1993 (7) TMI 117 - AT - Income Tax

Tribunal reverses valuation order, deletes Rs. 80,89,150 addition, adjusts dividend income expenditure.

The Tribunal partly allowed the appeal by reversing the CIT (Appeals) order on the valuation of closing stock, deleting the addition of Rs. 80,89,150. The ... Assessing Officer, Closing Stock, Equity Shares, Market Value, Valuing Stock Issues Involved:1. Valuation of closing stock and the method of accounting.2. Deduction under section 80M for dividend income and the estimation of related expenses.Issue-wise Detailed Analysis:1. Valuation of Closing Stock and the Method of Accounting:The primary dispute in the appeal concerns the valuation of closing stock, specifically an addition of Rs. 80,89,150 upheld by the CIT (Appeals). The Assessing Officer noted that the assessee, dealing exclusively in equity shares of Reliance Industries Ltd., used a valuation method at cost or market value, whichever was lower. However, the assessee's method did not conform to the FIFO (first in first out) or LIFO (last in first out) systems, which led the Assessing Officer to conclude that the method was a deliberate device to reduce profits. Consequently, the closing stock was revalued using the FIFO method, resulting in the addition of Rs. 80,89,150 as concealed income.The CIT (Appeals) observed that the assessee had changed its method of stock valuation from 'at cost' in the previous year to 'at cost or market value, whichever was lower' in the current year. The assessee argued that each share was identifiable by its distinctive number and followed the specific identification method, which is recognized by the Institute of Chartered Accountants. However, the CIT (Appeals) found the method defective, invoking the proviso to section 145(1) of the IT Act, citing the Supreme Court's decision in McDowell & Co. Ltd. v. CTO, which held that colorable devices cannot be part of tax planning.The Tribunal examined whether the income could be properly deduced from the method of valuation of stocks adopted by the assessee. It was noted that the IT Act does not specify the method of stock valuation, allowing methods such as (i) at cost, (ii) at market value, or (iii) at cost or market value, whichever is lower. The dispute centered on whether the cost should be ascertained by the specific identification method or the FIFO method. The Tribunal found that the FIFO method adopted by the Assessing Officer brought anticipated profit into account, which was contrary to the principles laid down by the Supreme Court in Chainrup Sampatram v. CIT, where the purpose of stock valuation is to balance the cost of unsold goods and not to account for anticipated profits.The Tribunal concluded that where specific identification is possible and maintained, the specific identification method should be followed. Therefore, the income could be properly deduced from the method of accounting followed by the assessee, and the proviso to section 145(1) was not applicable. The addition of Rs. 80,89,150 was deleted, and the assessee's ground of appeal was allowed.2. Deduction Under Section 80M for Dividend Income and the Estimation of Related Expenses:The second issue pertains to the direction of the CIT (Appeals) estimating the expenditure for earning dividend income at Rs. 13,624 instead of Rs. 400 estimated by the assessee. The assessee claimed that dividend income fell under the head 'Other sources,' and consequently, a deduction under section 80M was claimed. The Assessing Officer, however, treated the dividend income as business income, denying the deduction under section 80M. The CIT (Appeals) accepted the assessee's contention that the dividend income should be taxed under 'Other sources' and allowed the deduction under section 80M but estimated the related expenditure at Rs. 13,624.The Tribunal noted that expenses directly relatable to earning the dividend income were not available separately, necessitating an estimate. Considering the total expenditure and the proportion of sales to dividend income, the Tribunal estimated that Rs. 5,000 could be related to earning the dividend income, as opposed to Rs. 13,624 adopted by the CIT (Appeals). This ground was partly allowed, leading to a partial allowance of the appeal.Conclusion:The appeal was partly allowed, with the Tribunal reversing the order of the CIT (Appeals) on the valuation of closing stock and reducing the estimated expenditure related to earning dividend income.