2018 (4) TMI 1625 - AT - Income Tax

Tribunal upholds LIFO method for stock valuation, rejects unwarranted additions.

M/s Roopshree Jewellers (P) Ltd. Versus ITO, Ward-9 (3), Kolkata And Vice-Versa

The Tribunal dismissed the revenue's appeal, confirming that LIFO is an acceptable method for valuing closing stock and the addition of Rs. 3,91,71,167/- ... Valuation of closing stock of gold jewellery - LIFO or FIFO method - accounting standard - Held that:- We find that the CIT-A had correctly deleted the addition on the ground that the assessee company had been regularly employing LIFO method for the purpose of valuation of its stocks since its inception and there is no deviation of the same during the year and the said method had been accepted by the revenue in the earlier years. We find that the entire issue under dispute is squarely covered by the decision of this tribunal in the case of ACIT vs Jewell India Jewellers [2016 (7) TMI 376 - ITAT KOLKATA] as held method of accounting regularly employed by the assessee for valuation of closing stock of Gold and other jewellery. It is quite natural that jewellery being a fashion industry, the old stocks would most of the times remain with the assessee and the revenue cannot expect the old stocks to be sold out first though it would remain in the wish list of the jeweller. We find that the aforesaid valuation exactly fits into the accepted method of valuation for a jeweller as approved in the case of Cochin Tribunal in the case of ITO vs Sree Padmanabha Jewellery Mart[1986 (8) TMI 120 - ITAT COCHIN ] In any event, we hold that no addition could be made towards value of stock because the closing stock cannot be construed as a source of profit for the assessee - assessee has been consistently following LIFO method of accounting for valuation of its closing stock of gold which has been accepted by the department in the earlier years even in scrutiny assessment proceedings of the assessee. Then there is no justifiable reason to reject the same method during the year under appeal. - Decided against revenue Addition towards making charges included in valuation of closing stock - Held that:- We find that the assessee had stated that it had included making charges in the closing stock. But this statement made by the assessee has been accepted by the CITA without verifying the said fact. Thus remand this issue to the file of the AO, with a direction to verify the fact of inclusion of making charge in the valuation of closing stock - grounds raised by the assessee and revenue as above are allowed for statistical purposes. MAT addition u/s 115JB - addition towards closing stock valuation and towards making charges not included in closing stock to the book profits computed u/s 115JB - Held that:- We have held that LIFO is also a recognized method of accounting. Hence it cannot be said that the valuation method is not in consonance with the accounting standards and Part II and Part III of Schedule VI of the Companies Act. Hence no such addition could be made to the book profit u/s 115J. With regard to the other item of making charges inclusion in the closing stock of ₹ 10,96,584/- , the assessee had stated that it had already included the making charges including wastage (i.e amount paid to karigars) in the valuation of closing stock, which has been directed to be verified by the ld AO in the earlier grounds supra by us. AO would decide this ground vis a vis inclusion of the same in the book profits u/s 115JB accordingly. If any addition is sustained under the normal provisions of the Act, the same addition need to be made in the computation of book profits u/s 115JB - Decided partly in favour of revenue partly for statistical purposes Issues Involved:1. Dispute in valuation of closing stock2. Addition towards making charges included in the valuation of closing stock3. Addition of Rs. 4,02,67,751/- u/s 115JB of the Income Tax ActDetailed Analysis:1. Dispute in Valuation of Closing StockFacts and Arguments:- The assessee, engaged in the business of manufacturing and selling Gold & Diamond Studded Gold Jewellery, filed its return of income for AY 2010-11.- The assessee adopted the LIFO method for valuing closing stock: Gold at cost including making charges, Diamond at cost or net realizable value, and Pearl & Emerald at cost.- The Assessing Officer (AO) questioned the LIFO method, stating that AS-2 issued by ICAI prescribes FIFO or weighted average method, not LIFO.- The AO argued that the LIFO method did not reflect the true profit, leading to an addition of Rs. 3,91,71,167/- for undervaluation of closing stock.Assessee’s Defense:- The assessee contended that LIFO is a recognized method and has been consistently followed since 1994.- It cited various judicial precedents supporting LIFO as a valid method.- The assessee argued that revaluation of closing stock would be revenue-neutral as it would affect the opening stock valuation of the next year.Tribunal’s Findings:- The Tribunal noted that the LIFO method was consistently followed and accepted by the revenue in past years.- It referenced several judicial precedents, including the decisions of the Pune Tribunal in Sandvik Asia vs. DCIT and the Cochin Tribunal in ITO vs. Sree Padmanabha Jewellery Mart, which upheld LIFO as a recognized method.- The Tribunal upheld the CIT(A)’s deletion of the addition, affirming that LIFO is a recognized method and there was no reason to deviate from the consistent practice.Conclusion:- The Tribunal dismissed the revenue's appeal, confirming that LIFO is an acceptable method for valuing closing stock and the addition of Rs. 3,91,71,167/- was unwarranted.2. Addition Towards Making Charges Included in the Valuation of Closing StockFacts and Arguments:- The AO added Rs. 10,96,584/- to the total income, arguing that making charges and wastage were not included in the closing stock valuation.- The assessee claimed that making charges, including wastage, were already included in the valuation.CIT(A)’s Decision:- The CIT(A) partially granted relief, reducing the addition to Rs. 7,73,488/- after verifying the inclusion of making charges in the closing stock.Tribunal’s Findings:- The Tribunal noted that the CIT(A) accepted the assessee’s claim without verification.- It remanded the issue back to the AO for verification of the inclusion of Rs. 14,82,742/- in making charges in the closing stock valuation.Conclusion:- The Tribunal allowed the grounds raised by both the assessee and revenue for statistical purposes, directing the AO to verify the inclusion of making charges in the closing stock.3. Addition of Rs. 4,02,67,751/- u/s 115JB of the Income Tax ActFacts and Arguments:- The AO added Rs. 4,02,67,751/- to the book profits u/s 115JB, arguing that the profit and loss account was not prepared according to the notified accounting standards due to the use of LIFO for stock valuation.CIT(A)’s Decision:- The CIT(A) deleted the addition, stating that the AO cannot make any addition to book profit other than those contemplated in Explanation to section 115JB(2).Tribunal’s Findings:- The Tribunal upheld the deletion of the addition related to the valuation of closing stock, confirming that LIFO is a recognized method.- It directed the AO to verify the inclusion of making charges in the valuation of closing stock and adjust the book profits accordingly.Conclusion:- The Tribunal partly allowed the revenue’s appeal for statistical purposes, directing the AO to verify and decide the inclusion of making charges in the book profits u/s 115JB.Final Judgment:- Both the appeals of the assessee and the revenue were partly allowed for statistical purposes, with specific directions for verification and adjustments by the AO.