2013 (3) TMI 171 - AT - Income Tax

Tribunal validates stock valuation method, excludes taxes from turnover, penalty pending fresh adjudication

The Tribunal upheld the assessee's method of valuing non-moving stock at 5% of the purchase cost, remanding the matter for verification. Sales-tax and ... Valuation of stock - non moving stock - identification of nonmoving items - held that:- if the method of valuation adopted by the assessee is a recognized method, the same cannot be disregarded on mere technicalities. - consistency in the method applied by the assessee is fairly emerging. - in the case before the Hon’ble High Court of Rajasthan in the case of Wolkem India Ltd. (2009 (1) TMI 241 - RAJASTHAN HIGH COURT), the valuation of unusable and non-moving items on account of obsolescence at 5% of the cost on estimation has been found to be reasonable. Since the non-moving items added to the closing stock during the year is only 19,28,259/-, the Assessing Officer shall be justified to put such working for further verification and examination. For examination of this aspect, matter remanded back to AO. - Decided in favor of assessee. Issues Involved:1. Valuation of non-moving stock.2. Exclusion of Sales-tax and Excise duty from total turnover.3. Penalty under section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Valuation of Non-Moving Stock:Facts:The assessee, involved in the manufacturing of air pollution control equipment, valued its closing stock of non-moving items at 5% of the cost, reducing the stock value by Rs 44,74,470/-. The Assessing Officer (AO) added this amount back, citing non-disclosure in the return and lack of specific auditor comments. The Commissioner of Income-tax (Appeals) (CIT(A)) partially upheld the AO's decision, sustaining an addition of Rs 19,28,259/- while granting relief of Rs 25,47,211/-.Arguments:- Assessee: Valuing non-moving stock at 5% is fair and consistent with generally accepted principles. The method has been followed in past and subsequent years without disallowance. The assessee cited several judgments supporting the valuation method.- Revenue: The method was not properly disclosed, and complete details of purchases were not furnished. Non-moving stock should be classified only if unused for over five years.Findings:The Tribunal found the assessee's method of valuing slow/non-moving stock at 5% of the purchase cost to be reasonable and consistent with commercial principles. The CIT(A)'s decision to restrict the addition to Rs 19,28,259/- was upheld, but the matter was remanded to the AO for verification of the working of non-moving items as per the claimed policy.2. Exclusion of Sales-tax and Excise Duty from Total Turnover:Facts:The CIT(A) directed the exclusion of Sales-tax and Excise duty from the total turnover, following the Bombay High Court judgment in CIT v. Sudarshan Chemical Inds. Ltd. The Revenue argued that the Supreme Court had not settled the issue on merits.Arguments:- Assessee: The issue is settled by the Supreme Court in CIT v. Laxmi Machine Works, favoring the exclusion of Sales-tax and Excise duty from total turnover.- Revenue: Cited a contrary judgment from the Bombay High Court in Hindustan Petroleum Corpn. V. CIT.Findings:The Tribunal affirmed the CIT(A)'s order, citing the Supreme Court's judgment in CIT v. Laxmi Machine Works, confirming that Sales-tax and Excise duty should be excluded from the total turnover.3. Penalty under Section 271(1)(c):Facts:The AO levied a penalty of Rs 7,08,635/- under section 271(1)(c) related to the addition of Rs 19,28,259/-. The CIT(A) confirmed the penalty.Arguments:- Assessee: The penalty should be set aside as the quantum addition issue was remanded to the AO for fresh adjudication.- Revenue: Supported the penalty based on the sustained addition.Findings:The Tribunal set aside the penalty, as the issue of the addition of Rs 19,28,259/- was remanded to the AO. The penalty was deemed premature until the fresh adjudication was completed.Conclusion:- The assessee's appeal regarding the valuation of non-moving stock was allowed for statistical purposes, with the matter remanded for verification.- The Revenue's appeal on excluding Sales-tax and Excise duty from total turnover was dismissed.- The penalty under section 271(1)(c) was set aside, contingent on the outcome of the remanded valuation issue.Result:- Assessee's appeals (ITA Nos 1389/PN/06 and 157/PN/10) were allowed.- Revenue's appeal (ITA No 55/PN/2007) was dismissed.