2014 (11) TMI 647 - AT - Income Tax

ITAT Ahmedabad: Valuation Method & Expense Disallowance

M/s. Ambuja Oil Industries Versus Income Tax Officer

The ITAT Ahmedabad overturned the addition of &8377; 4,61,305 for the valuation of closing stock, stating the assessee had the freedom to choose a ... Addition of valuation of closing stock – Held that:- The AO observed that as per the tax audit report filed by the assessee under clause 12(a), the basis for valuation of closing stock was 'market price' - for the purposes of valuation of closing stock, the assessee is at liberty to choose a method of valuation of closing stock but the assessee is required to follow the chosen method regularly – revenue is bound by the assessee’s choice of the method regularly employed unless by this method the true income or profits cannot be arrived at - The assessee’s regular method should not be rejected as improper merely because it gives him the benefit in certain years because as per the AO the other method would have been more preferable - The method of accounting cannot be substituted by the AO merely because it is unsatisfactory. What is material for the purposes of section 145 of the Income Tax Act, 1961 is, the method should be such that the real income, profits and gains can be properly deduced - No material has been brought on record by the Revenue to show that the assessee has not adopted the average market rate of last month of the year for the purposes of valuation of closing stock of cotton, cotton seeds and oil consistently and regularly for the purposes of its account - the lower authorities were not justified in valuing the closing stock of the assessee on the basis of the sale bills at the fag-end of the year in place of the method adopted by the assessee of valuing its closing stock on the basis of average market price of the last month of the year – the order of the CIT(A) is set aside – Decided in favour of asseessee. Addition of 20% of gunny bags – Held that:- AO observed that the assessee has paid ₹ 24,13,728/- for ginning and pressing charges to Vishal Industries – CIT(A) rightly held that the AO has made an estimated disallowance of 25% of the expenses on the gunny bags and that the assessee contended that the no show cause notice was given by the AO before making the disallowance and hence restored the matter back to the file of the AO, directing him to verify the working regarding consumption of gunny bags furnished by the assessee in the written submissions and modify the assessment order accordingly – the order of the CIT(A) is upheld – Decided against assessee. Issues:1. Valuation of closing stock2. Disallowance of expenses on gunny bagsValuation of Closing Stock:The appeal was filed against the order of the Commissioner of Income Tax confirming the addition on account of valuation of closing stock. The Assessing Officer observed discrepancies in the valuation method used by the assessee, leading to an addition of &8377; 4,61,305. The assessee argued that the valuation was based on the average market rate of the last month, following a consistent method. The Commissioner of Income Tax (Appeals) upheld the addition, stating that the audit report mentioned valuation at 'market price' and the method used by the Assessing Officer was valid. However, the ITAT Ahmedabad held that the assessee had the liberty to choose a valuation method, as long as it was consistent and provided a true picture of profits. The ITAT concluded that the lower authorities were unjustified in valuing the closing stock based on year-end sale bills, overturning the addition of &8377; 4,61,305.Disallowance of Expenses on Gunny Bags:The Assessing Officer disallowed 25% of expenses claimed for gunny bags due to lack of details provided by the assessee. On appeal, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to verify the consumption details of gunny bags and modify the assessment order accordingly. The ITAT Ahmedabad noted that the Assessing Officer made an estimated disallowance without providing a show-cause notice. The Commissioner's decision was upheld, and the matter was sent back for verification. The assessee failed to present any grievance against this finding, leading to the dismissal of this ground of appeal. Ultimately, the ITAT partly allowed the appeal of the assessee.The judgment by the ITAT Ahmedabad addressed the issues of valuation of closing stock and disallowance of expenses on gunny bags. It emphasized the importance of a consistent valuation method for closing stock and highlighted the need for proper verification before disallowing expenses. The ITAT's decision provided clarity on the acceptable practices for valuation and expense disallowance, ensuring a fair assessment process.