Sonal Diamonds Pvt. Ltd., Surat V. The ACIT., Circle-4, Surat

ITA 311/AHD/2007

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89742 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-07-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-04-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 17-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: S N SOPARKAR
• Section: 143(3)

Judgement Text

ITA NO.311/AHD/2007 ASSESSMENT YEAR: 2003-04 PAGE 1 OF 4 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND S.S. GODARA JM] ITA NO.311/AHD/2007 ASSESSMENT YEAR: 2003-04 SONAL DIAMONDS PRIVATE LIMITED, ............. APPELLANT C/11, LAXMAN NAGAR, OPP. SHYAM NAGAR, L.H. ROAD, SURAT [PAN: AADCS 3627 B] VS. ASSISTANT COMMISSIONER OF INCOME TAX, ........... .............RESPONDENT CIRCLE-4, SURAT. APPEARANCES BY: S.N. SOPARKAR , FOR THE APPELLANT DINESH SINGH, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : APRIL 28, 2015 DATE OF PRONOUNCING THE ORDER : JULY 21, 2015 O R D E R PER PRAMOD KUMAR: 1. IT IS A RECALLED MATTER. VIDE ORDER DATED 31 ST DECEMBER 2009, THE TRIBUNAL HAD DISPOSED OF THE APPEAL BY THE ASSESSE BUT ONE O F THE GROUNDS OF APPEAL REMAINED TO BE DISPOSED OF. ON 21 ST FEBRUARY 2014, HOWEVER, THE ORDER WAS RECALLED FOR THE LIMITED PURPOSES OF DISPOSING OF T HE FOLLOWING GROUND OF APPEAL: GROUND NO. 2. LEARNED CIT(A) HAS ERRED IN HOLDING T HAT THE APPELLANT HAS ARBITRARILY VALUED THE CLOSING STOCK AT A LOWER VALUE THAN THE NET REALISABLE VALUE AND, THEREFORE, CONFI RMING THE ADDITION OF RS.36,29,493/- ON THIS COUNT (INCLUDING G.P. ADDITI ON OF RS.3,00,000/). 2. THATS HOW WE HAVE COME TO BE IN SEISIN OF THE MATTER AGAIN. ITA NO.311/AHD/2007 ASSESSMENT YEAR: 2003-04 PAGE 2 OF 4 3. THE IMPUGNED ORDER CIT(A)S ORDER DATED 10 TH NOVEMBER, 2006, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE IN COME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASSESSMENT YEAR 2003-04. 4. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. THE ASSESSE IS ENGAGED IN THE BUSINESS OF IMPORTS, PROCESSING AND EXPORTS OF DIAMONDS. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER NOTICED THAT THE ASSESSE HAS VALUED THE CLOSING STOCK AT RS 7,74,99,000. THIS VALUATION WAS DONE AT THE NET REALIZABLE VALUE. HOWEVER, WHE N THE ASSESSING OFFICER LINKED EACH ITEM IN THE CLOSING STOCK LIST TO THE S UBSEQUENT SALE INVOICE RAISED BY THE ASSESSE IN RESPECT OF THE SAME, HE VALUED THE C LOSING STOCK AT RS 8,11,28,493. WHEN ASSESSE WAS CALLED UPON TO EXPLAI N THE DIFFERENCE, IT WAS SUBMITTED BY THE ASSESSE THAT THE RATE ADOPTED FOR VALUATION IS ESTIMATED SALES PRICE, AFTER DEDUCTING INSURANCE AND FORWARDING EXP ENSES, RE-ASSORTMENT CHARGES AND SALES COMMISSION. IT WAS ALSO EXPLAINED THAT THE MINOR DIFFERENCE IN VALUATION IS ALSO DUE TO DAY TO DAY FLUCTUATION IN THE MARKET RATES AND OTHER RELATED EXPENSES. HOWEVER, THE ASSESSING OFFICER R EJECTED THE STAND OF THE ASSESSE AND ADOPTING THE SUBSEQUENT SALE PRICE OF D IAMONDS AS ITS VALUE AS ON THE YEAR END, MADE AN ADDITION OF RS 36,29,493 IN T HE VALUE OF CLOSING STOCK. AGGRIEVED, ASSESSE CARRIED THE MATTER IN APPEAL BUT WITHOUT ANY SUCCESS. THE ASSESSE IS NOT SATISFIED AND IS IN FURTHER APPEAL B EFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF T HE APPLICABLE LEGAL POSITION. 6. WE FIND THAT BY VALUING THE STOCK AT THE SALE PR ICE, THE ASSESSING OFFICER HAS ENDED UP BRINGING ANTICIPATED PROFITS ON SALE O F DIAMONDS IN THE SUBSEQUENT YEAR AS PROFITS OF THE CURRENT YEAR. NO MATTER WHAT BE THE CERTAINTY OF SUCH ANTICIPATED PROFITS, THESE PROFITS CANNOT BE BROUGH T TO TAX UNLESS THESE PROFITS ARE REALIZED. IN THE LANDMARK CASE OF CHAINRUP SAM PATRAM VS CIT [(1953) 24 ITR 481 (SC)] , HONBLE SUPREME COURT HAS HELD THAT WHILE ANTICIPATED LOSSES DUE TO FALL IN VALUE OF STOCKS ARE TO BE PROVIDED F OR BY VALUING STOCKS AT SUCH ITA NO.311/AHD/2007 ASSESSMENT YEAR: 2003-04 PAGE 3 OF 4 REDUCED VALUE, THE ANTICIPATED PROFITS ON INCREASE IN VALUE OF STOCKS CANNOT BE TAKEN INTO ACCOUNT. ELABORATING THIS PRINCIPLE, IN THE INIMITABLE WORDS OF HONBLE JUSTICE PATANJALI SHASTRI CJ AS HIS LORDSHI P THEN WAS, HONBLE SUPREME COURT HAS OBSERVED AS FOLLOWS: .WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCO UNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLO SING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE T O SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALISATION. THIS IS THE T HEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR M ARKET PRICE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN E STABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS OF COURSE, SUCH PRINC IPLES HAVE BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, U NREALISED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING U NSOLD AT THE END OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING Y EAR'S ACCOUNT IN A BUSINESS THAT IS CONTINUING ARE NOT BROUGHT INTO TH E CHARGE AS A MATTER OF PRACTICE, THOUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REA LISED. AS TRULY OBSERVED BY ONE OF THE LEARNED JUDGES IN WHIMSTER & CO. VS. IRC (1926) 12 TAX CASES 813, 827, 'UNDER THIS LAW (REVENUE LAW) THE P ROFITS ARE THE PROFITS REALISED IN THE COURSE OF THE YEAR. WHAT SEEMS AN E XCEPTION IS RECOGNISED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS OR S TOCKS WHICH HAVE FALLEN IN VALUE. NO LOSS HAS BEEN REALISED. LOSS MA Y NOT OCCUR. NEVERTHELESS, AT THE CLOSE OF THE YEAR HE IS PERMIT TED TO TREAT THESE GOODS OR STOCKS AS OF THEIR MARKET VALUE.' 7. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, SU BMITS THAT THE CHOICE OF VALUATION METHOD FOR STOCK WAS ASSESSES OWN CHO ICE AND WAS CONSISTENTLY FOLLOWED OVER THE YEARS. WE ARE NOT IMPRESSED BY TH IS ARGUMENT EITHER. FIRSTLY, THE ASSESSE HIMSELF HAS TAKEN A STAND THAT THE ESTI MATED VALUE WILL STAND REDUCED BY THE RELATED EXPENSES ON PRODUCTION, AND, THEREFORE, IT IS MORE OF A BACKWARD WORKING OF THE VALUE OF THE STOCK THAN THE ADOPTION OF SALES PRICE PER SE. SECONDLY, NO MATTER WHAT BE THE METHOD ADOPTED BY THE ASSESSE, WHEN IT IS CLEARLY CONTRARY TO THE LAW LAID DOWN BY HONBLE SU PREME COURT AND ENDS UP BRINGING PROFITS OF SUBSEQUENT PERIOD TO TAX IN THI S YEAR, THE ASSESSING OFFICER CANNOT CAPITALIZE OUT OF THE MISTAKE OF THE ASSESSE . ITA NO.311/AHD/2007 ASSESSMENT YEAR: 2003-04 PAGE 4 OF 4 8. WE HAVE ALSO NOTED THAT THE DIFFERENCE IN VALUAT ION OF STOCK IS WELL UNDER 5% WHICH IS LESS THAN THE AGGREGATE OF THE GROSS PR OFIT AND COSTS INCURRED BY THE ASSESSE IN CONNECTION WITH PROCESSING AND SALE OF D IAMONDS. THE DIFFERENCE IN VALUATION RATES IS THUS REASONABLY EXPLAINED AND FA LLS WITHIN THE PERMISSIBLE LIMITS. ANY OTHER APPROACH TO THE STOCK VALUATION I SSUE, AS WE HAVE HIGHLIGHTED ABOVE, WILL RESULT IN SHIFTING OF PROFITS OF THE SU BSEQUENT ASSESSMENT YEAR INTO THIS ASSESSMENT YEAR. 9. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARIN G IN MIND ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO DELETE THE IMPUG NED ADDITION OF RS 36,29,493. THE ASSESSE GETS THE RELIEF ACCORDINGLY. 10. GROUND NO. 2 IS THUS ALLOWED. 11. IN THE RESULT, THE ORDER DATED 31 ST DECEMBER 2009 STANDS MODIFIED, AND SUPPLEMENTED, IN THE TERMS INDICATED ABOVE. PRONOUN CED IN THE OPEN COURT TODAY ON THE 21 ST DAY OF JULY, 2015. SD/- SD/- S. S. GODARA PRAMOD KUM AR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, THE 21 ST DAY OF JULY, 2015 COPIES TO: (1) THE APPELLANT (2) THE RESPON DENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD