ITO, Mandi Gobindgarh V. Sh. Bal Mukand Aggarwal, Mandi Gobindgarh

ITA 311/CHANDI/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51517 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 23-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Assessee Lawyers: N K GARG
• Keywords: Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL: CHANDIGARH BE NCH B BEFORE MS SUSHMA CHOWLA, JM AND SHRI MEHAR SINGH, AM ITA NO. 311/CHANDI/2011 ASSESSMENT YEAR: 2007-08 I.T.O. WARD -1, MANDI GOBINDGARH V. BAL MUKAND AGGARWAL PROP. M/S BAL IRON & STEEL CO MANDI GOBINDGARH PAN: ABFPA 2173 A (APPELLANT) (RESPONDENT) APPELLANT BY : SMT. JAISHREE SHARMA RESPONDENT BY: SHRI N.K. GARG DATE OF HEARING: 20.9.2011 DATE OF PRONOUNCEMENT: 27.9.2011 ORDER PER MEHAR SINGH, AM THE PRESENT APPEAL FILED BY THE REVENUE FOR ASSESS MENT YEAR 2007-08 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A), PATIALA D ATED 25.1.2011 U/S 250(6) OF THE INCOME-TAX ACT (IN SHORT THE ACT). 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF A PPEAL: 1 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 18,69,105/- MADE BY TH E AO ON ACCOUNT OF DIFFERENCE IN THE VALUATION OF THE CLOSING STOCK, B Y OBSERVING THAT THE AO HAD NOT REJECTED THE BOOKS OF ACCOUNT AND THE ASSES SEE HAD BEEN FOLLOWING A CONSISTENT METHOD OF ACCOUNTING, WITHOUT APPRECIA TING THE FACTS BROUGHT ON RECORD BY THE AO ON THE BASIS OF WHICH IT HAD BE EN SHOWN THAT THE ASSESSEE HAD SUBSTANTIALLY UNDERVALUED THE MARKET R ATE OF THE CLOSING STOCK. 2 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 18,69,105/- MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN THE VALUATION OF THE CLOSING STOCK, W ITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD FAILED TO SUBSTANTIATE THAT T HERE WERE SEPARATE AND DISTINCT IDENTIFIABLE ITEMS OF VARYING VALUES IN OR DER TO JUSTIFY THE GROSS UNDER-VALUATION OF THE CLOSING STOCK WHEN COMPARED TO THE MARKET VALUE. 3 IT IS PRAYED THAT THE ORDER OF LD. CIT(A) BE SET ASIDE AND THAT OF THE AO RESTORED. ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 2 3. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.10 .2007 DECLARING TOTAL INCOME OF RS. 1,94,808/- FROM BUSINESS AND PROFESSI ON AND INCOME FROM OTHER SOURCES. THE CASE WAS PROCESSED U/S 143(1) OF THE ACT ON 11.3.2009. NOTICE U/S 143(2) DATED 24.9.2008 WAS ISSUED AND DULY SERVED U PON THE ASSESSEE ON 25.9.2008. A DETAILED QUESTIONNAIRE WAS ISSUED TO THE ASSESSEE ON 29.4.2009. BOOKS OF ACCOUNT, SALE PURCHASES BILLS AND VOUCHERS WERE PRODUCED WHICH WERE TEST CHECKED. THE ASSESSMENT WAS FRAMED VIDEORDER D ATED 28.12.2009 U/S 143(3) OF THE ACT AT RS. 20,63,910/-. PERUSAL OF THE INFOR MATION FURNISHED BY THE ASSESSEE REGARDING SALES AND PURCHASE MADE DURING THE YEAR U NDER CONSIDERATION , IT IS OBSERVED BY THE AO THAT THE ASSESSEE HAS DEALT WITH DIFFERENT ITEMS OF IRON AND STEEL VIZ. BARS, COIL ENDS, BAR-FLAT, COBBLE PLATES AND HEAVY MELTING SCRAP. 3.1 FURTHER, ON PERUSAL OF THE CHART REGARDING DETA ILS OF CLOSING STOCK, AS ON 31.3.2007, THE AO OBSERVED THAT THE ASSESSEE HAD TA KEN THE ITEMS CLAIMED TO HAVE BEEN PURCHASED BY HIM AS FAR AS BACK IN MARCH, 2006, OCTOBER, 2006 AND DECEMBER 2006 AND ALSO WHICH ARE SHOWN TO HAVE BEEN PURCHASED AT A LOW VALUE OF ABOUT RS. 11,000/MT. THE ASSESSEE HAD TAKEN THE AVERAGE PRICE OF THESE ITEMS AS THE MARKET PRICE AND HAS INTENTIONALLY MAD E THE SALES OF THIS STOCK AT ALMOST THE SAME RATES. 3.2 THE ASSESSEE HAS FURNISHED PHOTOCOPIES OF PURCH ASE AND SALE ACCOUNT AS APPEARING IN THE BOOKS OF ACCOUNT AS PER WHICH THE AVERAGE PURCHASE PRICE COMES TO RS. 18,722/- AND THE AVERAGE SALE PRICE COMES TO RS. 23,478/-, AS INDICATED BY THE AO IN PARA 3.2 OF THE ASSESSMENT ORDER. 3.3 THE AO OBSERVED THAT THE ASSESSEE HAS DELIBERAT ELY UNDERVALUED HIS CLOSING STOCK BY TRYING TO SHOW THE ITEMS PURCHASED BY HIM LONG BACK AT LOWER RATES. THE AVERAGE MARKET PRICE AS PER INFORMATION GATHERED AND THAT DISCUSSED ABOVE COMES TO RS. 26,500/-. THE ASSESSEE HAD HIMSE LF SOLD THE GOODS DURING THE YEAR AT THE AVERAGE MARKET PRICE OF RS. 23,478/-. A CCORDINGLY, TO BE REASONABLE, THE AO VALUED THE QUANTITY OF CLOSING STOCK I.E. 39 1.190 MT, AT THE RATE OF RS. 23,478/- AS ON 31.3.2007 AT RS. 91,84,358/-, AGAINS T RS. 73,15,253/- AS DECLARED BY THE ASSESSEE, IN ITS BALANCE SHEET. THE DIFFERE NCE OF RS. 18,69,105/-, IS ADDED TO THE RETURNED INCOME OF THE ASSESSEE. ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 3 4. THE LD. CIT(A), UPTURNED THE FINDINGS OF THE AO AND GRANTED RELIEF TO THE ASSESSEE. IT WOULD BE IN THE FITNESS OF THINGS TO REPRODUCE THE FINDINGS OF LD. CIT(A) WITH A VIEW TO APPRECIATE THE FACTUAL AND LE GAL ASPECTS THEREOF:- IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND RIVAL SUBMISSIONS OF BOTH THE AO IN HIS REMAND REPORT AND WRITTEN SUBMIS SIONS OF THE LD. COUNSEL IT IS SEEN THAT NO DOUBT THE VALUATION OF OPENING A ND CLOSING STOCK IS A VERY IMPORTANT ASPECT FOR ASCERTAINMENT OF TRUE PROFITS AND AN IMPROPER VALUATION OF STOCK CAN BE A GROUND FOR REJECTION OF BOOKS AS HELD IN MURUGAPPA CHETTIAR (S) V. CIT (1988) 174 ITR 245 (KER). BUT IN THE PRESENT CASE, NO REJECTION OF BOOKS HAS BEEN DONE. ANY RECTIFICATIO N OR ADJUSTMENT TO BE MADE IN THE CLOSING STOCK SHOULD BE ON THE BASIS OF PROPER VALUATION. THE ADDITION CAN NOT BE ON FLIMSY GROUNDS. THE METHOD OF VALUATION OF STOCK WHICHEVER HAS BEEN FOLLOWED HAS TO BE CONSISTENT. IN THE PRESENT CASE, THE AO HAS NOWHERE POINTED OUT WHETHER SUCH CONSISTENCY HAS BEEN DISTURBED BY THE APPELLANT. NO CHANGE HAS BEEN POINTED OUT. ON THE OTHER HAND THE APPELLANT HAS PROVED THAT HE HAS CONSISTENTLY FOLLO WED THE SYSTEM OF VALUING THE STOCK AND THERE IS NO OCCASION FOR THE AO TO VALUE IT ON A SALE PRICE OF RS. 23,478/- PER MT. THE APPELLANT HAS AD OPTED THE AVERAGE COST PRICE THROUGHOUT THE YEAR OF A PARTICULAR ITEM AND HE STATES THAT HE HAS ADHERED TO THIS SYSTEM FROM YEAR TO YEAR. IN SUCH CIRCUMSTANCES, THERE CAN BE NO DEFLECTION IN THE COMPUTATION OF PROFITS. TH E AO CAN NOT DISCARD THE METHOD OF ACCOUNTING ADOPTED BY THE APPELLANT CONSI STENTLY AND REGULARLY. IN VIEW OF THIS THE ADDITION MADE TO THE APPELLANT S INCOME IS DELETED. 5. THE DR CONTENDED THAT THE LD. CIT(A) ACTED AGA INST THE WELL ESTABLISHED PRINCIPLE PRESCRIBING THAT CLOSING STOCK IS TO BE V ALUED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. THE CONCEPT OF AVERAGE PRI CE, AS ADOPTED BY THE ASSESSEE, IN COMPUTING VALUATION OF THE CLOSING STO CK IS CONTRARY TO SUCH ESTABLISHED PROPOSITION. 6. THE LD AR FOR THE ASSESSEE, ON THE OTHER HAND, JUSTIFIED THE ORDER OF LD. CIT(A) AND PLACED RELIANCE ON THE DECISION IN THE C ASE OF CHAINRUP SAMPATRAM V. ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 4 CIT (1953) 24 ITR 481 (S.C) , ACIT V. TIRUPATI MICR OTECH (P) LTD (2008) 112 ITD 328, A.L.A. FIRM V. CIT (1991) 189 ITR 285 (S.C) AN D SIR KIKABHAI PREMCHAND V. CIT (1953) 24 ITR 506 (S.C). 7. WE HAVE CAREFULLY PERUSED THE FACTS OF THE CASE, RIVAL SUBMISSIONS AND THE CASE LAWS CITED THEREIN. THE ASSESSEE IS A DEALER IN IRON AND STEEL ITEMS. A PERUSAL OF THE CLOSING STOCK AS EVIDENCED BY THE TR ADING ACCOUNT REVEALS THAT IT HAS BEEN VALUED AT RS. 73,15,253/-. THE DETAILS ARE FU RNISHED AS UNDER:- PARTICULARS QUANTITY (MT) AMOUNT AVERAGE PRICE OPENING STOCK 469.005 RS.64,29,063 13708 PURCHASES 2897.490 RS. 6,60,55,910/- 22797 SALES 2935.305 RS. 6,89,17,740/- 23478 CLOSING STOCK 391.190 RS. 73,15,253 18700 7(I) THE AO OBSERVED THAT AS PER THE AUDIT REPORT T HE CLOSING STOCK HAD BEEN VALUED BY THE ASSESSEE, AT MARKET RATES. ON THE BA SIS OF DETAILS, IN RESPECT OF VALUING OF CLOSING STOCK ITEM-WISE, AS CALLED FOR B Y THE AO, IT WAS FOUND THAT THE ASSESSEE CALCULATED AVERAGE RATE AT 18722 PER MT AN D THE MARKET RATE HAS BEEN SHOWN AT 18700 PER MT. THE AO SPECIFICALLY RAISED THE QUERY AS TO WHETHER THE LOTS OF STOCK AS SUBMITTED BY HIM, ARE SEPARATELY A ND DISTINCTLY IDENTIFIABLE. THE ASSESSEE FAILED TO FILE ANY EVIDENCE OR SUBMISSION TO SATISFY THE QUERY RAISED BY THE AO. IT IS OBSERVED BY THE AO THAT THE NATURE / PRICE OF ITEMS SOLD IN THE LIGHT OF SALE BILLS, ACCOUNT REVEAL THAT ALL THE BILLS BEAR THE NARRATION AS IRON AND STEEL AS THE ITEM SOLD. THE ASSESSEE FAILED TO SUBSTANTIATE THE QUERY RAISED BY THE AO. THE ASSESSEE EXPLAINED BEFORE THE AO THAT THE CLOSI NG STOCK HAD BEEN VALUED AT MARKET PRICE, WHICH HE HAD SHOWN AT RS. 18700 PER MT, ON THE BASIS OF SALES ALLEGEDLY IMMEDIATELY AFTER THE CLOSE OF FINANCIAL YEAR 2006-07. ACCORDING TO THE AO, THIS APPROACH OF THE ASSESSEE IS AN AFTER-THOUG HT, BY MAKING THE COST PRICE OF THE CHEAPEST ITEMS AS THE BASIS THEREOF. THE DETAI LS AND OBSERVATIONS OF THE AO, AS CONTENDED IN PARA 3.2.1. OF THE ASSESSMENT ORDER DATED 28.12.2009, PASSED U/S 143(3) OF THE ACT ARE REPRODUCED HEREUNDER:- ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 5 3.2.1 THE MARKET PRICE OF THE ITEMS IN WHICH THE A SSESSEE DEALS I.E. BARS, COIL ENDS, BAR FLAT, COBBLE PLATES, AS PER MCX AS O N 30.3.2007 TO 11.4.2007 WAS AS UNDER: AS ON 30.3.2007 AS ON 4.4.2007 AS ONJ 11.4.2007 FLATS RS. 26,500 TO RS. 27,500 RS. 26,500 TO RS. 27,500 RS. 26,500 TO RS. 27,500 MS ANGLES RS. 27,700 TO RS. 28,800 RS. 28,000 TO RS. 29,100 RS. 28,000 TO RS. 29,100 CHANNELS RS. 28,700 RS. 28,700 RS. 28,700 FURTHER, THE MARKET RATE AS PER THE LOCAL WEEKLY NE WSPAPER PUBLISHED AT MANDI GOBINDGARH, UNDER THE NAME ACHCHA JI (WEEKLY) , MANDI GOBINDGARH GIVING LOCAL MARKET RATES FOR THE WEEKS 28 TH MARCH 3 RD APRIL, 2007 AND 3 RD APRIL 2007 AND 3 RD APRIL TO 10 TH APRIL 2007 ARE AS UNDER:- 28 TH MARCH 3 RD APRIL, 2007 3 RD APRIL TO 10 TH APRIL, 2007 FLATS RS. 26,100 TO RS. 27,550 RS. 26,800 TO RS. 27 ,550 MS ANGLES RS. 26,900 TO RS. 27,400 RS. 27,300 TO RS . 28,800 CHANNELS RS. 27,300 TO RS. 30,100 RS. 27,300 TO RS. 30,200 MELTING SCRAP RS. 19,200 TO RS. 19,700 RS. 19,700 T O RS. 19,900 THE ABOVE FIGURES SHOW THAT NONE OF THE ITEMS BEING DEALT WITH BY THE ASSESSEE WERE SOLD IN ANY OF THE MARKETS IN INDIA O R EVEN AT MANDI GOBINDGARH, AT THE MARKET RATES TAKEN BY THE ASSESS EE FOR THE PURPOSE OF VALUATION OF CLOSING STOCK. THE RATES FOR EVEN THE MELTING SCRAP WAS HIGHER THAN TAKEN BY THE ASSESSEE FOR VALUATION OF GENERAL OTHER ITEMS ALLEGEDLY LYING AS CLOSING STOCK. 4. THE ASSESSEES COUNSEL, DURING THE COURSE OF PRO CEEDINGS ON 22.12.2009 WAS CONFRONTED WITH THE ABOVE OBSERVATIO NS AND WAS INTIMATED THAT IT IS PROPOSED TO APPLY THE MARKET RATES AS PR EVALENT DURING THE PERIOD 28.3.2007 TO 11.4.2007 TO THE QUANTITY OF CLOSING S TOCK DECLARED BY THE ASSESSEE. HE WAS ASKED TO EXPLAIN AND SHOW CAUSE A S TO WHY THESE RATES BE NOT APPLIED. IN RESPONSE, THE ASSESSEES COUNSE L SUBMITTED AS UNDER:- THAT OUR CLOSING STOCK AT THE END OF THE YEAR I.E. ON 31.3.2007 WERE INCLUDE PART OF A RESIDUAL UNSOLD QUANTITY OF OPENI NG STOCK WHICH WERE PURCHASED IN A LOT IN THE PRECEDING YEAR AT A LOW RATE AS THIS LOT WAS CONSISTING OF A OLD IRON AND STEEL AND THIS ENT IRE LOT WAS INCLUDED WITH JUNKED MATERIAL AND WITH OTHER IMPURITIES AS ( COPIES OF THE PURCHASE BILLS OF THIS MATERIAL HAVE BEEN SUBMITTED ). OUT OF THIS LOT CERTAIN MATERIAL A PER THE REQUIREMENTS OF THE PURC HASER WAS SOLD OUT DURING THE YEAR WITH OTHER MATERIALS. OUR STOCK RE GISTER AND COPIES OF LEDGER ACCOUNT OF SALES WERE CONTINUED TO BE HELD D URING THE YEAR EVEN WHEN THE PURCHASE AND SALES COULD NOT TAKE PLA CE FOR A LONG TIME. THEREFORE, AT THE END OF THE YEAR WE VALUED THE ENT IRE STOCK INCLUDING THE RESIDUAL OPENING STOCK AVAILABLE WITH US AT A S INGLE AVERAGE MARKET PRICE, WHICH COULD HAVE BEEN REALIZED IN SUCH CIRCU MSTANCES. MOREOVER, THIS ENTIRE LOT OF STOCK WHEN SOLD IN THE NEXT YEAR FETCHED THE TOTAL VALUE OF CLOSING STOCK AS DECLARED BY US MAY BE ACCEPTED AS SUCH. 4.1 FURTHER ON BEING ASKED TO EXPLAIN WHETHER STOCK AS SPECIFIED IN THE DETAILS OF CLOSING STOCK FURNISHED CAN BE IDENTIFIE D DISTINCTLY, DURING THE COURSE OF PROCEEDINGS ON 24.12.2009, IT WAS SUBMITT ED BY HIM THAT IT IS NOT POSSIBLE IN VIEW OF THE KIND OF ITEMS BEING DEALT W ITH THE ASSESSEE. ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 6 5 THE ABOVE DISCUSSION SHOWS THAT THE ASSESSEE HAS DELIBERATELY UNDERVALUED HIS CLOSING STOCK BY TRYING TO SHOW THE ITEMS PURCHASED BY HIM LONG BACK AT LOWER RATES THAN THOSE WERE PREVALENT IN THE MARKET/AREA OF BUSINESS OF THE ASSESSEE IN THAT PERIOD. NONE OF T HE PURCHASES OR SALES AS PER INFORMATION FURNISHED BY THE ASSESSEE, WERE MADE AT RATES LOWER THAN OR EVEN EQUAL TO THE RATES TAKEN BY THE ASSESS EE FOR THE PURPOSE OF VALUATION OF CLOSING STOCK. IN ANY CASE, PURCHASE RATES ARE NOT TO BE CONSIDERED FOR THIS PURPOSE AS THE ASSESSEE HAS ADM ITTEDLY VALUED THE CLOSING STOCK AT MARKET RATES. THE AVERAGE MARKET PRICE AS PER INFORMATION GATHERED AND THAT DISCUSSED ABOVE COMES TO RS. 26,5 00/-. THE ASSESSEE HAS HIMSELF SOLD THE GOODS DURING THE YEAR AT THE A VERAGE MARKET PRICE OF RS. 23,478/- AS SHOWN IN PARA 3. ACCORDINGLY STRICTLY SPEAKING THE VALUATION OF THE CLOSING STOCK SHOULD BE AT THE MARKET RATE O F RS. 26,500/- BUT TO BE FAIR TO THE ASSESSEE, THE RATE OF RS. 23,478/- IS B EING APPLIED TO THE VALUATION OF CLOSING STOCK. APPLYING THIS RATE TO THE QUANTITY OF CLOSING STOCK I.E. 391.190 METRIC TONS, THE VALUE OF CLOSING STOC K AS ON 31.3.2007 COMES TO RS. 91,84,358/- AGAINST RS. 73,15,253/- DECLARED BY THE ASSESSEE IN ITS BALANCE SHEET. THE DIFFERENCE OF RS. 18,69,105/- I S ADDED TO THE RETURNED INCOME OF THE ASSESSEE. 8. A PERUSAL OF THE FINDINGS OF THE AO CLEARLY REVE ALS THAT THE ASSESSEE SOLD GOODS DURING THE YEAR AT AN AVERAGE MARKET PRICE OF RS. 23,478/-. THE AVERAGE MARKET PRICE AS PER THE DETAILS GATHERED WORKS OUT TO RS. 26,500/-. THE AO ADOPTED THE RATE OF RS. 23,478/- FOR VALUING THE CL OSING STOCK. THE AO HAS GIVEN THE BENEFIT TO THE ASSESSEE WITH A VIEW TO UPHOLD T HE PRINCIPLE OF FAIRNESS AND REASONABLENESS WHILE ADOPTING THE RATE OF RS. 23,47 8/- FOR VALUING THE CLOSE STOCK. THE AO VALUED THE CLOSING STOCK OF 391.190 MT AS ON 31.3.2007 AT RS. 91,84,351/- AS AGAINST RS. 73,15,253/-, IN THE BALA NCE SHEET. THE DIFFERENCE OF RS. 18,69,105/-, WAS ADDED TO THE RETURNED INCOME O F THE ASSESSEE. 9. IN THE ABOVE FACTUAL BACKGROUND, THE DECISION RE LIED UPON BY THE ASSESSEE ARE DISCUSSED HEREIN AFTER. IN THE CASE OF CHAINRU P SAMPATRAM V. CIT (SUPRA) IT HAS BEEN HELD THAT IN ORDER TO DETERMINE THE TRADIN G RESULTS OF ACCOUNTING PERIOD, VALUATION OF UNSOLD STOCK AT THE CLOSE OF THAT PERI OD IS NECESSARY PART OF THE PROCESS. THE PRINCIPLE UNDER-LYING THE RULE THAT TH E CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER, IS NOW EST ABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY, AS THE PROFITS FOR THE IN COME-TAX PURPOSES ARE TO BE COMPUTED, IN CONFORMITY WITH THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING. PROPER VALUATION OF CLOSING STOCK IS ESSENTIAL FOR THE PURPOSES OF ARRIVING AT THE CORRECT PROFIT OF THE ASSESSEE. IN THE PRESENT CAS E, THE ASSESSEE HAS APPLIED AVERAGE PRICE OF ITEMS OF CLOSING STOCK, AS THE MAR KET PRICE AND VALUED THE CLOSING STOCK ACCORDINGLY. THIS APPROACH OF THE ASSESSEE R UNS CONTRARY TO THE RATIO LAID ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 7 DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF CH AINRUP SAMPATRAM V. CIT (SUPRA), THEREFORE, THE RATIO OF DECISION IS NOT AP PLICATION TO THE FACTS OF THE PRESENT CASE. AS PER THE RATIO OF DECISION OF THE HON'BLE SUPREME COURT, PROFIT CAN BE CORRECTLY ASCERTAINED ONLY AFTER BRINGING INTO TRAD E ACCOUNT, CLOSING STOCK AND VALUING THE SAME AS PER STOCK OR MARKET PRICE WHICH EVER IS LOWER. 9.1 A PERUSAL OF THE RATIO LAID DOWN BY ITAT, JODHP UR BENCH IN THE CASE OF ACIT V. TIRUPATI MICROTECH (P) LTD (SUPRA) REVEALS THAT THE UNDERLYING PRINCIPLE WAS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 9.2 THE DECISION IN THE CASE OF SIR KIKABHAI PREMCH AND V. CIT (SUPRA) IS ENTIRELY ON A DIFFERENT SET OF FACTS AND CIRCUMSTAN CES AND IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 9.3 THE HON'BLE SUPREME COURT IN THE CASE OF ALA F IRM V. CIT (SUPRA) HAS ENTIRELY FOLLOWED THE ESTABLISHED PRINCIPLE, AS LAI D DOWN IN CHAINRUP SAMPATRAM V. CIT (SUPRA). IN THE CASE OF ALA FIRM V CIT (SUPRA) IT HAS BEEN HELD THAT TRADING RESULTS OF BUSINESS, FOR ACCOUNTING PERIOD, CAN NOT BE ASCERTAINED WITHOUT TAKING INTO ACCOUNT, THE VALUE OF THE STOCK, IN TRADE AT T HE END OF THE PERIOD. IT HAS CLEARLY BEEN LAID DOWN THEREIN THAT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING PERMIT VALUING THE COST OR MARKET PRICE WHICHEVER IS LOWER . THE ASSESSEE HAS FAILED TO VALUE THE CLOSING STOCK IN CONSONANCE WITH THE DECI SION OF HON'BLE SUPREME COURT. 10. THE LANDMARK DECISION OF THE HON'BLE SUPREME CO URT, IN THE CASE OF CHAINRUP SAMPATRAM, 24 ITR 481 (S.C), DECIDED BY TH E BENCH OF FIVE JUDGES, IS AN AUTHORITY, FOLLOWED AND REFERRED TO, IN SUBSEQUE NT DECISIONS, SUCH AS CIT V. BRITISH PAINTS INDIA LTD., 188 ITR 44 AND ALA FIRM V. CIT., 189 ITR 285 (S.C). IN THIS CASE, THE INCOME-TAX AUTHORITIES HELD THAT TH E 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 1997, AND THEY ACCORDING LY INCLUDED IN THE TAXABLE PROFITS, A SUM OF RS. 2,20,887/-, AS THE EXCESS ARI SING FROM THE VALUATION OF THE SAID 582 BARS OF MARKET PRICE, ON THE CLOSING DAY. THEY WERE VALUED AT MARKET RATE AT WHICH THE REST OF THE CLOSING STOCK AT CALC UTTA WAS VALUED IN THE BOOKS OF THE FIRM. ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 8 ON APPEAL THE APPELLATE TRIBUNAL, ON A CONSIDERATI ON OF ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, RECORDED ITS FINDING AS FOLLOWS-------: ALL THESE CIRCUMSTANCES MAKE IT CLEAR TO US THAT T HE ACTION OF THE INCOME- TAX AUTHORITIES IN TREATING THE STOCK OF SILVER BAR S IN BIKANER AS PART OF THE STOCK-IN-TRADE OF THE CALCUTTA BUSINESS WAS AMPLY J USTIFIED. THE APPELLANT ON ACCOUNT OF THE PANIC IN CALCUTTA HAD TO REMOVE THE VALUABLE STOCK-IN- TRADE TO A SAFE PLACE IN BIKANER JUST MANY OTHER CA LCUTTA BUSINESSMEN DID AT THAT TIME. THE PARTNERS OF THE FIRM THEN NOTICE D THE UPWARD TREND OF THE SILVER MARKET, AND DECIDED TO TAKE ADVANTAGE OF THE CAMOUFLAGE AFFORDED BY THE ENTRIES IN THE BOOKS OF ACCOUNT AND THE STORY O F SALE TO PARTNERS, SO THAT THE PROFIT OF THE YEAR OF ACCOUNT COULD BE SUBSTANT IALLY REDUCED ARTIFICIALLY. THE APPEAL WAS ACCORDINGLY DISMISSED. THE APPLICAT ION BY THE FIRM U/S 66(1) OF THE ACT ASKING FOR A REFERENCE TO THE HIGH COURT OF SIX QUESTIONS AS QUESTIONS OF LAW ARISING OUT OF THE ORDER OF THE TRIBUNAL WAS A LSO REJECTED. THEREUPON THE FIRM MOVED, THE HIGH COURT U/S 66(2) AND THE COURT DIRECTED THE TRIBUNAL TO REFER THE FOLLOWING QUESTION OF LAW FOR ITS DECISION:- WHETHER IN THE CIRCUMSTANCES OF THE CASE AND ON A TRUE CONSTRUCTION OF SEC 4(1) (B) AND SEC 14(2)(C) OF THE INDIAN INCOME- TAX ACT, THE SUM OF RS. 2,20,887/- WAS IN LAW ASSESSABLE TO TAX? THE HIGH COURT REJECTED THIS CONTENTION ON THE G ROUND 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 ARI SES OR ACCRUES. THE SOURCE OF THE PROFIT IS THUS THE VALUATION, AND ITS SITUS IS WHERE THE VALUATION IS MADE. WHAT IS VALUED IS THE FIRMS BUSINESS AT THE SITE OF THE FIRM AND ALL THE STOCK-IN-TRADE OF THE FIRM IS NECESSARILY DRAWN INTO THE VALUATION WH EREVER THEY MAY BE PHYSICALLY SITUATED. THE PROFIT WHICH IS THE RESULT OF THE ST OCK VALUATION OF A BUSINESS IS THUS SUI GENERIC, A TYPE BY ITSELF, TO WHICH THE ORDINAR Y NOTIONS OF A PHYSICAL ACCRUAL WILL NOT APPLY. IT COMES INTO EXISTENCE WHEN THE VALUAT ION IS MADE AND SINCE IT ARISES OUT OF THE VALUATION IT ARISES, IN RESPECT OF THE WHOLE STOCK-IN-TRADE, AT THE SITE OF THE FIRM WHOSE STOCK-IN-TRADE IS BEING VALUED IRRES PECTIVE OF WHERE PARTS OF THE STOCK-IN-TRADE MAY BE. THE HON'BLE SUPREME COURT UPHELD THE ADDITION MADE BY THE REVENUE AND ANSWERED THE ISSUE IN FAVOUR OF THE REVENUE. IT WA S OBSERVED BY THE HON'BLE APEX ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 9 COURT THAT THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD STOCK IS TO BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE OF TH E ACCOUNT AT THE TIME OF THEIR PURCHASE, SO THAT THE CANCELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FORM BOTH SIDES OF THE ACCOUNT WOULD LEAVE ONLY THE TRAN SACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS ACTUALLY REALIZED ON THE YEARS TRADING. THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRI CE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES AR E TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTI NG. THE LOSS WAS ALLOWED IN HIS ASSESSMENT TO INCOME-TAX. WE AGREE WITH THE HIGH COURT THAT THE QUESTION RE FERRED SHOULD BE ANSWERED IN THE AFFIRMATIVE THOUGH ON DIFFERENT GRO UNDS. THE APPEAL IS ACCORDINGLY DISMISSED WITH COSTS. 11. THE OBJECT OF STOCK VALUATION IS THE CORRECT DE TERMINATION OF PROFIT OR LOSS, RESULTING FROM THE MERCHANTS TRADING, DURING THE A CCOUNTING PERIOD. THE CORRECT AND PROPER VALUATION OF STOCK-IN-TRADE BOTH IN THE BEGINNING AND AT THE END OF THE ACCOUNTING PERIOD IS ESSENTIAL WITH A VIEW TO COMPU TING THE INCOME CHARGEABLE UNDER THE INCOME-TAX ACT. THE TRUE AND CORRECT PRO FIT CAN BE DETERMINED ONLY BY ENTERING THE VALUE OF THE STOCK-IN-TRADE, AT THE BE GINNING AND AT THE END OF THE ACCOUNTING PERIOD, AT COST OR MARKET PRICE, WHICHEV ER IT LOWER. NEEDLESS TO STATE HERE THAT VALUATION OF CLOSING STOCK AT COST OR MAR KET VALUE, WHICHEVER IS THE LOWER, IS EXCLUSIVE WITHIN THE DISCRETION OF THE ASSESSEE. HOWEVER, IT IS IMPERATIVE THAT WHICHEVER METHOD THE ASSESSEE ADOPTS, IT SHOULD DIS CLOSE A TRUE AND CORRECT PICTURE OF PROFITS AND GAINS. IF THE ASSESSEE DOES NOT ADOPT A SYSTEM WHICH DISCLOSES THE TRUE STATE OF AFFAIRS FOR THE PURPOSE OF DETERMINATION OF TAX, IT IS THE DUTY OF THE AO TO ADOPT ANY SUCH COMPUTATION AS DEE MED APPROPRIATE FOR THE PROPER DETERMINATION OF CORRECT AND TRUE INCOME. T HIS IS NOT ONLY A STATUTORY RIGHT ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 10 BUT DUTY OF THE AO. INCORRECT VALUATION OF STOCK L EADS TO DISTORTED PICTURE OF BOOK- VERSION AND UNDER-VALUATION OF UNSOLD STOCK AT THE END OF THE YEARS LEADS TO COMPARATIVELY LOWER PROFIT WHICH CAUSES DISTORTION OF THE ASSESSMENT OF PROFIT AND GAINS, FOR THE RELEVANT ASSESSMENT YEAR. IT IS NOT TENABLE TO SAY THAT THE AO IS BOUND TO ACCEPT THE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, THE CORRECTNESS OF WHICH HAD NOT BEEN QUESTIONED IN THE PAST. IN FISCAL MATTERS LIKE THIS, THERE IS NO ESTOPPLE. FOR COMPUTATION OF TRUE PROFITS OF THE YEAR, EACH YEAR BEING A SELF-CONTAINED AND SEPARATE UNIT, THE VALUE OF THE STOCK-IN-TRADE , AT THE BEGINNING AND AT THE END OF THE ACCOUNTING OF YEAR HAS TO BE TAKEN INTO ACCOUNT. IT WOULD BE IMPOSSIBLE TO ACCURATELY ASSESS, THE PROFI T AND GAINS MERELY, ON THE BASIS OF STATEMENT OF RECEIPTS AND PAYMENTS OR ON T HE BASIS OF TURNOVER, WITHOUT TAKING INTO ACCOUNT THE VALUE OF CLOSING STOCK, AT COST OR MARKET PRICE WHICHEVER IS LOWER AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABL ISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. 11(I) THUS, VALUATION OF CLOSING STOCK, AS PER THE JUDICIALLY SANCTIFIED METHOD AND ESTABLISHED COMMERCIAL AND ACCOUNTING PRACTICE, AS DISCUSSED EARLIER, IS ESSENTIAL AND INTEGRAL ELEMENT IN THE PROCESS OF DETERMINING THE TRADING RESULTS OF THE ACCOUNTING PERIOD. IT IS POINTED OUT THAT SUCH EST ABLISHED PRACTICE OF VALUATION OF CLOSING STOCK IS EQUALLY APPLICABLE TO BOTH THE MER CANTICE AND CASH SYSTEM OF ACCOUNTING. HENCE, VALUATION OF CLOSING STOCK CANN OT BE DISPENSED WITH. SIMILARLY, ANY VALUATION OF CLOSING STOCK CONTRARY TO SUCH ESTABLISHED PRACTICE CANNOT BE ACCEPTED, AS IT WOULD DISTORT THE TRUE AN D CORRECT STATE OF AFFAIRS OF THE BUSINESS. THE RATIONAL BEHIND THIS SYSTEM IS SIMPL E. AS THE ASSESSEE MAKES PURCHASE, THE ENTRY OF STOCK IS MADE AT THE COST PR ICES, ON ONE SIDE OF THE ACCOUNTS. AT THE CLOSE OF THE ACCOUNTING YEAR, THE VALUE OF UNSOLD STOCK IS ENTERED ON THE OTHER SIDE OF THE ACCOUNTS, THUS, CANCELLING OUT THE ENTRIES RELATING TO THE SAME UNSOLD STOCK ENTERED EARLIER IN THE ACCOUNTS. FURTHER, THAT STOCK IS CARRIED FORWARD AS THE NEXT YEARS OPENING STOCK. ULTIMATE LY, SUCH CANCELLING OUT OF THE UNSOLD STOCK FROM BOTH SIDES OF ACCOUNTS LEAVES ONL Y THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES AND GIVES A TRUE AND A CTUAL PROFIT OR LOSS OF THE YEAR LIABLE TO BE TAXED. THIS IS THE CORE AND TRUE OBJE CT OF VALUATION OF CLOSING STOCK AT ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 11 THE END OF ACCOUNTING PERIOD. BY THIS PROCESS, TRU E AND CORRECT INCOME IS ASCERTAINED. 11(II) ARBITRARY VALUATION OF CLOSING STOCK-IN-TRAD E, DISREGARDING THE RECOGNISED PRACTICE OF VALUATION EITHER AT COST OR MARKET PRIC E, WHICHEVER IS THE LOWER, DESERVES TO BE REJECTED, EVEN IF THE SAME IS ADOPTE D UNIFORMALLY YEAR AFTER YEAR. IT IS THE EXCLUSIVE DISCRETION OF THE ASSESSEE TO VALU E STOCK-IN-TRADE EITHER AT COST OR MARKET RATE, WHICHEVER IS LOWER, BUT HE IS NOT ENTI TLED TO VALUE IT BELOW BOTH. IN CASES OF UNDERVALUATION, THE AO IS COMPETENT TO REJ ECT THAT PART OF ASSESSEES METHOD AND PROCEED TO COMPUTE THE INCOME ON THE BAS IS OF EITHER AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. THE OBJECT O F UNDER VALUATION OF STOCK-ON- TRADE MAY BE THE CREATION OF SECRET RESERVE WHICH INVOLVES THE RETENTION OF PROFITS NOT TO BE INCLUDED IN THE PROFITS INTENDED FOR SHAR EHOLDERS BY THE PROFITS AND LOSS ACCOUNT AND THE BALANCE SHEET, HOWEVER, SUCH PROFIT CONSTITUTES PART OF TAXABLE INCOME. 12. WE HAVE ALSO GONE THROUGH THE FINDINGS OF LD. C IT(A) AND FIND THAT THE SAME ARE PURELY GENERAL IN NATURE AND CONTRARY TO THE RA TIO LAID DOWN BY THE HON'BLE SUPREME COURT, IN CASES, DISCUSSED ABOVE. IN VIEW OF THE ABOVE LEGAL AND FACTUAL DISCUSSIONS, THE FINDINGS OF LD. CIT(A), CANNOT BE SUSTAINED. THEREFORE, THE ORDER OF AO IS RESTORED. THE GROUNDS OF APPEAL RAISED BY THE DEPARTMENT ARE ALLOWED. 13. IN THE RESULT, APPEAL FILED BY THE DEPARTMENT I S ALLOWED. ORDER PRONOUNCED ON 27 .9.2011 SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER ACCOUNANT MEMBER CHANDIGARH, THE 27 .9.2011 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A) / THE DR ITA NO.311/CHANDI/2011 ITO V. BAL MUKAND AGGARWAL 12