TaxTMI 
TaxTMI 
2011 (9) TMI 806
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....ock." "2 In the facts and circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs. 18,69,105/- made by the AO on account of difference in the valuation of the closing stock, without appreciating the fact that the assessee had failed to substantiate that there were separate and distinct identifiable items of varying values in order to justify the gross under-valuation of the closing stock when compared to the market value." "3 It is prayed that the order of ld. CIT(A) be set aside and that of the AO restored." 3. The assessee filed its return of income on 29.10.2007 declaring total income of Rs. 1,94,808/- from business and profession" and Income from other sources. The case was processed u/s 143(1) of the Act on 11.3.2009. Notice u/s 143(2) dated 24.9.2008 was issued and duly served upon the assessee on 25.9.2008. A detailed questionnaire was issued to the assessee on 29.4.2009. Books of account, sale purchases bills and vouchers were produced which were test checked. The assessment was framed vide order dated 28.12.2009 u/s 143(3) of the Act at Rs. 20,63,910/-. Perusal of the information furnished by the assessee regardin....
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....rectification or adjustment to be made in the closing stock should be on the basis of proper valuation. The addition can not be on flimsy grounds. The method of valuation of stock whichever has been followed has to be consistent. In the present case, the AO has nowhere pointed out whether such consistency has been disturbed by the appellant. No change has been pointed out. On the other hand the appellant has proved that he has consistently followed the system of valuing the stock and there is no occasion for the AO to value it on a sale price of Rs. 23,478/- per MT. The appellant has adopted the average cost price throughout the year of a particular item and he states that he has adhered to this system from year to year. In such circumstances, there can be no deflection in the computation of profits. The AO can not discard the method of accounting adopted by the appellant consistently and regularly. In view of this the addition made to the appellant's income is deleted." 5. The 'DR' contended that the ld. CIT(A) acted against the well established principle prescribing that closing stock is to be valued at cost or market price, whichever is the lower. The concept of average price....
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....eproduced hereunder:- "3.2.1 The market price of the items in which the assessee deals i.e. bars, coil ends, bar flat, cobble plates, as per MCX as on 30.3.2007 to 11.4.2007 was as under: As on 30.3.2007 As on 4.4.2007 As on 11.4.2007 Flats Rs. 26,500 to Rs. 27,500 Rs. 26,500 to Rs. 27,500 Rs. 26,500 to Rs. 27,500 MS Angles Rs. 27,700 to Rs. 28,800 Rs. 28,000 to Rs. 29,100 Rs. 28,000 to Rs. 29,100 Channels Rs. 28,700 Rs. 28,700 Rs. 28,700 Further, the market rate as per the local weekly newspaper published at Mandi Gobindgarh, under the name Achcha Ji (weekly), Mandi Gobindgarh giving local market rates for the weeks 28th March - 3rd April, 2007 and 3rd April 2007 and 3rd April to 10th April 2007 are as under:- 28th March - 3rd April, 2007 3rd April to 10th April, 2007 Flats Rs. 26,100 to Rs. 27,550 Rs. 26,800 to Rs. 27,550 MS Angles Rs. 26,900 to Rs. 27,400 Rs. 27,300 to Rs. 28,800 Channels Rs. 27,300 to Rs. 30,100 Rs. 27,300 to Rs. 30,200 Melting scrap Rs. 19,200 to....
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....the market/area of business of the assessee in that period. None of the purchases or sales as per information furnished by the assessee, were made at rates lower than or even equal to the rates taken by the assessee for the purpose of valuation of closing stock. In any case, purchase rates are not to be considered for this purpose as the assessee has admittedly valued the closing stock at market rates. The average market price as per information gathered and that discussed above comes to Rs. 26,500/-. The assessee has himself sold the goods during the year at the average market price of Rs. 23,478/- as shown in para 3. Accordingly strictly speaking the valuation of the closing stock should be at the market rate of Rs. 26,500/- but to be fair to the assessee, the rate of Rs. 23,478/- is being applied to the valuation of closing stock. Applying this rate to the quantity of closing stock i.e. 391.190 Metric tons, the value of closing stock as on 31.3.2007 comes to Rs. 91,84,358/- against Rs. 73,15,253/- declared by the assessee in its balance sheet. The difference of Rs. 18,69,105/- is added to the returned income of the assessee. " 8. A perusal of the findings of the AO clearly re....
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....e Supreme Court in the case of ALA Firm (supra) has entirely followed the established principle, as laid down in Chainrup Sampatram (supra). In the case of ALA firm (supra) it has been held that trading results of business, for accounting period, can not be ascertained without taking into account, the value of the stock, in trade at the end of the period. It has clearly been laid down therein that the ordinary principle of commercial accounting permit valuing the cost or market price whichever is lower. The assessee has failed to value the closing stock in consonance with the decision of Hon'ble Supreme Court. 10. The landmark decision of the Hon'ble Supreme Court, in the case of Chainrup Sampatram (supra) decided by the Bench of Five Judges, is an authority, followed and referred to, in subsequent decisions, such as CIT v. British Paints India Ltd.[1991] 188 ITR 44/54 Taxman 499 (SC) and ALA Firm's case (supra). In this case, "the Income-tax authorities held that the alleged sale was not genuine and that the said silver bars still formed part of the stock-in-trade of the firm at the close of the previous year 1997, and they accordingly included in the taxable profits, a sum of ....
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....n it arises, in respect of the whole stock-in-trade, at the site of the firm whose stock-in-trade is being valued irrespective of where parts of the stock-in-trade may be." The Hon'ble Supreme Court upheld the addition made by the Revenue and answered the issue in favour of the revenue. It was observed by the Hon'ble Apex Court that the true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock form both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year's trading. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting. The loss was allowed in his assessment to income-tax. "We agree with the High Cour....
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....stock, as per the judicially sanctified method and established commercial and accounting practice, as discussed earlier, is essential and integral element in the process of determining the trading results of the accounting period. It is pointed out that such established practice of valuation of closing stock is equally applicable to both the Mercantice and cash system of accounting. Hence, valuation of closing stock cannot be dispensed with. Similarly, any valuation of closing stock contrary to such established practice cannot be accepted, as it would distort the true and correct state of affairs of the business. The rational behind this system is simple. AS the assessee makes purchase, the entry of stock is made at the cost prices, on one side of the accounts. At the close of the accounting year, the value of unsold stock is entered on the other side of the accounts, thus, cancelling out the entries relating to the same unsold stock entered earlier in the accounts. Further, that stock is carried forward as the next year's opening stock. Ultimately, such cancelling out of the unsold stock from both sides of accounts leaves only the transactions on which there have been actual sales....