High Court upholds LIFO method for closing stock valuation over FIFO, stresses need for credible evidence

The High Court of Calcutta dismissed the revenue's appeal challenging the valuation of closing stock using the LIFO method instead of FIFO. The court upheld the tribunal's decision, emphasizing the legality and consistency of the LIFO method applied by the assessee over the years. The court also rejected the revenue's reliance on an alleged admission during survey operations, highlighting the importance of credible evidence in assessment procedures. The appeal was dismissed, affirming the CIT(A)'s order in favor of the assessee.

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Issues:
1. Valuation of closing stock using LIFO method instead of FIFO method.
2. Compliance with Accounting Standard-2 for inventory valuation.
3. Validity of assessment based on alleged admission during survey operations.

Issue 1: Valuation of closing stock using LIFO method instead of FIFO method:
The appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 challenges the order of the Income Tax Appellate Tribunal confirming the deletion of an amount due to the difference in stock valuation. The revenue contends that the assessee unlawfully followed the Last In First Out (LIFO) method of accounting for closing stock valuation, contrary to the Accounting Standard-2 which recommends FIFO or Weighted Average Method. The assessing officer initiated the assessment based on a survey action revealing a stock difference, leading to the application of the LIFO method. However, the CIT(A) allowed the appeal, emphasizing the consistency of the assessee's method over the years. The tribunal upheld this decision, emphasizing the need for consistency in valuation methods.

Issue 2: Compliance with Accounting Standard-2 for inventory valuation:
The appellant argues that the assessee's failure to follow the FIFO method as per Accounting Standard-2 is a violation of the statutory rule. However, Section 145 of the Income Tax Act allows for the adoption of accounting standards notified by the Central Government. The assessee consistently applied the LIFO method, which was accepted by the revenue in previous years and even approved by the tribunal in earlier cases. Citing a similar case precedent, the tribunal affirmed the CIT(A)'s decision, emphasizing the legality and consistency of the LIFO method in the assessee's case.

Issue 3: Validity of assessment based on alleged admission during survey operations:
The assessing officer's reliance on the alleged admission by the director of the assessee during survey operations was challenged. The CBDT circular cautioned against obtaining confessions without credible evidence during search and seizure operations. The tribunal found that the assessing officer's conclusion solely based on the survey report was unjustified. The tribunal emphasized the importance of evidence collection and consistency in assessment procedures, ultimately dismissing the revenue's appeal and upholding the order passed by the CIT(A).

In conclusion, the High Court of Calcutta dismissed the revenue's appeal, answering the substantial questions of law against the revenue. The tribunal's decision to affirm the CIT(A)'s order was upheld, emphasizing the legality and consistency of the LIFO method in the assessee's case.

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