AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (11) TMI 693
X X X X Extracts X X X X
X X X X Extracts X X X X
....in law and on facts in not appreciating that from the assessee's method of valuation of closing stock on the basis of the average rate method for the last three years, the correct profit of the assessee for the year under consideration could not have been arrived at and as such the AO was justified in law in rejecting the said method of valuation adopted by the assessee. 1.4 In doing so, the Ld. CIT(A) has erred in law and on facts in not appreciating that under the weighted average cost formula as per the Accounting Standard 2 (Revised), the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the year and the said Accounting Standard nowhere provides that average Market rate of three years can be taken for valuing the closing stock. 2. On the facts and in the circumstances of the case, the Ld. CIT (A)-XX, Ahmedabad ought to have upheld the order of the A.O. 3. It is, therefore, prayed that the order of the CIT(A)-XX, Ahmedabad be set aside and that of A.O, be restored to the above extent." 2. The facts of the case are that the assessee is a partner....
X X X X Extracts X X X X
X X X X Extracts X X X X
....losing stock, found that the assessee has maintained closing stock of gold and silver ornaments by adopting average rate method of three years which is not in conformity with the accounting policy for valuation of closing stock. The AO has after considering the facts and explanation of the assessee concluded that the same cannot be accepted, as the assessee has not followed the recognized commercial accounting policy for valuation of closing stock. The AO has, however, not made any mention or tried to distinguish the case laws cited by the assessee from the facts of the assessee's case. After rejecting the method of accounting for valuation of closing stock, without invoking provisions of Section 145 of the IT Act, the AO proceeded to revalue the closing stock at cost or market price, whichever is lower, and he has drawn revised profit & loss account, replacing the valuation of both the opening as well as closing stocks and determined the resultant net profit at Rs. 62,65,101/-. Since the net profit disclosed in the audited accounts of the assessee was Rs. 9,52,095/-, he has made an addition of Rs. 53,13,006/-. 3. Before the learned CIT(A) it was submitted by the assessee as under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....addition made by applying average rate of purchases to the stock could be sustained." * Decision of ITAT Indore Bench in the case of ACIT Vs. Gopaldas Vallbhdas (59 TTJ 768) wherein it has been held that "Closing stock should be valued at average cost calculated on the basis of value of opening stock and purchases made during the year where LIFO or FIFO method could not be applied." * Decision of your Honour in the case of M/s Soni warkadas Virchand & Sons wherein your Honour held that "18. Since the case of appellant is clearly not covered under Para.14 of AS-2 (Revised), it will undoubtedly be covered by Para.16 which clearly provided that the cost of inventories other than those dealt with in Para.14, should be assigned by using the First in First Out (FIFO) or weighted average cost formula." During the course of assessment, the assessee has furnished revised working of stock on the basis of average price. The stock value following that method works out at Rs. 2,62,86,543/- as against Rs. 2,78,09,346/- shown by the assessee. (5) There was an arithmetical error in calculation of opening stock. The paper book filed by the appellant also contains copy of the written submiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d for by your goodself is not a standard method. (2) As regards introduction to partner capital, copies of bank pass books of partners showing source of amount introduce are enclosed herewith. (3) A copy of bill of making charges paid to Vinayak Silver Works amounting to Rs. 25,875/- is enclosed herewith. Since the above amount has not been subjected to TDS, the same has been disallowed in the return of income filed. (4) Provisions of service-tax are not applicable to us. We hope, the above will suffice your requirements. The appellant has also relied on various judicial citations which are placed on page numbers 14 to 45 of the paper book. A copy of assessment order for A. Y. 2005-06 passed under Section 143(3) of the Act dated 13th December, 2007 by the Assessing Officer is also filed in support of arguments that the valuation of stock on weighted average cost basis has not been disturbed by the Department in the past and the rule of consistency has to be adopted in such matter. During the course of appellate proceedings, the AR has submitted at length on the issue. Further, on being asked by the undersigned, during the course of appeal hearing, the AR has filed the quant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunals. The ITAT, Chandigarh 'A' Bench on the similar facts and in similar nature of business in the case of ACIT Vs. Jagdishchand (2004) 90 TTJ (CHD) 943 held such enhancement of valuation of closing stock as not justified. 3.3.2 Considering the issue of valuation of inventory from another angle, a person can be said to earn income if and only if the same has accrued to it and if and only if there is a reasonable certainty of recovery of the same in due course of time. Merely because of the spiraling prices in respect of inventory held, there is neither accrual of income nor reasonable certainty of realization in due course of time. It can at the most be treated as a future profit, which may or may not be realized in the year of sale. 3.3.3 The learned counsel of the appellant has referred various judicial pronouncements through written submissions as well as oral arguments and has relied on the following case-laws in support of his arguments: (i) I T O Vs. Choksi Hirachand & Bros. 37 TTJ 415 of ITATAhmedabad bench; (ii) ACIT Vs. Jagdishchand (90) TTJ page 943 Chan); (iii) ACIT Vs. Gopaldas Vallabhdas 59 TTJ page 768 (Indore ITAT); (iv) I T O Vs. M/s. Son! D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Department in the past in all these years. The Authorised Representative has pointed out that the firm had valued the stock by adopting the same formula and the same has never been disturbed or challenged by the Department in the past. The Assessing Officer is, therefore, not justified in adopting suddenly a changed method replacing the standard and accepted method of valuation of stock (weighted average cost method) to market price. 3.3.6 The contention of the appellant that the issue also gets covered by Accounting Standard - 2 (Revised) issued by the Institute of Chartered Accountants of India is also correct. The Assessing Officer has, however, proceeded to disturb the method under AS-2 Para.14 and not by Para.16, as made out by the appellant to be. The Para.14, in turn, provides that the cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs, has clearly no application in the case of the appellant, being a jeweler having hundreds and thousands of items in stocks with there clearly being no specific identification of the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not justified in disturbing the method of valuation of opening and closing stocks and thereby making an addition pf Rs. 53,13,006/-. In view of above discussion and taking into consideration the entirety of the facts, the resultant addition of Rs. 53,13,006/- is hereby deleted. 4. In the result, the appeal is allowed." 5. The learned DR relied upon the order of the AO and referred to Para 3 in the assessment order and submitted that the method of valuation of closing stock by the assessee was not the correct method of valuation. The assessee followed the method of valuation of closing stock at lower of cost or (average market price) whichever is less. The assessee adopted average of three years which was incorrect method. Since incorrect method was applied, therefore, average of opening stock should be adopted while making valuation of the closing stock. He has submitted that the AO has not changed the method of valuation of closing stock but applied correct method of valuation. He has submitted that the decisions cited by the assessee are not applicable to the facts of the case copies which are filed in the paper book. The learned DR also filed copy of Accounting Standard 2 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 etc. dated 31-10-2011 in which it was held that it is well settled law that though the principle of res-judicata does not apply to the income tax proceedings but the principle of consistency shall have to be followed by the revenue department while making the assessments. 7. We have considered the rival submissions and perused the material on record and do not find any merit in the departmental appeal. The assessee filed copy of the audit report of the assessment year under appeal as well as of the preceding assessment year 2005- 06. We find that in both the audit reports the assessee has adopted the same method of valuation of the closing stock which is adopted in the assessment year under appeal and followed in the preceding assessment year. In the assessment year 2005-06, the AO accepted the same method of valuation of the closing stock in the scrutiny assessment u/s 143 (3) of the IT Act. It is, therefore, proved on record that the revenue department accepted the same method of valuation of closing stock in the earlier years on the same set of facts and circumstances of the case of the business of the assessee. It is well settled law that though the principle of res-judicata....