THE ITO, Vijayawada V. Sri Bharath Kumar Jai, Vijayawada

ITA 393/VIZ/2015

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9662 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 17-11-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI SHANKAR NARAYAN
• Section: 142(1)

Judgement Text

ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.393/VIZAG/2015 ( / ASSESSMENT YEAR: 2011-12) ITO, WARD - 2(1), VIJAYAWADA VS. SRI BHARATH KUMAR JAIN, VIJAYAWADA [PAN: ACWPB 5131F ] ( % / APPELLANT) ( &'% / RESPONDENT) C.O. NO.48/VIZAG/2016 (ARISING OUT OF I.T.A.NO.393/VIZAG/2015) ( / ASSESSMENT YEAR: 2011-12) SRI BHARATH KUMAR JAIN, VIJAYAWADA VS. ITO, WARD - 2(1), VIJAYAWADA ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI RAVI SHANKAR NARAYAN, DR / RESPONDENT BY : SHR I G.V.N. HARI, AR / DATE OF HEARING : 20.12.2016 / DATE OF PRONOUNCEMENT : 30.12.2016 ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 2 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE AND CROSS OBJECTI ON FILED BY THE ASSESSEE ARE DIRECTED AGAINST ORDER OF THE CIT(A), VIJAYAWADA DATED 31.8.2015 AND IT PERTAINS TO THE ASSESSMENT YEAR 20 11-12. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL DERIVING INCOME FROM BUSINESS IN GOLD AND JEWELLERY , FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 22.9.2011 DECLARING TOTAL INCOME OF ` 8,95,630/-. THE CASE WAS SELECTED FOR SCRUTINY AN D ACCORDINGLY, NOTICES U/S 143(2) & 142(1) OF THE INC OME TAX ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT') WERE ISSUED. IN RESPONSE TO THE NOTICES, AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND PRODUCED BOOKS OF ACCOUNTS AND OTHER DETAILS CA LLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. OBSERVED THAT THE ASSESSEE HAS VALUED CLOSING STOCK OF ` 80,98,201/- AND ARRIVED AT GROSS PROFIT OF ` 29,72,286/-. TO ASCERTAIN THE CORRECTNESS OF CLOSI NG STOCK VALUATION, THE A.O. ISSUED A SHOW CAUSE NOTICE AND ASKED TO PRODUC E THE DETAILS OF PURCHASES AND SALES AND ALSO METHOD OF VALUATION OF CLOSING STOCK. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE VIDE HI S LETTER DATED 31.1.2014 STATED THAT CLOSING STOCK WAS VALID AT CO ST ON FIFO BASIS ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 3 EXCLUDING VAT COLLECTED AND PAID. THE A.O., BASED ON THE INFORMATION FURNISHED BY THE ASSESSEE ARRIVED AT A CLOSING STOC K OF ` 1,19,74,157/- BY TAKING AN AVERAGE RATE OF COST OF GOLD AT ` 1790/- PER GM. AND ARRIVED AT A GROSS PROFIT OF ` 68,48,240/-, THUS QUANTIFIED UNDERSTATEMENT OF GROSS PROFIT TO THE EXTENT OF ` 38,75,954/-. THEREFORE, ISSUED ONE MORE NOTICE ON 5.2.2014 AND A SKED AS TO WHY THE UNDERSTATED PROFIT SHOULD NOT BE BROUGHT TO TAX. I N RESPONSE TO NOTICE, THE ASSESSEE VIDE HIS LETTER DATED 19.2.2014 SUBMIT TED THAT HE WAS BY OVERSIGHT INFORMED THAT HE FOLLOWED FIFO METHOD FOR VALUATION OF CLOSING STOCK, WHEREAS THE ACTUAL METHOD OF CLOSING STOCK V ALUATION IS WEIGHTED AVERAGE COST METHOD AND AS PER WHICH VALUE OF CLOSI NG STOCK HAS BEEN DETERMINED AT ` 80,98,201/- AND HENCE, THERE IS NO DIFFERENCE IN V ALUE OF CLOSING STOCK AND ACCORDINGLY UNDERSTATEMENT OF GROSS PROFIT QUANTIFIED BY YOU IS INCORRECT. THE A.O. AFTER CON SIDERING THE EXPLANATION OF THE ASSESSEE, OBSERVED THAT THE ACCE PTED METHOD OF VALUATION OF CLOSING STOCK IS EITHER AT COST PRICE OR MARKET PRICE, WHICHEVER IS LOWER AND AVERAGE COST PRICE IS NOT A ACCEPTED METHOD OF VALUATION OF CLOSING STOCK. AS THE ASSESSEE COULD NOT EXPLAIN THE UNDERSTATEMENT OF PROFIT, THE SAME HAS BEEN ADDED T O THE TOTAL INCOME OF THE ASSESSEE. ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 4 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE A.O. THE ASSESSEE FURTHER SUBMITTED THAT THE A.O. WAS INCORRECT IN STATING THAT WEIGHTE D AVERAGE COST PRICE METHOD IS NOT AN ACCEPTED METHOD OF VALUATION OF CL OSING STOCK. THE ASSESSEE FURTHER SUBMITTED THAT AS PER AS-2 ISSUED BY THE ICAI IN RESPECT OF VALUATION OF INVENTORIES, IT IS PROVIDED THAT WHERE SPECIFIC IDENTIFICATION OF INVENTORY IS NOT POSSIBLE, VALUAT ION OF CLOSING STOCK SHOULD BE DONE BY FIFO OR WEIGHTED AVERAGE COST MET HOD. SINCE, HE IS INVOLVED IN THE BUSINESS OF TRADING IN GOLD JEWELLE RY, IT IS VERY DIFFICULT TO IDENTIFY THE ITEM AVAILABLE IN STOCK WITH REFERENCE TO THE COST OF PURCHASE OF THE ITEM, THEREFORE, HE HAD FOLLOWED WEIGHTED AV ERAGE COST PRICE METHOD BY TAKING INTO ACCOUNT THE OPENING STOCK + P URCHASES TO ARRIVE AT A WEIGHTED AVERAGE COST PRICE FOR VALUATION OF C LOSING STOCK. HE IS FOLLOWING THIS METHOD OF VALUATION OF CLOSING STOCK CONSISTENTLY FOR PAST SEVERAL YEARS WHICH WAS ACCEPTED BY THE TAX AUDITOR IN HIS AUDIT REPORT SINCE, HE IS FOLLOWING ONE OF THE ACCEPTED METHOD O F VALUATION OF CLOSING STOCK AND ALSO THERE IS NO CHANGE IN METHOD OF VALU ATION OF CLOSING STOCK FOR THE YEAR UNDER CONSIDERATION, THE A.O. WAS INCO RRECT IN FOLLOWING FIFO METHOD OF VALUATION OF CLOSING STOCK. IN SUPP ORT OF HIS ARGUMENTS, ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 5 RELIED UPON THE DECISION OF ITAT, AHMEDABAD IN THE CASE OF CHIMANLAL H. SONI VS. ITO IN ITA NO.1663/AHD/2009 DATED 3.5.2012 . 4. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND ALSO TAKEN INTO ACCOUNT THE REMAND REPORT ISSUED BY THE A.O., HELD THAT IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS FOLL OWED WEIGHTED AVERAGE COST PRICE METHOD FOR THE CURRENT YEAR AND THE SAME METHOD WAS FOLLOWED IN EARLIER YEARS AND IT WAS ACCEPTED BY TH E DEPARTMENT. ONCE A CHANGE IS MADE IN THE METHOD OF VALUATION OF CLOSIN G STOCK, IT HAS REPERCUSSIONS OVER THE SUBSEQUENT YEARS ALSO. IT I S OBVIOUS THAT THE CLOSING STOCK OF THIS YEAR BECOMES THE OPENING STOC K OF THE NEXT YEAR AND IN THE LIKE MANNER, THE CLOSING STOCK OF THE PR ECEDING YEAR BECOMES THE OPENING STOCK OF THE CURRENT YEAR. IF THE CURR ENT YEARS CLOSING STOCK VALUATION IS CHANGED, THEN ITS EFFECT ON THE OPENIN G STOCK VALUATION IS ALSO TO BE LOOKED INTO. ONCE THE METHOD OF VALUATI ON OF CLOSING STOCK IS CHANGED, WITHOUT SUITABLE MODIFICATION ON THE OPENI NG STOCK ALSO, WHICH WAS DONE IN OTHER METHOD THAT WILL GIVE DISTORTED P ICTURE OF PROFIT. THEREFORE, OPINED THAT THE A.O. WAS ERRED IN MAKING ADDITION AND ACCORDINGLY DELETED ADDITIONS MADE BY THE A.O. AGG RIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN APPEAL BEFORE US. ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 6 5. THE LD. D.R. SUBMITTED THAT THE OBSERVATION OF T HE LD. CIT(A) THAT ONCE METHOD OF VALUATION OF CLOSING STOCK IS CHANGE D, WITHOUT SUITABLE MODIFICATION ON THE OPENING STOCK ALSO, WHICH WAS D ONE IN ANOTHER METHOD THAT WILL GIVE DISTORTED PICTURE OF PROFIT I S NOT CORRECT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. REPORTED IN 312 IT R 254, WHEREIN IT WAS HELD THAT THE OFFICER IS NOT BOUND BY THE METHO D FOLLOWED IN THE EARLIER YEARS AND THAT THE ACCOUNTING METHOD FOLLOW ED BY AN ASSESSEE CONTINUOUSLY FOR A GIVEN PERIOD OF TIME NEEDS TO BE PRESCRIBED TO BE CORRECT TILL THE A.O. COMES TO A CONCLUSION FOR THE REASON TO BE GIVEN THAT THE SAID SYSTEM DOES NOT REFLECT TRUE AND CORR ECT PROFITS. THE D.R. FURTHER SUBMITTED THAT THE LD. CIT(A) ERRED IN APPR ECIATING THE FACT THAT THE ASSESSEE HIMSELF ACCEPTED THAT HE HAD FOLLOWED FIFO METHOD OF VALUATION OF CLOSING STOCK. SINCE, THE CLOSING STO CK HAS TO BE VALUED EITHER ON COST OR MARKET VALUE WHICHEVER IS LESS, T HE ASSESSEE HAS TO FOLLOW FIFO METHOD TO ARRIVE AT A CLOSING STOCK AND HENCE THE A.O. WAS RIGHTLY MADE ADDITIONS AND HIS ORDER SHOULD BE UPHE LD. 6. THE LD. A.R. ON THE OTHER HAND STRONGLY SUPPORTI NG THE ORDER OF CIT(A), SUBMITTED THAT THE A.O. WAS ERRED IN HOLDIN G THAT THE ASSESSEE NEEDS TO FOLLOW FIFO METHOD TO ARRIVE AT A CLOSING STOCK. THE A.R. ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 7 FURTHER SUBMITTED THAT IT IS TRUE THAT ASSESSEE NEE DS TO FOLLOW COST OR MARKET PRICE, WHICHEVER IS LESS TO ARRIVE AT A CLOS ING STOCK. BUT, WHEN IT COMES COST PRICE METHOD, THERE ARE 3 METHODS I.E. F IFO, LIFO & WEIGHTED AVERAGE COST PRICE METHOD. THE ASSESSEE C AN FOLLOW ANY ONE OF THE METHOD TO ARRIVE AT A CLOSING STOCK, BUT HE NEEDS TO FOLLOW THE SAME METHOD CONSISTENTLY WITHOUT ANY CHANGE IN METH OD OF VALUATION. THE ASSESSEE IS CONSISTENTLY FOLLOWING WEIGHTED AVE RAGE COST PRICE METHOD FOR VALUATION OF CLOSING STOCK AND WHICH IS ONE OF THE ACCEPTED METHOD OF VALUATION OF CLOSING STOCK AND ACCORDINGL Y, THE A.O. WAS INCORRECT IN FOLLOWING FIFO METHOD TO VALUE CLOSING STOCK. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE FACTUAL MATRIX OF THE ISSUE WHICH LEADS TO ADDITION ARE THAT THE ASSESSEE HAS VALUED CLOSING STOCK BY FOLLOWING WEIGHTED AVER AGE COST METHOD TO ARRIVE AT CLOSING STOCK. THE A.O. OBSERVED THAT TH E ASSESSEE NEEDS TO FOLLOW COST OR MARKET PRICE, WHICHEVER IS LESS METH OD TO VALUE THE CLOSING STOCK, BUT HE CANNOT FOLLOW WEIGHTED AVERAG E COST PRICE METHOD. THE A.O. FURTHER OBSERVED THAT WEIGHTED AVERAGE COS T PRICE METHOD IS NOT AN ACCEPTED METHOD OF VALUATION OF CLOSING STOC K. ACCORDINGLY, RE- WORKED CLOSING STOCK BY HIS OWN METHOD AND ARRIVED AT AN ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 8 UNDERSTATEMENT OF CLOSING STOCK OF ` 38,75,954/-. IT IS THE CONTENTION OF THE ASSESSEE THAT HE HAD FOLLOWED WEIGHTED AVERAGE COST PRICE METHOD FOR VALUATION OF CLOSING STOCK AND WHICH WAS FOLLOW ED CONSISTENTLY FOR PAST SEVERAL YEARS AND THE SAME HAS BEEN ACCEPTED B Y THE DEPARTMENT. THE ASSESSEE FURTHER CONTENDED THAT WEIGHTED AVERAG E COST PRICE METHOD IS ONE OF THE ACCEPTED METHOD OF VALUATION O F CLOSING STOCK, WHICH WAS SUGGESTED BY THE ICAI IN ACCOUNTING STAND ARD-2 FOR VALUATION OF CLOSING STOCK, WHEREIN, IT STATED THAT IF THE SP ECIFIC IDENTIFICATION OF INVENTORY IS NOT POSSIBLE, VALUATION SHOULD BE DONE BY EITHER FIFO OR WEIGHTED AVERAGE COST PRICE METHOD. SINCE, THE MET HOD FOLLOWED BY THE ASSESSEE FOR VALUATION OF CLOSING STOCK IS ONE OF T HE ACCEPTED METHOD OF VALUATION OF CLOSING STOCK AND ALSO FACT THAT THE S AME HAS BEEN FOLLOWED FOR PAST SEVERAL YEARS, THE A.O. WAS INCORRECT IN C HANGING THE METHOD OF VALUATION OF CLOSING STOCK TO FIFO METHOD WITHOUT M ODIFYING THE OPENING STOCK, WHICH RESULTS INTO DISTORTED FIGURE OF NET P ROFIT. 8. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATER IAL ON RECORD, WE FIND THAT THE A.O. HAS RE-WORKED CLOSING STOCK B Y HOLDING THAT WEIGHTED AVERAGE COST PRICE METHOD CANNOT BE FOLLOW ED FOR VALUATION OF CLOSING STOCK. ACCORDING TO THE A.O., COST OR MARK ET PRICE, WHICHEVER IS LESS IS THE METHOD OF VALUATION OF CLOSING STOCK. WE DO NOT FIND ANY ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 9 MERITS IN THE FINDINGS OF THE A.O. NO DOUBT, ALL A SSESSEES HAVE TO FOLLOW COST OR MARKET PRICE TO DETERMINE VALUE OF CLOSING STOCK. BUT, WHEN IT COMES TO COST PRICE METHOD, THERE ARE 3 METHODS OF VALUATION OF CLOSING STOCK, I.E. FIFO METHOD LIFO METHOD AND AVERAGE COS T PRICE METHOD. THE ASSESSEE CAN FOLLOW ONE OF THE METHODS TO VALUE THE CLOSING STOCK, HOWEVER, THE SAME METHOD SHOULD BE FOLLOWED CONSIST ENTLY WITHOUT ANY CHANGE. IN CASE, ANY CHANGES ARE MADE IN THE METHO D OF VALUATION OF CLOSING STOCK, THE EFFECT IN THE VALUATION OF CLOSI NG STOCK HAS TO BE SUITABLY DISCLOSED IN THE ACCOUNTS TO ARRIVE AT A T RUE AND CORRECT PROFIT FROM THE BUSINESS. ONCE THE ASSESSEE IS FOLLOWING ONE OF THE ACCEPTED METHODS OF VALUATION OF CLOSING STOCK AND WHICH WAS FOLLOWED CONSISTENTLY FOR PAST SEVERAL YEARS, THE A.O. WAS I NCORRECT IN CHANGING THE METHOD OF VALUATION OF CLOSING STOCK WITHOUT SU ITABLE MODIFICATION TO THE OPENING STOCK, BECAUSE THE CLOSING STOCK OF THI S YEAR BECOMES THE OPENING STOCK OF THE NEXT YEAR AND IN THE LIKE MANN ER, THE CLOSING STOCK OF THE PRECEDING YEAR BECOMES THE OPENING STOCK OF THE CURRENT YEAR. THOUGH THERE MAY BE DIFFERENCE IN VALUATION OF CLOS ING STOCK BECAUSE OF CHANGE IN METHOD OF VALUATION, THE EFFECT OF WHICH IS NEUTRALIZED IN THE SUBSEQUENT YEAR BECAUSE THE CLOSING STOCK OF THIS Y EAR BECOMES THE OPENING STOCK OF SUBSEQUENT YEAR. THEREFORE, WE AR E OF THE VIEW THAT ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 10 THE A.O. WAS ERRED IN MAKING ADDITION ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK WITHOUT MAKING ANY ADJUSTMENTS TO THE OPENING STOCK. 9. IN THE PRESENT CASE ON HAND, ON PERUSAL OF THE F ACTS, WE FIND THAT THE ASSESSEE IS FOLLOWING WEIGHTED AVERAGE COST MET HOD OF VALUATION CONSISTENTLY FOR PAST SEVERAL YEARS AND IN THE YEAR UNDER CONSIDERATION, HE HAD FOLLOWED THE SAME METHOD WHICH WAS CERTIFIED BY THE TAX AUDITOR IN HIS TAX AUDIT REPORT. THE ASSESSEE HAS FOLLOWED COST OR MARKET PRICE WHICHEVER IS LOW FOR VALUATION OF CLOSING STOCK, HO WEVER, FOR ADOPTING COST METHOD, HE HAD CHOSEN, WEIGHTED AVERAGE COST P RICE METHOD. THEREFORE, WE ARE OF THE VIEW THAT THE A.O. WITHOUT BROUGHT ON RECORD ANY EVIDENCE TO PROVE THAT THE ASSESSEE HAS CHANGED HIS METHOD OF VALUATION FROM THE EARLIER METHOD, CANNOT DISTURB M ETHOD OF VALUATION FOLLOWED BY THE ASSESSEE FOR VALUATION OF CLOSING S TOCK. THE CIT(A) AFTER CONSIDERING THE RELEVANT FACTS HAS RIGHTLY DELETED ADDITIONS MADE BY THE A.O. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER PASSED BY THE CIT(A), HENCE WE INCLINED TO UPHOLD THE CIT(A) ORDE R AND DISMISS THE APPEAL FILED BY THE REVENUE. 10. THE C.O. FILED BY THE ASSESSEE IS IN SUPPORT OF THE ORDER OF LD. CIT(A). THEREFORE, FOR THE REASONS RECORDED IN THE PRECEDING ITA NO.393/VIZAG/2015 & CO 48/VIZAG/2016 SRI BHARATH KUMAR JAIN, VIJAYAWADA 11 PARAGRAPHS, WE DISMISS CROSS OBJECTION FILED BY THE ASSESSEE AS NOT MAINTAINABLE. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30 TH DEC16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 30.12.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE ITO, WARD-2(1), VIJAYAWADA 2. / THE RESPONDENT SRI BHARATH KUMAR JAIN, PROP: R AHUL JEWELS SHOP NO.F/F-5, E.V. PLAZA, RAJAGOPALACHARI STREET, VIJAY AWADA 3. + / THE CIT, VIJAYAWADA 4. + ( ) / THE CIT (A), VIJAYAWADA 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM