2024 (8) TMI 933 - HC - Income Tax

Valuation of Closing Stock Must Reflect Market Price, Rules ITAT, Dismissing Appeal and Emphasizing Compliance with Sec 145.

The ITAT dismissed the Appeal, upholding the A.O.'s valuation of closing stock at market price, which was higher than the Assessee's declared amount. The ... Method of valuation of stock - 'Material on Record' and rejecting the consistency and regularity of the method of valuation - CIT(Appeals) had examined the order of the AO and found that the AO had not rejected the books of accounts - HELD THAT:- We are of the firm view that so far as the principle of consistency and validity of method of valuation is concerned, the same would remain same for different assessment years. So far as the valuation is concerned, for each year the market price of a particular goods may change and therefore, the value of the stock would also accordingly change and the same even for the same amount of stock, valuation will have to be different. In the present case, the valuation of stock has changed on account of the change in market price as well as change in the sale price, the average market could not have been taken up by the Assessee because the sale price of goods could not change in every year. Keeping in view the above, we are in agreement with the view taken by the A.O. and affirmed by the ITAT and answer question No. (i) in favour of respondent-revenue. Method of valuation of stock - We find that the decision of CIT vs. British Paints India Ltd [1990 (12) TMI 2 - SUPREME COURT] has laid down the method of valuation of stock, considering the facts and circumstances of the said case alone and would therefore not be a binding precedent in all cases as noticed above. The sale price of goods having not changed every year, the method of valuation of stock cannot be applied in the same manner as held in CIT vs. British Paints India Ltd. (Supra). We accordingly answer question No. (ii) in favour of the respondent/revenue. Issues:1. Valuation of closing stock based on market price.2. Consistency and validity of the method of valuation.3. Application of Section 145 of the Income Tax Act, 1961.4. Interpretation of CIT vs. British Paints India Ltd. (1992) Supp. (1) SCC 55.Analysis:Issue 1: Valuation of closing stock based on market priceThe Income Tax Appellate Tribunal (ITAT) found that the Assessing Officer (A.O.) concluded that the closing stock was undervalued by the Assessee. The A.O. valued the closing stock at Rs. 91,84,351/- based on market price, which was higher than the declared amount. The ITAT upheld this valuation method, stating that the closing stock should be valued at the cost or market price, whichever is lower. The ITAT emphasized that the concept of average price used by the Assessee was contrary to established principles.Issue 2: Consistency and validity of the method of valuationThe Appellant argued that the method of valuation had been consistent and should not be changed by the Assessing Officer. However, the ITAT held that for each assessment year, the market price of goods may change, leading to a change in the valuation of stock. The ITAT referred to Section 145 of the Income Tax Act, 1961, which mandates proper accounting methods to be followed.Issue 3: Application of Section 145 of the Income Tax Act, 1961The ITAT invoked Section 145 of the Income Tax Act, 1961, to support its decision regarding the valuation of closing stock. This section empowers the Assessing Officer to make assessments if the accounts of the assessee are not satisfactory or if the accounting method is not in accordance with the standards notified.Issue 4: Interpretation of CIT vs. British Paints India Ltd. (1992) Supp. (1) SCC 55The Court examined whether the decision in CIT vs. British Paints India Ltd. should be considered a binding precedent for stock valuation methods. The Court held that the method of valuation in that case was specific to its circumstances and not universally applicable. The Court ruled in favor of the revenue, stating that the method of valuation cannot be applied uniformly when the sale price of goods remains constant.In conclusion, the Appeal was dismissed, and all pending applications were disposed of. The judgment emphasized the importance of following proper valuation methods based on market prices and the provisions of the Income Tax Act, 1961. The decision also clarified that precedents in tax matters may not apply universally and must be considered in light of specific circumstances.