2016 (10) TMI 1019 - AT - Income Tax

Tribunal upholds FIFO method for stock valuation, directs re-examination of commission expenses

The Tribunal upheld the CIT(A)'s decision to delete the addition for undervaluation of closing stock, citing the assessee's consistent use of the FIFO ... Addition of undervaluation of closing stock - Held that:- Assessee has been following FIFO method for valuation of its stocks in all earlier and subsequent years and no addition has ever been made. The assessment order was passed u/s 143(3) for A.Y. 2009-10 accepting FIFO method of stock valuation. It is further noted that assessee had submitted copies of bills and other evidences to justify valuation based upon FIFO method. Further, nothing wrong could be pointed out by the Ld. DR in the detailed and well reasoned findings of Ld. CIT(A). Further, it is noted by us that closing stock of the impugned year had become opening stock of the next year. Thus, viewed from this angle also, overall tax effect taking both the years into account will be tax-neutral. - Decided in favour of assessee Addition of commission expenses - Held that:- As decided in assessee's own case in previous AY the findings by the ld. CIT(A) are based on bald claims, de hors any material on record. Merely making general statements, without basis in any material on record, which has moved the ld. CIT(A), would not prove a claim. His taking cognizance of the copies of the confirmations, i.e., which are inadmissible in evidence, cannot also to be regarded as valid. Even no finding qua commission to Parul Bahirwani, a relative, stands issued. We, accordingly, vacating his findings, restore the matter back to the file of the A.O. to allow the assessee an opportunity to present its case before him. The A.O. shall, on his part, proceed reasonably; that being the hallmark of any good assessment, sustainable in law. Issues Involved:1. Deletion of addition on account of undervaluation of closing stock.2. Disallowance of commission expenses.Issue-Wise Detailed Analysis:1. Deletion of Addition on Account of Undervaluation of Closing Stock:The Revenue appealed against the Ld. CIT(A)'s decision to delete the addition of Rs. 88,15,024/- made by the AO for undervaluation of closing stock. The AO had applied the average cost method for stock valuation, which the assessee contested, stating that they consistently followed the FIFO method, accepted in previous and subsequent years. The Ld. CIT(A) noted that the assessee provided quantitative details and purchase bills during scrutiny, consistently followed the FIFO method, and the department had accepted this method in earlier years without any additions. The CIT(A) concluded that the method of accounting regularly followed by the assessee cannot be disturbed unless it results in underestimation of profits, citing precedents such as CIT v. McMillan & Co. and CIT v. Advance Construction Co. (P.) Ltd. The Tribunal upheld the CIT(A)'s findings, noting that the assessee had justified the valuation with evidence and that the overall tax effect would be neutral as the closing stock of one year becomes the opening stock of the next. Therefore, the Tribunal found no necessity to interfere with the CIT(A)'s order and rejected this ground.2. Disallowance of Commission Expenses:The Revenue challenged the Ld. CIT(A)'s decision to delete the disallowance of commission expenses amounting to Rs. 8,93,558/-. The AO disallowed the expenses due to lack of evidence proving the genuineness of the commission transactions. The Tribunal noted that in a similar issue for A.Y. 2009-10, the matter was sent back to the AO for re-examination. The Tribunal observed that the primary reason for disallowance was the non-furnishing of evidence for services rendered, and the CIT(A) reversed the AO's findings without substantial evidence. The Tribunal restored the matter back to the AO, directing the assessee to present requisite evidence to substantiate the rendering of services by the agents. The AO was instructed to proceed reasonably and in accordance with the law, considering the commercial expediency and regularity of the commission payments. Consequently, this ground was allowed for statistical purposes.Assessee’s Appeal:The assessee appealed against the disallowance of Rs. 7,00,000/- as commission expenses. The Tribunal noted that this issue was identical to the Revenue's second ground. Since the Tribunal had already sent this issue back to the AO for re-examination, the same directions were applied to the assessee's appeal. The AO was directed to follow the Tribunal's order, and the grounds were treated as allowed for statistical purposes.Conclusion:Both appeals were partly allowed, with the Tribunal directing the AO to re-examine the commission expenses issue, ensuring the assessee provides necessary evidence for the services rendered. The Tribunal upheld the CIT(A)'s decision regarding the undervaluation of closing stock, finding no reason to interfere with the well-reasoned findings.