The Income Tax Officer, Bathinda V. M/s. Singhal Jewellers, Bathinda

ITA 717/ASR/2013

• Counselvise Citation: 71720914 RSA 2013
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 31-07-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 09-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P N ARORA
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. A.D. JAIN, JUDICIAL MEMBER AND SH. B.P.JAIN, ACCOUNTANT MEMBER I.T.A. NO.717(ASR)/2013 ASSESSMENT YEAR:2010-11 PAN :AAVFS1476P INCOME TAX OFFICER, VS. M/S. SINGHAL JEWELLERS, WARD 1(1), BATHINDA. POST OFFICE BAZAR, BATHINDA. (APPELLANT) (RESPONDENT) APPELLANT BY:SH.TARSEM LAL, DR RESPONDENT BY: SH.P.N.ARORA, ADVOCATE DATE OF HEARING: 31/07/2014 DATE OF PRONOUNCEMENT:06/08/2014 ORDER PER B.P.JAIN, AM ; THIS APPEAL OF THE REVENUE ARISES FROM THE ORDER OF THE CIT(A), BATHINDA DATED 12.09.2013 FOR THE ASSESSMENT YEAR 2010-11.THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF: ITA NO.717(ASR)/2013 2 (I) RS.1,18,19,777/- MADE BY THE AO ON ACCOUNT OF DIFFE RENCE IN VALUATION OF CLOSING STOCK, AFTER APPLYING PROVISIO N OF SECTION 145(3) OF THE I.T.ACT, 1961. (II) RS.43,725/- MADE BY THE A.O. BY DISALLOWING INTERES T, RELYING UPON THE JUDGMENT OF MADHAV PARSHAD JANTIA VS. CIT, UP REPORTED IN AIR 1979 SC 1291. 2. THAT IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. 3. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD OFF OR DISPOSED O FF. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PARTNERSHIP FIRM CARRYING ON THE BUSINESS OF RETAIL TRADING OF GOLD AND DIAMOND JEWELLERY. DURING THE ASSESSMENT PROCEEDINGS, IT WAS NOTICED B Y THE AO FROM THE TRADING ACCOUNT OF GOLD JEWELLERY ACCOUNT, THE VALU E OF OPENING, PURCHASE, SALE AND CLOSING STOCK OF 22 CARAT OF GOLD JEWELLER Y IS ASUNDER: PARTICULAR S QTY.(GRAMS) AMOUNT(RS) PARTICULARS QTY.(GMS) AMT.(RS) TO OPENING STOCK @ RS.711/- 15,978.32 11,389.057 BY SALES @ RS.1717/- 1,368.11 2,349,468 TO PURCHASE @ RS.1519/- 613.58 932.053 BY CLOSING STOCK @ RS.1519/- 15,223.79 23,124,931 TO GROSS PROFIT 13,153.290 TOTAL 16,591.9 25,474.400 16,591.9 25,474,400 ITA NO.717(ASR)/2013 3 AS PER AO THE CLOSING STOCK WAS VALUED AT RS.742/- PER GRAM BUT AS PER COLUMN 11 AND 12 OF FORM 3CD PREPARED BY THE TAX AU DITOR, THE ASSESSEE HAD ADOPTED THE MERCANTILE SYSTEM OF ACCOUNTING AND MET HOD OF VALUATION OF CLOSING STOCK HAD BEEN MENTIONED AS COST PRICE OR MARKET PRICE WHICHEVER IS LESS IN COLUMN 11 AND 12 OF THE TAX AUDIT REPOR T. THUS, ACCORDING TO THE AO THE ASSESSEE WAS REQUIRED TO VALUE THE CLOSING STOCK OF 22 CARAT GOLD JEWELLERY @ RS.1519/- PER GRAM BEING THE AVERAGE PU RCHASE PRICE. THE ASSESSEE WAS ASKED TO EXPLAIN DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT WHY THE VALUE OF PURCHASE RATE OF GOLD JEWELLE RY BE NOT APPLIED ON THE CLOSING STOCK AND THE TRADING ACCOUNT BE RE CASTED RESULTING THEREIN INCREASE IN THE GROSS PROFIT AND NET PROFIT AFTER REJECTING THE BOOK RESULTS U/S 145(3) OF THE INCOME TAX ACT, 1961. THE ASSESSEE SUBMITTED TH E FOLLOWING REPLY DURING THE COURSE OF ASSESSMENT PROCEEDINGS: 1. REGARDING THE BIFURCATION OF THE 24,23,22 AND 18 CA RAT GOLD, IT IS HEREBY SUBMITTED THAT ALL OUR GOLD IS OF 22 CARA TS AND ALL GOLD EMBEDDED WITH DIAMONDS I.E. DIAMONDS JEWELLERY IS O F 18 CARATS. REGARDING VALUE OF CLOSING STOCK, WE FOLLOW A UNIFO RM METHOD OF VALUATION OVER ALL THE YEARS. WE FOLLOW A COST OR M ARKET PRICE WHICHEVER IS LESS METHOD. WE HAVE A OPENING STOCK P URCHASED AT A VERY LESS VALUE AND A FEW PURCHASES DURING THE PREV IOUS YEAR. OUR PRODUCT IS OF SUCH A NATURE THAT IT CAN BE SOLD OU T OF NEW STOCK OR OLD STOCK. IT IS NOT OF PERISHABLE IN NATURE THAT WE HA VE TO SELL OLD STOCK FIRST OR NEW STOCK FIRST. IT ALL DEPENDS UPON THE C USTOMER GOODS HE SELECTS MAY BE OUT OF OLD STOCK OR NEW STOCK. SO WE VALUE STOCK AT THE BASIS OF COST OR MARKET PRICE WHICHEVER IS LESS. AT THE END, WE HAVE STOCK WHICH CONSISTS OUT OF OLD STOCK AS WELL AS NE W STOCK. SO WE CALCULATED AVERAGE COST AND CURRENT MARKET PRICE A ND VALUES ITA NO.717(ASR)/2013 4 WHICHEVER IS LESS. THIS METHOD IS FOLLOWED BY US DU RING THE PREVIOUS YEAR AS WELL AS DURING THE ALL PAST YEARS . FOR YOU R PERUSAL FIND ATTACHED LAST YEARS CLOSING STOCK VALUATION CALCUL ATIONS AND AUDIT REPORT. 2. SIMILARLY, WE HAVE APPLIED AVERAGE COST ON VALUA TION OF JEWELLERY AS SOME IS SOLD OUT OF OLD STOCK AND SOME OUT OF FRESH PURCHASES IF WE VALUE ALL THE OLD STOCK AT NEW PURC HASE RATE THEN IT WILL AMOUNT TO THAT WE ARE TAKING NOTIONAL PROFIT IN OUR FINANCIAL STATEMENTS. WE HAVE FOLLOWED THE SAME METHOD FOR A LL THE PAST YEARS AS WELL. MOREOVER, THIS WILL NOT EFFECT THE REVENUE IN ANY WAY. REVENUE IS NEUTRAL ON THIS AS SAME STOCK VALUATION IS TAKEN AS OPENING STOCK OF NEXT YEAR. THE AO REJECTED THE REPLY OF THE ASSESSEES A/R BEC AUSE ACCORDING TO HIM THERE IS NO SUCH CONCEPT OF VALUATION OF CLOSING ST OCK IN THE MERCANTILE ACCOUNTING SYSTEM AND EVEN ASSESSEE AS WELL AS THE CHARTERED ACCOUNTANT HAS MENTIONED HIMSELF IN THE AUDIT REPORT THAT THE RATES HAVE BEEN ADOPTED AT COST PRICE OR MARKET PRICE WHICHEVER IS LESS. THE A O ALSO REJECTED THE BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS OF SECTION 14 5(3) AND APPLIED THE PURCHASE RATE OF RS.1519/- PER GRAM FOR THE PURPOSE OF VALUATION OF CLOSING STOCK AND MADE THE ADDITION OF RS.1,18,19,777/- WHI LE PASSING ORDER U/S 144 OF THE INCOME TAX ACT, 1961 AGAINST WHICH THE ASSES SEE IS IN APPEAL. 3. THE LD. CIT(A) VIDE PARA 2.12 OBSERVED THAT THE ASSESSEE HAS RIGHTLY VALUED THE CLOSING STOCK OF GOLD JEWELLERY AT THE A VERAGE COST OF OPENING STOCK AND PURCHASES AND THE OBSERVATION OF THE AO T HAT BOOKS OF ACCOUNT ARE LIABLE TO BE REJECTED SINCE THE ASSESSEE HAD NOT AP PLIED PROPER METHOD OF ITA NO.717(ASR)/2013 5 VALUATION OF CLOSING STOCK OF GOLD JEWELLERY IS FAC TUALLY NOT CORRECT AND THEREFORE, REVERSED THE ORDER OF THE A.O. FOR INVOK ING THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE LD. CIT(A) RELYING U PON THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMP ATRAM VS. CIT (1953) 24 ITR 481, HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. SANT RAM MANGAT RAM (2005) 275 ITR 312 AND ITAT, CH ANDIGARH BENCH IN THE CASE OF ACIT VS. JAGDISH CHAND (2004) 90 TTJ 94 3, ITAT, INDORE BENCH IN THE CASE OF GOPALDAS VALABHDAS 59 TTJ 768, ITAT AHMEDABAD BENCH IN THE CASE OF SHANTI LAL NAGAR DAS & CO. ITA NO.336 2/AHD/2009 ORDER DATED 11.11.2011 AND VARIOUS DECISION RELIED UPON B Y THE A.O. IN THE REMAND PROCEEDINGS IN THE CASE OF A.L.A. FIRM VS. CIT 189 ITR 285 AND FURTHER RELYING UPON THE DECISION OF THE HONBLE SUPREME C OURT IN THE CASE OF SAKTHI TRADING CO. VS. CIT 250 ITR 871 OBSERVED THA T WHILE COMPUTING THE CLOSING STOCK, THE SAME IS VALUED TO DETERMINE THE TRADING RESULTS OF AN ACCOUNTING PERIOD IN WHICH ANTICIPATED LOSSES ARE T AKEN INTO ACCOUNT BUT THE ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALU ATION OF CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT AND SUCH METHOD BEING FOLLOWED CONSISTENTLY BY THE ASSESSEE IS RECOGNIZED METHOD OF VALUATION OF CLOSI NG STOCK AND THEREFORE, DELETED THE ADDITION SO MADE BY THE A.O. ITA NO.717(ASR)/2013 6 4. THE LD. DR, MR. TARSEM LAL, RELIED UPON THE ORD ER OF THE A.O. AND LD. COUNSEL FOR THE ASSESSEE, MR. P.N.ARORA, ON THE OTHER HAND, RELIED UPON THE ORDER OF LD. CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THE ASSESSMENT IN THE PRESENT CASE HAS BEEN MADE UN DER SECTION 144 OF THE ACT. THE AO REJECTED THE BOOKS OF ACCOUNT BY OBSERV ING THAT THE ASSESSEE IS MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING AND TH E AUDITORS HAS MENTIONED THAT THE ASSESSEE HAS ADOPTED THE METHOD OF VALUATION OF STOCK AS COST PRICE OR MARKET PRICE WHICHEVER IS LESS AND AC CORDINGLY ASSESSEE HAVING ADOPTED AVERAGE RATE OF COST, IT IS NOT POSSIBLE TO DEDUCE CORRECT INCOME OF THE ASSESSEE. THE AO RELIED UPON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF S.N. NAMASIVAYAM CHETTIAR VS. CIT 38 ITR 579 IN THIS REGARD. THE AO RE CASTED THE PROFIT & LOSS ACCOUNT BY TAKING THE CLOSING STOCK AT THE PURCHASE PRICE AT RS.1519/- VIDE PARA 3.5 OF HIS ORDER AND WORKED OUT THE GROSS PROFIT AT RS.13,153,290/- IN P LACE OF RS.13,33,513/- DECLARED BY THE ASSESSEE. ACCORDINGLY, AN ADDITION OF RS.1,18,19,777/- WAS MADE BEING DIFFERENCE IN VALUATION OF CLOSING STOCK AS MENTIONED HEREINABOVE. 5.1. AS HELD BY THE HONBLE SUPREME COURT IN THE CA SE OF CHAINRUP SAMPATRAM VS. CIT (SUPRA) THAT THE VALUATION OF UNS OLD STOCK AT THE CLOSE OF ITA NO.717(ASR)/2013 7 THE PERIOD IS A NECESSARY PART OF PROCESS WHERE APP RECIATION VALUE OF STOCK IN THE FORM OF ANTICIPATED PROFIT IS NOT BROUGHT INTO ACCOUNT I.E. INCREASED PROFITS ARE NOT SHOWN BEFORE ACTUAL REALIZATION. TH EREFORE, THE CLOSING STOCK HAS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. ON READING THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE C ASE OF CHAINRUP SAMPATRAM VS. CIT (SUPRA) AND IN VIEW OF THE DECISI ON OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. SANT RAM MANGAT RAM (SUPRA), WE ARE OF THE VIEW THAT ASSESSEE HAS TO ADOPT METH OD OF VALUATION OF CLOSING STOCK AND ITS VALUATION SHOULD BE COST OR MARKET PR ICE WHICHEVER IS LOWER AND IT SHOULD BE A METHOD WHICH IS BEING CONSISTENTLY FOLLOWED. THE AO IN THE PRESENT CASE HAS NOT REJECTED OR HAS NOT POINTED OU T ANY DEFECT IN VALUING THE STOCK AT AVERAGE COST EITHER IN THE PREVIOUS YEAR OR IN THE PRESENT YEAR. THE AO HAS OBSERVED THAT IT SHOULD BE THE PURCHASE PRIC E OR MARKET PRICE WHICHEVER IS LOWER. IN OUR VIEW, IT IS THE COST OR MARKET PRICE WHICHEVER IS LOWER HAS TO BE TAKEN INTO CONSIDERATION FOR VALUAT ION OF CLOSING STOCK AND COST CAN BE AVERAGE COST. IN THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE, SINCE AT THE FIRST INSTANCE, IT IS BEING FOLLOWED C ONSISTENTLY FROM THE LAST YEAR AND IN THE PRESENT YEAR BEING THE SECOND YEAR, THE AO HAS OBSERVED THAT INCOME OF THE PRESENT YEAR CANNOT BE DEDUCED CORREC TLY BUT HAS NOT POINTED OUT HOW THE SAME IS NOT DEDUCED CORRECTLY. THOUGH T HERE IS NOTHING ON ITA NO.717(ASR)/2013 8 RECORD, EITHER FROM REVENUE OR FROM ASSESSEES SIDE , WHETHER THE ASSESSEE IS MAINTAINING STOCK REGISTER QUANTITY-WISE AND ITEM-W ISE. IF THE ASSESSEE HAD BEEN MAINTAINING STOCK REGISTER QUANTITY-WISE AND I TEM-WISE, THERE WOULD NOT HAVE BEEN ANY QUESTION OF AVERAGE COST OF VA LUATION. THEREFORE, A REASONABLE PRESUMPTION HAS TO BE MADE THAT THE ASSE SSEE HAD BEEN MAINTAINING STOCK REGISTER WHICH IS NOT ITEM-WISE A ND WHICH IS NOT THE DISPUTE RAISED BY THE AO WHILE FRAMING THE ASSESSME NT. THEREFORE, THE ASSESSEE HAVING MAINTAINED STOCK REGISTER AND THERE IS NO DISPUTE ON THE QUANTITY AND IN THE PRESENT FACTS AND CIRCUMSTANCES , THE AVERAGE COST IS THE BEST FORMULA WHERE THE ITEMS OF GOLD ARE MIXED UP AND EXACT COST OF ANY ITEM CANNOT BE COMPUTED VIZ-A-VIZ CLOSING STOCK VAL UATION. THEREFORE, IN SUCH FACTS AND CIRCUMSTANCES, AVERAGE COST HAS TO B E TAKEN INTO CONSIDERATION AND THE MEANING OF COST HAS TO BE SUBSTITUTED FOR A VERAGE COST FOR THE PURPOSE OF COST OR MARKET PRICE WHICHEVER IS LOWE R. THE ACCEPTED METHOD OF VALUATION HAS TO BE TAKEN INTO CONSIDERATION WH ICH THE ASSESSEE HAD ADOPTED DURING THE IMPUGNED YEAR BY FOLLOWING THE PRECEDING YEAR. THEREFORE, CONSISTENT METHOD FOLLOWED BY THE ASSESS EE CANNOT BE REJECTED AND THE A.O. IS NOT JUSTIFIED IN REJECTING THE BOOK S OF ACCOUNT AND ADOPTING PURCHASE PRICE AS THE COST, IN THE PRESENT FACTS AN D CIRCUMSTANCES. THEREFORE, KEEPING INTO CONSIDERATION THE DECISIONS OF VARIOUS COURTS OF LAW RELIED UPON ITA NO.717(ASR)/2013 9 BY THE LD. CIT(A), WE FIND NO INFIRMITY IN HIS ORDE R IN REVERSING THE ORDER OF THE A.O. DELETING THE ADDITION SO MADE. THUS, A LL THE GROUNDS OF THE REVENUES APPEAL ARE DISMISSED. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.717(ASR)/2013 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 6TH AUGUST, 2014. SD/- SD/- (A.D.JAIN) (B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 6TH AUGUST, 2014 /SKR/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE:M/S. SINGHAL JEWELLERS, P.O. BAZAR, BA THINDA. 2. THE ITO WARD 1(1), BATHINDA. 3. THE CIT(A), BATHINDA. 4. THE CIT, BATHINDA. 5. THE SR DR, ITAT, AMRITSAR. TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, AMRITSAR BENCH: AMRITSAR