OF VALUATION OF STOCK BEING CONSISTENTLY FOLLOWED BY THE ASSESSEE. FURTHER WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON' BLE SUPREME COURT I N CHAINRUP SAMPAT RAM V. CIT (SUPRA) WHEREIN IT HAS BEEN HELD THAT THE VALUE OF STOCK CANNOT B E APPRECIATED HIGHER THAN THE COST BECAUSE THE CLOSING STOCK IS NOT THE SOURCE OF PROFIT FOR THE AS SESSEE. IT HAS ALSO BEEN HELD BY THE HON'BLE SUPREME COURT THAT THE CLOSING STOCK IS TO BE VA LUED EITHER AT COST OR MARKET VALUE, WHICHEVER IS LOW. IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WE ARE IN CONFORMITY WITH THE ORDER OF CIT(A) AND UPHOLD THE SAME. THERE IS NO M ERIT IN ADOPTING THE WEIGHTED AVERAGE COST METHOD FOR VALUATION OF INVENTORY OF STOCK IN THE CIRCUMSTANCES O F THE CASE. WE CONFIRM THE DELETION OF ADDITION MADE BY THE ASSESSING OFFICER TOTALING RS. 52,23,753/ - . THE GROUND OF APPEAL RAISED BY THE REVENUE IS THUS DISMISSED. RESPECTFULLY FOLLOWING THE ABOVE DECISION AS WELL AS THE OTHER CASES RELIED UPON BY THE FAA AND THE REPLY SUPPLIED BY THE ICAI WITH REGARD TO ACCOUNTING STANDARDS, WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO . AS A RESULT,APPEAL FIL ED BY THE AO STANDS DISMISSED. . ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH , JUNE ,2015. 4 , 2015 SD/ - SD/ - ( /I P BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNT ANT MEMBER ITA/ 1771 /MUM/2013,AY. 09 - 10 - ARJUNLAL KHEMRAJ KOTHARI 4 / MUMBAI, /DATE: 3 RD JUNE , 2015 . . . JV . SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERN ED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY/ / / BY ORDER, / D Y./ASST. REGISTRAR , / ITAT, MUMBAI.