2015 (11) TMI 1294 - AT - Income Tax

Challenges in Stock Valuation Methods: FIFO vs. Weighted Average

Arora Jewellers Pvt. Ltd. Versus Asstt. Commissioner of Income Tax, Central Circle-12, New Delhi

Arora Jewellers Pvt. Ltd. Versus Asstt. Commissioner of Income Tax, Central Circle-12, New Delhi - TMI Issues:- Valuation of closing stock using weighted average method- Discrepancy in valuation method adopted by the assessee- Addition made on account of undervaluation of stock- Confirmation of addition by CIT(A)- Appeal against the order of CIT(A)- Adherence to FIFO method by the Assessing Officer- Failure to demonstrate consistent use of weighted average methodAnalysis:1. Valuation of closing stock using weighted average method:The appellant, a company engaged in manufacturing and sale of gold and silver ornaments, filed its return for the assessment year 2009-10, disclosing a loss. The appellant consistently valued its closing stock using the weighted average method, as evident from the Balance Sheet and Audit Report for preceding and succeeding years. The dispute arose when the Assessing Officer made an addition of a significant amount on account of undervaluation of stock, claiming the appellant failed to prove the method of valuation adopted. The appellant maintained that the weighted average method was consistently followed, challenging the addition made.2. Discrepancy in valuation method adopted by the assessee:The Assessing Officer contended that the appellant provided contradictory statements regarding the method of valuation of closing stock. While the appellant claimed to use the weighted average method, there were references to the FIFO method as well. The Tax Audit Report did not specify the method used for valuation, leading to confusion and inconsistency in the appellant's submissions. This discrepancy in the appellant's stand created challenges in determining the correct valuation method.3. Addition made on account of undervaluation of stock:The Assessing Officer, based on the discrepancy and inconsistent statements by the appellant, added a substantial amount to the assessed income on the grounds of undervaluation of stock. The addition was made using the FIFO method for valuation, which the Assessing Officer deemed appropriate given the lack of clarity from the appellant's side regarding the valuation method employed.4. Confirmation of addition by CIT(A) and appeal against the order:The CIT(A) upheld the addition made by the Assessing Officer, emphasizing the contradictory nature of the appellant's submissions and the failure to provide substantial evidence supporting the consistent use of the weighted average method. The appellant, dissatisfied with the CIT(A)'s decision, appealed against the order, reiterating the use of the weighted average method and disputing the addition made on account of undervaluation of stock.5. Adherence to FIFO method by the Assessing Officer:The Assessing Officer justified the addition by adhering to the FIFO method for valuation of closing stock, a widely accepted practice in accounting standards. Despite the appellant's claims of following the weighted average method, the Assessing Officer relied on the FIFO method due to the lack of concrete evidence supporting the consistent use of the weighted average method.6. Failure to demonstrate consistent use of weighted average method:During the appeal proceedings, the appellant reiterated the use of the weighted average cost method for valuing closing stock but failed to provide substantial proof or documentation supporting this claim. The inconsistent stand taken by the appellant and the absence of clear evidence led to the dismissal of the appeal, affirming the Assessing Officer's decision to add the amount on account of undervaluation of stock.In conclusion, the judgment highlights the importance of consistency and clarity in the valuation of closing stock, emphasizing the need for proper documentation and evidence to support the chosen valuation method. The dismissal of the appeal underscores the significance of providing transparent and verifiable information during assessment proceedings to avoid discrepancies and additions on account of undervaluation.