2018 (3) TMI 895 - AT - Income Tax

Tribunal Partially Allows Appeal on Stock Value, Remits Tax Disallowance Issue for Fresh Adjudication

The Tribunal allowed the appeal in part by deleting the addition made on account of the suppressed value of closing stock. The issue of disallowance under ... Additions on account of suppression of closing stock - defects in the LIFO method adopted - AS-2 by Institute of Chartered Accountants of India (ICAI) - Held that:- It is well settled that the consistent method of accounting or stock valuation followed by the assessee cannot be disturbed by the AO, without pointing out the defects in the method. LIFO is a well accepted and recognised method of valuation of closing stock. In our view, AS-2 by Institute of Chartered Accountants of India does not state that valuation of closing stock under LIFO method cannot be done. The act mandates that the valuation of inventory should be made in accordance with the method of accounting regularly employed by the assessee. Thus the AO, is wrong in disturbing the method of accounting regularly employed by the assessee for valuation of closing stock. Hence the addition is bad in law. - Decided in favour of assessee TDS u/s 194C - tds on payments made for melting charges and hall marking charges - assessee submits that the recipient parties have already offered this receipt to tax in their computation of total income and have accordingly paid tax on the same - Held that:- The second proviso to section 40(a)(ia) of the Act provides that in such cases no disallowance can be made u/s 40(a)(ia) of the Act. The courts have held that this proviso is retrospective in nature. Thus we set aside this issue to the file of the AO for verification and denovo adjudication of this issue of disallowance u/s 40(a)(ia) of the Act in accordance with law. - Decided in favour of assessee for statistical prposes. Issues Involved:1. Addition on account of suppression of value of closing stock.2. Disallowance under section 40(a)(ia) for non-deduction of tax at source on melting and hallmarking charges.Issue-wise Detailed Analysis:1. Addition on Account of Suppression of Value of Closing Stock:The assessee, a partnership firm engaged in manufacturing and retail trading in gold ornaments, filed its return of income for A.Y. 2013-14. The AO completed the assessment determining the total income at Rs. 2,64,90,350/- by making additions for suppression of closing stock. The AO argued that the assessee undervalued its closing stock by using the LIFO method, which is not in accordance with AS-2 issued by the Institute of Chartered Accountants of India. The books of accounts were not rejected by the AO.The assessee appealed, arguing that:- The LIFO method is a recognized method of stock valuation and has been consistently followed since the inception of the business.- The AO did not find any defects in the books of accounts or stock registers.- Section 145A mandates that inventories be valued in accordance with the method of accounting regularly employed by the assessee.- The AO's calculation of the closing stock value was factually incorrect.The Tribunal held that:- The LIFO method is a well-accepted and recognized method of valuation.- AS-2 does not specifically prohibit the LIFO method.- Section 145A supports the consistent method of accounting employed by the assessee.- The AO and CIT(A) erred by not revaluing the opening stock using the same method as the closing stock.- The AO's calculation of the closing stock value was incorrect.The Tribunal deleted the addition made on account of suppressed value of closing stock, allowing this ground of appeal.2. Disallowance Under Section 40(a)(ia) for Non-Deduction of Tax at Source:The AO disallowed melting and hallmarking charges paid by the assessee for non-deduction of tax at source under section 194C. The assessee argued that:- There was no contract warranting such deduction.- The recipient parties had already offered the sums received to tax in their income tax returns.The Tribunal noted that the second proviso to section 40(a)(ia) provides that no disallowance can be made if the recipient has paid tax on the sums received. The Tribunal set aside the issue to the AO for verification and denovo adjudication in accordance with the law.This ground of appeal was allowed for statistical purposes.General Ground:The third ground was general in nature and did not require adjudication.Conclusion:The appeal was allowed in part, with the addition on account of suppression of closing stock being deleted and the issue of disallowance under section 40(a)(ia) being remitted to the AO for fresh adjudication. The order was pronounced on 16.03.2018.