TaxTMI 
TaxTMI 
2010 (5) TMI 827
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....sing Officer in the assessment order. b) That in the case of CIT vs. Realest Builders & Services Ltd. 307 ITR 202 the Hon'ble Supreme Court has opined that the application of "rule of consistency" by the High Court cannot be followed if the method of accounting followed by the assessee results in under estimation of the profits/net income." 3. The assessee company filed its return of income on 01.11.2004 declaring total income at Rs. 1,53,39,650/-. The return was accompanied by the audited balance sheets and tax audit report. During the relevant period, the assessee was engaged in the business of production of mustard oil and mustard cake from mustard seeds in its factory located at Agra. The goods produced were sold through its network of distributors and dealers. During the year, the assessee declared turnover of Rs. 94,55,40,725/- as against turnover of Rs. 72,01,53,875/- shown in the immediate preceding assessment year. The assessee had shown the net profit of Rs. 1,66,19,610/- in the current year as against the net profit of Rs. 104,45,088/- in the immediate preceding year. The assessee had declared closing stock of Rs. 6,29,50,140/- for its finished goods i.e. mu....
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....otified by the Institute of Chartered Accountants of India. In this reply, the assessee invited the attention of the AO to para - 10 of the Accounting Standard - 2. After considering the assessee's submissions and para - 10 of Accounting Standard - 2, the AO valued the closing stock of mustard oil and mustard seeds by allocating, the cost of raw material and manufacturing towards both the products i.e. mustard oil and mustard cake, and arrived at a difference of Rs. 32,13,980/- in the opening stock and as well in closing stock of the relevant year, which was added to the net profit declared by the assessee. The various proposition and discussion with regard to the system of accounting and valuation of stock has been referred to by the AO in the assessment order. 5. Being aggrieved, the assessee preferred an appeal before the CIT(A). 6. Before the ld. CIT(A), the assessee reiterated the submissions and contentions that were made before the AO to contend that the same method of valuing the closing stock have been regularly followed by the assessee for last so many earlier years, which is in accordance with the Accounting Standard - 2. The ld. counsel for the assessee furt....
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.... the assessee cannot be rejected on the view that assessee should have adopted a different method of keeping accounts. A tax payer is free to employ his own method of keeping accounts for the purpose of his trade. For this purpose, he may value the stock in trade either at cost or marked price. In the case of Vijaya Traders vs. CIT (1969) 74 ITR 271 (Mysore), it was held that rejection of accounts merely on the ground that the method of valuation of stock was not correct in the absence of a finding that the manner in which the accounts were kept did not allow a proper determination of income, profits or gains of business of the assessee. Needless to mention here that in accounting principles, rule of consistency is very important as held by Special Bench, Amritsar in the case of Shanker Rice Co. vs. ITO (2001) 249 ITR 44 (Asr.) (SB). Delhi High Court too held the same in the case of CIT vs. Neo Polypack P. Ltd. as reported in (2002) 112 Taxman 363. From the facts of the case, it is quite clear that the appellant has not changed its method of accounting especially of valuation of opening/closing stock and consistently followed a particular system of accounting. There is no reason....
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....yes." In view of the above judicial pronouncements and the facts the ratios of the case laws on which the AO relied are not applicable to the facts of the instant case, I direct the AO to delete the addition." 8. Hence, the department is in appeal before us. 9. The ld. DR has relied upon the AO's order to contend that having regard to the correct method point out by AO in his order, the AO was justified in holding that the assessee had under stated the value of closing stock as well as the opening stock by Rs. 32,13,980/-, which was rightly added by the AO to the value of closing stock and made the addition to the total income accordingly. 10. The ld. counsel for the assessee, on the other hand, reiterated the contentions that were made before the CIT(A) and further submitted that the assessee has consistently and regularly following the method of valuation of closing stock, whereunder the realizable value of mustard cake remaining in stock at the end of the year is reduced from the cost of mustard seeds and other direct manufacturing expenses to arrive at the cost of mustard oil produced by the assessee. He further submitted that the assessee was following the m....
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.... proceed to first determine as to whether the method of valuation adopted by the assessee is in accordance with the guidelines provided under AS - 2. In AS - 2, the net realizable value is defined to be the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimates cost necessary to make the sale. It is further provided therein that the inventory should be valued at the of lower cost and the net realizable value. The cost of inventory should comprised of costs of purchase, costs of conversion, and other costs incurred in the bringing the inventory to their present location and condition. In para - 16 of AS - 2, it is provided that the cost of inventory other than those dealt with in paragraph 14, should be assigned by using First-In-First-Out (FIFO), weighted average cost formula. Further, para - 10 of AS - 2 states as under:- "10. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocat....
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....ing oil mill is to produce mustard oil from the mustard seeds. It is not in dispute that the mustard cake are also simultaneously obtained from the manufacturing process of manufacturing mustard oil from the mustard seeds. Whether the mustard seeds is a by product or it is another main product being produced simultaneously with the mustard oil is to be considered from the point of view of commercial value in the market, and not with reference to the quantity of yield of each product. Though yield of mustard cake ranges from 62 % to 66%, and as compared to yield of mustard oil ranges from 33% to 34%, it cannot be a criteria to hold that the mustard cake is another main product produced simultaneously alongwith production of mustard oil. In the present case, the production process result in only one main product, that is, mustard oil, and the mustard cake is a by-product. The selling value of the two outputs, out of one quintal of mustard seeds crushed, has been computed by the AO in proportion of Rs. 1618.01 of mustard oil to Rs. 381.99 of mustard cake. In other words, the total sale realized by the assessee from two products out of one quintal of mustard seeds is in the ratio of....
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....regularly being followed by the assessee since so many years as per guidelines given in later-part of Para - 10 of AS - 2. In the present case, it is no where disputed that the net realizable value based on last ten lot selling prices of mustard cake adopted by the assessee was not correct. It is also not the case, where the value of closing stock of mustard cake has not been taken into account while valuing the closing stock. In the present case, instead of taking the net realizable value of mustard cake in the value of closing stock shown in the trading account, the assessee has deducted the same from the cost of mustard seeds and other manufacturing expenses, which makes no difference in the ultimate result shown in the trading account. 14. Considering the totality of the facts and circumstances of the case, we are in full agreement with the CIT(A) in holding as under:- 1. The method of valuation of closing stock consistently and regularly adopted by the assessee since last so many years cannot be rejected merely on the view of the AO that the assessee should have adopted a different method unless the method followed by the assessee is found to be incorrect and unsustainab....