The ACIT, Central Circle-3, JAMNAGAR V. Shree Balkrishna Jelwellers, JAMNAGAR

ITA 218/RJT/2013

• Counselvise Citation: 21824914 RSA 2013
• Duration Of Justice: 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 09-01-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 09-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR J B JHAVERI
• Assessee Lawyers: J C RAMPURA C A
• Section: 145; 263

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBULAL; RAJKOT BENCH, RAJKOT. BEFORE SHRI T. K. SHARMA JM AND SHRI B. R. JAIN AM ITA NO. 218/RJT/2013 / ASSESSMENT YEAR 2006-07. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-3, JAMNAGAR. ( / APPELLANT V/S SHREE BALKRISHNA JEWELLERS STANDARD HOUSE, INDIRA GANDHI MARG, JAMNAGAR. PAN- AAOFS7004G / RESPONDENT ! '# / REVENUE BY DR. J.B. JHAVERI, D.R. $% ! '# / ASSESSEE BY SHRI J.C. RAMPURA, C.A. ' & ' %( / DATE OF HEARING 09/01/2014 ) %( / DATE OF PRONOUNCEMENT 09/01/2014 / ORDER PER B. R. JAIN, A. M. : THIS APPEAL BY THE REVENUE AGAINST THE ORDER DATED 07/02/2013 OF SHRI S.K. MOHANTY, THE LEARNED CIT(A), JAMNAGAR RAI SES THE FOLLOWING GROUNDS:- 1 THE CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE ADDITION OF RS. 14,75,408/- MADE BY THE A.O. ON ACCOUNT OF UNDE R VALUATION OF CLOSING STOCK. 2 THE CIT(A) ERRED IN LAW AND ON FACTS IN NOT APPRE CIATING THE FACT IN VIEW OF PARA 10 OF ACCOUNTING STANDARD-II ( CBDTS NOTIFICATION NO. 9949 (SO 69 (E)(F. NO. 132/7/95-PP L) DATED 25/01/1996) RELATING TO DISCLOSURE OF CHANGE IN SIG NIFICANT ACCOUNTING POLICIES, THE ASSESSEE WAS REQUIRED TO R EFLECT THE EFFECT OF ANY CHANGE IN ACCOUNTING POLICY IN THE FI NANCIAL STATEMENTS OF THE PERIOD IN WHICH SUCH CHANGE IS MA DE IF THE CHANGE HAS A MATERIAL EFFECT. ACCORDINGLY, THE ASSE SSEE SHOULD HAVE INCORPORATED SUCH CHANGE IN THE P & L A CCOUNT AND SHOULD HAVE PAID TAX THEREON. 3 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 4 IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 5. THAT THE REVENUE CRAVES LEAVE TO ADD, AMEND, ALT ER OR WITHDRAW ANY GROUNDS OF APPEAL. 2. BRIEFLY THE FACTS ARE THAT THE ASSESSEE RETURNED INCOME OF RS. 10,54,110/- FROM THE BUSINESS OF MANUFACTURE AND TR ADING OF GOLD AND SILVER ORNAMENTS. THE LD. COMMISSIONER OF INCOME TA X VIDE ORDER DATED 29/3/2011 MADE U/S 263 OF THE I.T. ACT, 1961 (IN SH ORT THE ACT), DIRECTED THE ASSESSING OFFICER TO FRAME THE ASSESSMENT AFRESH AF TER CONSIDERING THE ISSUE REGARDING VALUATION OF CLOSING STOCK OF GOLD ORNAMENTS MANUFACTURED BY IT.. IT WAS OBSERVED THAT THE ASSESSEE WAS CONSI STENTLY VALUING ITS OWN MANUFACTURED GOODS AT MARKET PRICE, CERTIFIED BY TH E PARTNERS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE, HOWEVER, HA S DEVIATED FROM THE ACCOUNTING METHOD AND INSTEAD VALUED ITS CLOSING ST OCK IN RESPECT OF GOODS MANUFACTURED BY IT AT AVERAGE PRICING METHOD. THE P RICE OF GOLD OF SUCH GOODS VALUED AT MARKET PRICE AS ON 31/3/2005, WHICH BECAME OPENING STOCK FOR THE YEAR UNDER CONSIDERATION WAS RS. 6,18 0/- AND SALE PRICE OF SUCH GOODS AS ON 31/3/2005 WAS RS. 8,490/-. HE THER EFORE, CONSIDERING PROVISIONS OF SECTION 145A OF THE ACT, REQUIRED THE ASSESSEE TO EXPLAIN REASON AND SHOW CAUSE AS TO WHY THE ADDITION ON ACC OUNT OF PROFIT DUE TO SUCH DIFFERENCE IN VALUATION BE NOT MADE. IN RESPON SE THERETO, THE ASSESSEE REPLIED THAT DUE TO HEAVY VOLATILE MARKET SITUATION, THE ASSESSEE CHANGED TO THE WEIGHTED AVERAGE COST METHOD ON THE BONAFIDE NEED OF BUSINESS. SUCH A CHANGE WAS STRICTLY IN ACCORDANCE WITH THE PERMISSIBLE NORMS U/S 145 OF THE ACT READ WITH ACCOUNTANT STAND ARD AS-2 APPROVED BY THE ICAI. THE OTHER JEWELLERY ITEMS AND BRANDED ITE MS BY THE ASSESSEE WERE FOUND VALUED AT COST CONSISTENTLY. METHOD SO A DOPTED IN VALUING OF ITS OWN MANUFACTURED GOODS HAS BEEN FOLLOWED CONSISTENT LY IN SUBSEQUENT YEARS. 3. THE A.O. WORKED OUT THE DIFFERENCE IN VALUATION OF CLOSING STOCK AT RS. 14,75,408/- AS REFLECTED IN TABLE-A AT INTERNA L PAGE NO. 3 OF THE ASSESSMENT ORDER, WHICH IS REPRODUCED AS UNDER:- NAME OB GMS. OB RATE OB TOTAL CB GMS. CB RATE CB TOTAL MKTCN DIF RATE AMT OF DIF 22 CT 2837.51 564 1600355.6 391.14 6421 251150.90 7782 1361 53234.153 24 CT 2.04 615 1254.6 42.392 7030 29801.576 8490 1450 6189.232 HEM URD 1 615 615 50.02 7276 36394.552 8490 1214 6072.428 HEM ORN 6877.37 588 4043893.6 10976.12 6645 7293631.7 7782 1137 1247984.844 ORD ORN URD 1027.63 540 554920.2 596.05 5900 351660.5 7782 1882 112176.61 18 CT 445.08 455 202511.4 402.52 5131 206533.01 6367 1236 49751.472 TOTAL 6403550.4 12458.242 8169181.4 1475408.74 THE A.O. FOUND THAT BY CHANGE IN METHOD OF ACCOUNTI NG/VALUATION OF STOCK ADOPTED BY THE ASSESSEE, HIS INCOME COULD NOT BE PR OPERLY DEDUCED THEREFROM. THE CLAIM OF THE ASSESSEE REGARDING VALU ATION OF CLOSING STOCK AS PAR ACCOUNTING STANDARDS MAY BE TRUE FOR AUDIT P URPOSE BUT THE SAME DOES NOT APPLY TO IT PROVISION. IF AN ASSESSEE INTE NDS TO CHANGE HIS METHOD OF VALUATION, HE CAN DO SO, HOWEVER, AFTER O FFERING TO TAX ON THE DIFFERENTIAL AMOUNT ARISING OUT OF THE ABOVE ADJUST MENT. THUS, THE FINANCIAL IMPLICATION I.E., THE DIFFERENCE IN THE VALUATION O F CLOSING STOCK BY ADOPTING THE WEIGHTED AVERAGE METHOD OF VALUATION AND AS P ER THE PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD HAVE BEEN OFFERED FOR TAX. AS SEEN FROM THE TABLE A DUE TO CHANGE IN METHOD OF VALUATION, THE RE WAS AN OVERALL REDUCTION IN THE VALUATION OF CLOSING STOCK OF RS. 14,75,408/- WHICH SHOULD HAVE BEEN OFFERED BY THE ASSESSEE FOR TAXATION. ACC ORDINGLY, THE VALUATION OF CLOSING STOCK OF OWN METHODS, GOODS WAS ADOPTED AT MARKET PRICE AND ADDITION OF RS. 14,75,408/- HAS BEEN MADE TO THE DE CLARED INCOME. 4. IN APPEAL, THE LD. CIT(A) DELETED THE ADDITION F OR THE REASON THAT THE ADDITION AFTER DISCUSSING THE RATIO LAID DOWN BY TH E HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM VS. CIT (1953) 24 ITR 483 (SC) WHEREIN IT HAS BEEN HELD AS UNDER:- VALUATION OF UNSOLD STOCK AT THE CLOSE OF THE ACCO UNTING PERIOD WAS A NECESSARY PART OF THE PROCESS OF DETERMINING THE TRADING RESULTS OF THAT PERIOD. IT CANNOT BE REGARDED AS THE SOURCE OF PROFITS. PROFITS CAN BE CORRECTLY ASCERTAINED ONLY AFTER BRINGING IN TO THE TRADING ACCOUNT, THE CLOSING STOCK WHEREVER IT MAY EXIST. I T WAS FURTHER HELD THAT THE TRUE PURPOSE OF CREDITING THE VALUE OF ALL SOLD STOCK IS TO BALANCE THE COST OF THE GOODS AS ENTERED ON THE OTH ER SIDE OF THE ACCOUNT AT THE TIME OF THE PURCHASE, SO THAT ON CAN CELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FROM BOTH SIDES OF THE ACCOUNT WOULD LEAVE ONLY THE TRANSACTIONS IN WHICH ACTUAL S ALES IN THE COURSE OF THE YEAR HAVE TAKEN PLACE AND THEREBY SHOWING TH E PROFIT OR LOSS ACTUALLY REALIZED THE YEARS TRADING. THE ENTRY FOR STOCK, WHICH APPEARS IN TRADING ACCOUNT, IS MERELY INTENDED TO C ANCEL THE CHARGE FOR THE GOODS PURCHASED WHICH HAVE NOT BEEN SOLD, W HICH SHOULD NECESSARILY REPRESENT THE COST OF THE GOODS. IF IT IS MORE OR LESS THAN THE COST, THEN THE EFFECT IS TO STATE THE PROFIT ON THE GOODS ACTUALLY SOLD. FROM THIS DOCTRINE THEE IS ONE EXCEPTION, NAM ELY, THE ADOPTION OF MARKET VALUE AT THE DATE OF MAKING OF ACCOUNTS, IF THAT VALUE IS LESS THAN THE COST. THIS IS AN ANTICIPATION OF THE LOSS THAT MAY BE MADE ON THE GOODS IN THE FOLLOWING YEAR. WHILE ANTI CIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SO INCREASE PROFITS BE FORE ACTUAL REALIZATION. THIS THEORY THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER, IS NOW GENERALL Y ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNT ANCY. HE ALSO RECORDED FINDINGS THAT DURING THE YEAR UNDE R CONSIDERATION, DUE TO HIGH VOLATILITY IN THE PRICE OF GOLD, RESULTING IN A RISE IN THE GOLD PRICE BY 37.37% AT THE END OF THE YEAR, THE APPELLANT CHOSE TO ADOPT THE LOWER OF THE MARKET PRICE AND THE COST PRICE FOR VALUING IT CLOSING STOCK, SO AS TO AVOID HIGH NOTIONAL G.P. ON ACCOUNT OF INCREASE IN MARKET PRICE OF GOLD. THE WEIGHTED AVERAGE COST ADOPTED BY THE APPELLANT WAS NOT BELOW THE ACTUAL COST PRICE. THE APPELLANT HAS ALSO DISCLOSED THE MATERIAL FACTS OF CHANGE IN ACCOUNTING POLICY WITH REGARD TO VALUATIO N OF STOCKS IN ITS ACCOUNTS. THE APPELLANT WAS FOUND TO HAVE BONAFIDE REASON TO CHANGE ITS VALUATION METHOD FROM MARKET PRICE TO AVERAGE COST PRICE FOR THE PURPOSE OF VALUATION OF THE CLOSING STOCK. HE FOUND NO SUBS TANCE IN BRINGING TO TAX THE NOTIONAL PROFIT FROM THE VALUATION OF STOCK ITS ELF AND ACCORDINGLY, DELETED THE ADDITION. 5. THE LD. D.R. CONTENDS THAT THERE HAS BEEN UNDERS TATEMENT OF INCOME DUE TO CHANGE IN VALUATION OF STOCK. THE LD. CIT(A), THEREFORE, IS NOT JUSTIFIED TO SET ASIDE THE ADDITION, WHICH WAS RESTED ON SOUND REASONS BY THE A.O. 6. THE ASSESSEES COUNSEL SHRI J.C. RAMPURA RELIED ON THE IMPUGNED ORDER OF THE LD. CIT(A) AS WELL AS THE WRITTEN SUBM ISSIONS FILED BY HIM, WHICH IS ALSO LAID ON THE RECORD. 7. HEARD PARTIES WITH REFERENCE TO MATERIAL ON RECO RD AND THE CASE LAWS BROUGHT TO OUR NOTICE. ADMITTEDLY, THE ASSESSEE HAD VALUED STOCK OF ITS OWN MANUFACTURED GOODS AT MARKET PRICE IN THE EARLIER Y EAR WHEREAS DURING THE YEAR UNDER CONSIDERATION, THE STOCK OF SUCH GOODS H AS BEEN VALUED AT AN AVERAGE COST PRICE. THE CHANGE IS FOUND BONAFIDE FO R THE REASON OF VOLATILE MARKET CONDITIONS IN THE LINE OF ACTIVITY. THE ASSE SSEE HAS ALSO STATED TO HAVE ADOPTED THE SAME BASIS OF VALUATION IN THE SUB SEQUENT YEARS. THE VALUE OF CLOSING STOCK OF THE YEAR UNDER CONSIDERAT ION HAS BECOME OPENING STOCK FOR SUBSEQUENT YEAR. HAD THE A.O. VAL UED THE OPENING STOCK ALSO AT AVERAGE PRICE, THERE WOULD HAVE BEEN NO UND ERSTATEMENT OF PROFIT. THE ENTRY FOR CLOSING STOCK WHICH APPEARED IN TRADI NG ACCOUNT IS MERELY INTENDED TO CANCEL THE GOODS PURCHASED/MANUFACTURED AT AVERAGE WEIGHTED COST METHOD BUT NOT SOLD OUT DURING THE YE AR UNDER CONSIDERATION. THE HONBLE APEX COURT IN THE CASE OF CHAINRUP SAMP ATRAM VS. CIT (1953) 24 ITR 483 (SC) HAS LAID DOWN PRINCIPLE THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SH APE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SO INCREASE PROFITS BEFORE ACTUAL REA LIZATION. THE LD. A.O., HOWEVER, BY VALUING THE STOCK OF MANUFACTURED GOODS AT SALE PRICE VENTURED INTO BRINGING THE APPRECIATED VALUE OF THE STOCK WITHOUT THERE BEING ANY SALES THEREOF AS ACTUAL REALIZATION DURIN G THE YEAR UNDER CONSIDERATION. THIS WAS NEITHER CORRECT NOR PERMISS IBLE IN THE LIGHT OF THE AFORESAID SUPREME COURT JUDGMENT. THE LD. CIT(A), T HEREFORE, FOR JUSTIFIABLE REASONS, DELETED THE ADDITIONS, WHICH C ALLS FOR NO INTERFERENCE. THE GROUNDS RAISED IN APPEAL BY REVENUE STAND REJEC TED. 8. IN THE RESULT, APPEAL BY REVENUE STANDS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 09/01/2014. SD/- SD/- ( T. K. SHARMA ) ( B. R. JAIN ) '* /JUDICIAL MEMBER #( '* / ACCOUNTANT MEMBER *#+ ,*-/ ORDER DATE 09/01/2014 /RAJKOT *RANJAN / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT- THE A.C.I.T., CIRCLE-3, JAMNAGAR. 2. /RESPONDENT- SHREE BALKRISHNA JEWELLERS, JAMNAGAR. 3. '-2- % & 3% / CIT-I, RAJKOT. 4. & 3%- / CIT (A), JAMNAGAR. 5. 789 % , , / DR, ITAT, RAJKOT 6. 9; <= / GUARD FILE. *#+ '# / BY ORDER , TRUE COPY PRIVATE SECRETARY, , INCOME TAX APPELLATE TRIBUNAL, RAJKOT.