TaxTMI 
TaxTMI 
2010 (5) TMI 827
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....r. 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 ₹ 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 ₹ 94,55,40,725/- as against turnover of ₹ 72,01,53,875/- shown in the immediate preceding assessment year. The assessee had shown the net profit of ₹ 1,66,19,610/- in the current year as against the net profit of ₹ 104,45,088/- in the immediate preceding year. The assessee had declared closing stock of ₹ 6,29,50,140/- for its finished goods i.e. mustard oil and mustard....
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....ons 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 ₹ 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 further stated before the CIT(A) that the value of mustard cake has already been taken into account by reducing the value there of from the cost of mustard seeds and manufacturing expenses while determining the cost....
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.... 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 for the AO to reject the books of accounts on the basis of valuation of the stock-intrade and hence, I do not agree with the AO for his rejecting the books of accounts of the appellant and making addition of ₹....
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..... 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 ₹ 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 method of valuing the closing stock at cost or market price, whichever is lower. He further submitted that the method adopted by the assessee is accepted systems approved under the Accounting Standard - 2, and that has also ....
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....ice 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 allocated between the products on rational and consistent basis. The allocation may be based, for example, on the relative sales values of each product either at the stage in the production process when the products become separately id....
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.... 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 ₹ 1618.01 of mustard oil to ₹ 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 ₹ 1618.01 :: 381.99, thus, the ratio of sale of values of mustard cakes is about 20% of the total sale value realized by the assessee. From this point of view, it cannot be said that the mustard cake is another main pr....