ACIT CIR 25(3), MUMBAI V. UDAY M GHARE, MUMBAI

ITA 4125/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4067 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2009-2010
• Appeal Filed On: 12-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL

Judgement Text

ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND DR. STM PAVALAN JUDICIAL MEMBER ITA NO. 4125/MUM/2012 ASSESSMENT YEAR 2009-10 DATE OF HEARING: 10/7/2013 DATE OF PRONOUNCEMENT: 19/7/2013 O R D E R PER RAJENDRA SINGH, AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 26.3.2012 OF CIT(A) FOR THE ASSESSMENT YEAR 2009-10. THE DISPUTES RAISE D BY THE REVENUE IN THIS APPEAL RELATE TO ADDITION ON ACCOUNT OF METHOD OF ACCOUNTING AND VAL UTATION OF CLOSING STOCK WHICH HAVE BEEN DELETED BY THE CIT(A). 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS CARRYING ON THE BUSINESS OF MANUFACTURING AND TRADING OF JEWELLERY THROUGH THE PROPRIETOR CONCERN, HAD DECLARED SALES OF RS. 15.97 CRORE, THE OPENING STOCK OF RS. 2.54 C RORE AND CLOSING STOCK OF RS. 5.49 CRORE. THE GROSS PROFIT DECLARED BY THE ASSESSEE WAS RS. 1 .79 CRORE. THE AO ASKED THE ASSESSEE TO GIVE THE BREAK UP OF ALL THE ITEMS TRADED AND THEIR PRICES AS SHOWN IN THE OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK. THE AO NOTED FR OM THE DETAILS FILED, THAT THE ASSESSEE ACIT CIR 25(3) 308 C-11 BANDRA KURLA COMPLEX, BANDRA (E) MUMBAI 400051. UDAY M GHARE 1-A, SANDESH BHAVAN, BAJAJ CROSS RD. KANDIVALI (W) MUMBAI 400067 PAN:- AAKPG5305N APPELLANT RESPONDENT DEPARTMENT BY. SHRI CVK NAIR ASSESSEE BY: DR. K. SHIVARAM MR. PARAS SAVLA ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 2 OF 6 HAD VALUED THE CLOSING STOCK ON THE BASIS OF AVERAG E PRICE OF OPENING STOCK AND PURCHASE. THE ASSESSEE EXPLAINED THAT THE METHOD FOLLOWED BY THE ASSESSEE WAS CORRECT AND SHOULD BE ACCEPTED. AO HOWEVER DID NOT ACCEPT THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE VALUE OF STONES, GOLD AND DIAMOND JEWELLERY DEP ENDED ON EACH PEACE ACCORDING TO SIZE PURITY AND COLOUR. THE AO, THEREFORE DID NOT ACCEPT THE AVERAGE METHOD IN CASE OF 22/23 CARRET GOLD JEWELLERY BAR AND GOLD COIN. HE FOLLOWE D THE FIFO METHOD. HE COMPUTED THE PROFIT IN RESPECT OF OPENING STOCK SEPARATELY TAKIN G THE ENTIRE STOCK HAVING BEEN SOLD. HE THUS DETERMINED THE GROSS PROFIT IN RESPECT OF SAL ES OF OPENING STOCK OF 22/23 CARRET GOLD, 18 CARRET GOLD AND GOLD COIN AT RS. 84,35,261/- . S IMILARLY HE DETERMINED THE PROFIT IN RESPECT OF PURCHASE MADE DURING THE YEAR WHICH HAD BEEN SOLD BY DEDUCTING QUANTITY OF OPENING STOCK FROM THE QUANTITY OF SALES. HE THUS C OMPUTED THE PROFIT IN RESPECT OF 22/23 CARRET GOLD, GOLD COIN AND GOLD BARS AT RS. 1,17,66 ,780/-. THE TOTAL GROSS PROFIT IN RESPECT OF BOTH OPENING STOCK AND PURCHASE WAS THUS COMPUTE D AT RS. 2,02,02,041/- . THE ASSESSEE HAD DECLARED THE GROSS PROFIT IN THE P&L ACCOUNT A T RS. 30,05,455/-. THE AO, THEREFORE, MADE ADDITION OF RS. 17196586. THEREAFTER THE AO MA DE VALUATION OF CLOSING STOCK ON THE BASIS OF FIFO METHOD TAKING THE OPENING STOCK ALREADY SOLD. HE D ETERMINED THE AVERAGE PRICE OF PURCHASE AND VALUED CLOSING STOCK ON THAT BASIS IN RESPECT OF 22/23 CARRET GOLD, 18 CARRET GOLD AND GOLD COINS. HE THUS MADE ADDITION OF RS. 1 5,52,246/- ON ACCOUNT OF SUPPRESSION OF CLOSING STOCK. 3. THE ASSESSEE DISPUTED THE DECISION OF AO AND SUB MITTED BEFORE CIT(A) THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK ON THE BASIS OF AVERAGE PRICE OVER OPENING STOCK AND PURCHASE WHICH HAD BEEN CONSISTENTLY FOLLOWED WHICH WAS ONE OF THE RECOGNIZED METHODS. THE SAME METHOD HAD BEEN FOLLOWED FROM ASSESSMENT Y EAR 2006-07 TO 2011-12. THE ASSESSEE REFERRED TO THE DECISION OF DELHI BENCH OF TRIBUNAL IN CASE OF AJANTA RAJ PROTEINGS LTD. VS. DCIT (32 SOT 517) IN WHICH IT HAS BEEN HEL D THAT ONCE THE ASSESSEE HAS CHOSEN TO ADOPT COST AS THE METHOD OF VALUATION AND WHICH HAD BEEN REGULARLY EMPLOYED BY THE ASSESSEE, THE ASSESSEE COULD NOT BE PERMITTED TO CH ANGE THE METHOD TO SOME OTHER BASIS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD REGULARLY FOLLOWED THE SAME METHOD AND HAD MAINTAINED QUANTITATIVE DETAILS. THE AO HAD NOT POI NTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS. REFERENCE WAS ALSO MADE TO THE JUDGMENT O F HONBLE HIGH COURT OF HIMACHAL PRADESH IN CASE OF CIT VS. HIMACHAL PRADESH STATE C IVIL SUPPLIES CORPORATION LTD. (301 ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 3 OF 6 ITR 402) AND THE DECISION OF AHMEDABAD BENCH OF TRI BUNAL IN CASE OF D. SUBHASCHANRA & CO. VS. ACIT (309 ITR 102) IN WHICH AVERAGE COST ME THOD OF VALUATION HAS BEEN UPHELD. REFERENCE WAS ALSO MADE TO A DECISION OF MUMBAI BEN CH OF TRIBUNAL IN CASE OF ACIT VS. D.P. ZAVERI IN ITA NO. 1386/MUM/1992 IN WHICH THE T RIBUNAL HELD THAT THE REVENUE IS NOT GOING TO GAIN BY CHANGING THE METHOD OF ACCOUNTING AS THE CREDIT FOR ADVANCED CLOSING STOCK HAS TO BE GIVEN IN THE OPENING STOCK OF THE F OLLOWING YEAR. THE ASSESSEE ALSO POINTED OUT THAT NET PROFIT RATIO WAS IN THE RANGE OF 6.04% TO 40.81%. THE AO HAD NOT GIVEN ANY FINDING THAT HE WAS NOT SATISFIED ABOUT THE CORRECT NESS OR COMPLETENESS OF THE ACCOUNTS. CIT (A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, AGREED THAT THE ADDITION MADE BY AO BY CHANGING THE METHOD OF COMPUTATION OF PROFIT WAS NOT JUSTIFIED. HE, THEREFORE, DELETED THE ADDITION MADE, AGGRIEVED BY WHICH THE REVENUE I S IN APPEAL BEFORE TRIBUNAL. 4. BEFORE US, LEARNED AR FOR THE ASSESSEE SUPPORTED THE ORDERS OF CIT(A) AND SUBMITTED THAT THE SAME BEING REASONABLE SHOULD BE ACCEPTED. IT WAS ARGUED THAT THE ASSESSEE HAD BEEN REGULARLY FOLLOWING THE SAID METH OD OF ACCOUNTING WHICH HAD BEEN FOLLOWED IN THE EARLIER YEARS AS WELL AS IN THE SUB SEQUENT YEAR. THEREFORE, IT WAS SUBMITTED THAT THERE WAS NO JUSTIFICATION FOR CHANGING THE ME THOD IN THE INTERVENING PERIOD. THE LEARNED AR ALSO SUBMITTED THAT THE ASSESSEE WAS DEA LING IN SEVERAL ITEMS BUT THE AO HAD CHANGED THE METHOD ONLY IN RESPECT OF THREE ITEMS A ND THE REMAINING WAS ACCEPTED. IT WAS ALSO SUBMITTED THAT THE SALE BILL OF ORNAMENTS ONLY CONTAINED NET RATE AND VALUE AND, THEREFORE, DETAILS IN RESPECT OF THE PURCHASES GON E INTO MANUFACTURING OF JEWELLERY WAS NOT AVAILABLE FROM THE RECORDS. HE REFERRED TO THE SALE BILL DATED 13.12.2007 AND 15.2.2008 PLACED AT PAGES 187 AND 189 OF THE PAPER BOOK TO SU BSTANTIATE THE CLAIM. IT WAS THUS ARGUED THAT AVERAGE METHOD WHICH WAS ACCEPTED METHOD WAS T HE MOST APPROPRIATE ON THE FACTS OF THE PRESENT CASE. HE REFERRED TO THE DECISION OF CH ANDIGARH BENCH OF TRIBUNAL IN CASE OF ACIT VS. JAGDISH CHAND (90 TTJ 943) IN WHICH THE T RIBUNAL HELD THAT THE AVERAGE RATE OF OPENING STOCK AND PURCHASES WAS AN ACCEPTED METHOD OF VALUATION APPROVED BY THE ACCOUNTING STANDARDS ISSUED BY ICAI AND THE SAME ME THOD BEING FOLLOWED IN THE EARLIER YEAR, THE METHOD FOLLOWED BY ASSESSEE HAS TO BE ACC EPTED. REFERENCE WAS ALSO MADE TO THE DECISION OF MUMBAI BENCH OF TRIBUNAL IN CASE ACIT V S. GOPALDAS VALLABHDAS (59 ITR 768) IN WHICH THE ASSESSEE HAD ARGUED THAT THE CLOS ING STOCK CONSISTED MOSTLY OF OPENING STOCK AND, THEREFORE, LIFO SHOULD BE FOLLOWED. THE TRIBUNAL HOWEVER OBSERVED THAT IN THE ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 4 OF 6 ABSENCE OF POINT TO POINT TALLY OF SALES WITH PURCH ASES, THE PRINCIPLE OF LIFO OR FIFO WAS NOT APPLICABLE. THE CLAIM WAS THUS REJECTED AND VALUATI ON ON AVERAGE COST PRICE WAS UPHELD. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDE R OF ASSESSING OFFICER AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE ASSESSMENT OR DER. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ADDITIONS MADE BY AO ON ACCOUN T OF METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSESSEE AND ON ACCOUNT OF VALUATIO N OF CLOSING STOCK. THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING AND TRADING OF JEWELL ERY. THE ASSESSEE HAD MAINTAINED PROPER BOOKS OF ACCOUNTS AND HAD MAINTAINED QUANTIT ATIVE DETAILS. THE ASSESSEE HAD FOLLOWED AVERAGE COST METHOD OF VALUATION OF CLOSIN G STOCK TAKING AVERAGE OVER THE OPENING STOCK AND THE PURCHASES. THE AO HAS NOT ACC EPTED THE METHOD FOLLOWED AND HELD THAT LIFO METHOD IS REQUIRED TO BE FOLLOWED. HE HAS THEREFORE TAKEN THE ENTIRE OPENING STOCK AS SOLD AND THE AVERAGE COST HAS BEEN COMPUTED ONLY OVER THE PURCHASES. HE HAS ALSO REJECTED THE ACCOUNTING RESULTS AND HAS PROCEEDED T O COMPUTE THE PROFIT IN RESPECT OF OPENING STOCK AND PURCHASES SEPARATELY WHICH HAVE R ESULTED INTO SUBSTANTIAL ADDITIONS. IN OUR VIEW THE APPROACH ADOPTED BY THE AO IS NOT CORR ECT. THE ASSESSEE HAS MAINTAINED PROPER BOOKS OF ACCOUNTS IN WHICH NO DEFECTS HAVE B EEN POINTED OUT BY THE AO EITHER IN THE PURCHASES OR IN THE SALES. THE ACCOUNTING RESULTS A S PER THE PROFIT/LOSS AND TRADING ACCOUNT PREPARED BY THE ASSESSEE COULD NOT BE REJECTED UNLE SS SOME DEFECTS ARE POINTED OUT IN THE BOOKS OF ACCOUNTS. THE AO HAS NOT ACCEPTED THE METH OD OF VALUATION OF CLOSING STOCK, WHICH WAS THE AVERAGE COST BASIS. THE ASSESSEE HAS EXPLAINED THE DIFFICULTY IN FOLLOWING THE LIFO OR FIFO METHOD AS IN THE SALE BILLS ONLY THE N ET RATE AND VALUE HAVE BEEN GIVEN AND IT WAS NOT POSSIBLE TO CORRELATE VARIOUS ITEMS OR INPU TS WHICH HAVE GONE INTO THE MANUFACTURING OF JEWELLERY. IN SUCH A SITUATION THE AVERAGE COST METHOD HAS BEEN FOLLOWED. THE AVERAGE COST METHOD IS ONE OF THE ACCEPTED METH ODS OF VALUATION OF AS HELD BY THE TRIBUNAL IN CASE OF ACIT VS. JAGDISH CHAND (SUPRA). SUCH METHOD HAS ALSO BEEN HELD VALID IN SEVERAL OTHER CASES. SECONDLY IN THIS CASE, THE AO HIMSELF HAS ACCEPTED THE AVERAGE COST METHOD IN THE EARLIER YEARS AS WELL AS IN THE SUBSE QUENT YEAR AS CLAIMED BY THE ASSESSEE WHICH HAS NOT BEEN CONTROVERTED BEFORE US. IT IS A SETTLED LEGAL POSITION THAT THE PROFIT HAS TO BE COMPUTED AS PER THE METHOD OF ACCOUNTING REGULAR LY FOLLOWED B THE ASSESSEE. THEREFORE, ONCE THE AVERAGE METHOD HAS BEEN ACCEPTED IN THE EA RLIER YEAR AS WELL AS IN SUBSEQUENT ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 5 OF 6 YEARS, THE SAME CANNOT BE REJECTED IN THE INTERVENI NG PERIOD. THE AO HAS ALSO NOT PLACED ON RECORD ANY MATERIAL TO SHOW THAT GROSS PROFIT RATE OR NET PROFIT RATE DECLARED BY THE ASSESSEE WAS LOWER COMPARED TO IN THE EARLIER YEARS OR IN RE LATION TO SIMILAR COMPARABLE CASES. IN THESE CIRCUMSTANCES WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF CIT (A) DELETING THE ADDITION MADE BY AO. THE ORDER OF CIT (A) IS ACCORD INGLY UPHELD. 6. IN THE RESULT APPEAL FILED BY THE REVENUE IS DIS MISSED. ORDER PRONOUNCED TODAY I.E 19 -7-2013 SD/- SD/- (DR. STM PAVALAN ) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SK SR. P.S, MUMBAI DATED 19.7.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI ITA NO. 4125/MUM/201 2 SHRI UDAY M. GHARE PAGE 6 OF 6