TaxTMI 
TaxTMI 
2025 (7) TMI 1493
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....y, irrational and arbitrary perceptions and reasonings, would be liable to be nullified, reversed and therefore, substituted by a judicious and analytical verdict. (Issue: Confirmation of Addition of Rs. 11467009.00, attributable to undervaluation of closing stock). 2. That on the facts and circumstances of the case, the Ld. Appellate Authority ought to have appreciated, from the specific ground taken, that Last in Fast Out Method (LIFO) of valuation for being consistently followed for both and Opening and Closing Stock, then Unilateral and thus, Asymmetrical application of a different method of Valuation, i.e., Average Cost Method, prescribed under Income Computation and Disclosure Standards-II (ICDS-II)/ Sec. 145(2), amounting to Rs. 11467070.00 to the Closing Stock alone, would lead to distorted, fictional and unrealized Income. (Issue: Confirmation of Addition of Rs. 11467009.00, contrary to consistent valuation practice and causing generation of fictional income) 3. Even otherwise, without prejudice to the Ground No. 1, if the closing stock valuation is to be subjected to principles of valuation i.e., Weighted Average Cost Method/WACM of Val....
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....r the present appeal, had been filed, the processing of the said return, under sec. 143(1)(a) had been carried out by the CPC, Bangaluru/Ld. Respondent. In the said Intimation, the Returned figure comprised by Business Income only, amounting to Rs. 928670/- had been enhanced to Rs. 12395680/-, signifying an addition of Rs. 11467009/-, effected to the former. This has consequently given rise to an additional tax liability of Rs. 4825150/-, inclusive of all interests attributable to the alleged defaults with regard to the Advance Tax payment liabilities. In the clarificatory cum adjustment note, appended to the Intimation, so raised, it has been conveyed that the aforementioned amount of Rs. 11467009/- had been added based on the information appearing in the Tax Audit Report, vide clause 13(e) thereof, indicating the understatement of valuation of closing inventory, within the meaning of Sec. 145(2) of the Act. The Appellant is preferring the present appeal challenging the said addition as Arbitrary, Excess and lastly, the one leading to taxation on unrealized income rather than on real income. The Appellant pleads that the addition should have been kept confined to either of the fol....
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.... the Ld. CIT(A) and stated that LIFO is not prescribed under the ICDS-II and the adjustment in the intimation issued u/s 143(1) of the Act was made as per the report by the Auditor, who did not revise the Tax Audit Report. No scrutiny was done in the earlier years. The Ld. AR submitted that in case ICDS-II is to be applied and not LIFO which was the method of valuation followed by the assessee, then the same should be applied to the opening stock as well as to the closing stock. The written submission filed by the assessee in this regard are as under: "The Appellant is a Partnership Firm, engaged in the manfac(sic). The present Appeal was filed against the Appellate Order, passed by the Ld. Faceless Appellate Authority, confirming the addition of Rs. 11467009/- (inadvertently, written as Rs. 11467070/- in the Appellate Ground No. 2) pertaining to valuation of Closing Stock. After the Return of Income had been filed along-with the Audited Statement of Account (PB-2 to 10) and the corresponding Tax Audit Report in 3CB/3CD (PB-11 to 37), the Return disclosing a Total Income of Rs. 928672.00, vide Computation (PB - 1), had been subjected to processing u/s 143(1) by the CPC Uni....
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....alue is enhanced by Rs. 11467010.00/114.67 lacs to apply the Weighted Average Value, the resultant GP amount of Rs. 148.25 lacs pertaining to the same sale amount of Rs. 223.15 Lacs, would hike the corresponding rate to 66.43%. Such an exercise would indisputably lead to an absurd, fictional and unachievable result. Consequently, it would defy and violate all conventions, time honoured practices and the settled laws that no fictional income could be transformed into real income. A chart of GP rates would bring clarity to this contention (PB-47). From the Gross Profit Tabulation, vide PB-47, it could be conveniently appreciated that due to consistent practice of application of LIFO Method, as against the current years 15% GP Rate, while in the immediately preceding year a GP Rate of 23.89% had been achieved, the Average GP Rate in the four preceding years had been 16.77%. So, for the sake of justice, fairness and also reasonableness, in the light of the GP Tabulation, vide PB-47, either the Gross Profit (Gold Trading Account, PB-3) be kindly upheld or alternatively, be increased by 8.84% to the level of 23.89% (GP on Sales achieved in immediately preceding F.Y. 2020-21 the immediate....
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....tock is changed from LIFO to Weighted Average Basis, it will invariably signify a mere revaluation of asset, and in the absence of any sale or transfer whatsoever, no real income from such revaluation could arise. The incorporation of such change in the valuation of stock alone would cause the regular GP, as a corollary thereof, to multiply by more than times, i.e., from 15% to 66% and such increased profit has originated not from any usual sale transactions but from putting more value on the credit side of the Trading Account. The stock has not changed hands like regular business transactions. It is also contended that only because Paragraph 22(ii) of ICDS-2, stipulates that Value of Opening Inventory as on the close of the immediately preceding previous year is to be taken, that does not mean that the method of valuation in respect of opening and closing stock could differ from each other, so as to give rise to some anomalous and abnormal result. This is because in the preamble of ICDS-2, entitled Income Computation and Disclosure Standard -II, Relating to Valuation of Inventories it is clearly and explicitly mentioned that "In the case of conflict between the provisions....
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....led. On appeal to the Hon'ble Supreme Court, it was held as under: No doubt, in the face of all the details and statement placed before the ITO at the time of the original assessment, it was difficult to take the view that the ITO had not at all applied his mind to the question whether the surplus was taxable or not. It was true that the return was filed and the assessment was completed on the same date. Nevertheless, it was opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It was not as if the assessments record contained a large number of documents or the case raised complicated issues rendering it probable that the ITO had missed these facts. It was a case where there was only one contention raised before the ITO and it was impossible to hold that the ITO did not at all look at the return filed by the assessee and the statements accompanying it. The more reasonable view to take would be that the ITO looked at the facts and accepted the assessee's contention that the surplus was not taxable. But in doing so, he obviously missed to take note of the law laid down in G.R. Ramachari & Co.'....
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....ed 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, and they accordingly included in the taxable profits a sum as the excess arising from the valuation of the said bars at market price on the closing day. They were valued at market rate at which the rest of the closing stock at Calcutta was valued in the books of the firm. On appeal, the Tribunal upheld the assessment. On reference, the assessee contended that even on the finding of the income-tax authorities that the silver bars in question formed part of the stock-in-trade of the business at Calcutta and their removal to Bikaner had been effected only for reasons of security, the said bars having remained there during the rest of the accounting year, their value at the market rate at the close of the year being an increment to the goods at Bikaner, the profit accrued at Bikaner with the result that it was exempted under section 14(2)(c) of the 1922 Act. The High Court rejected this contention on the ground that the "notional profit" represented by the appreciation in value of the stock-in-trade emerges out of the valuation and only when it so....
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....r, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. The appeal was accordingly dismissed. 9. Now the issue relating to valuation of closing stock needs to be examined and the legal provisions in this regard need to be noted. The provisions of section 145 are as under: Method of accounting. 145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time income computation and disclosure standards to be followed by any class of assessee's or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) has not been regularly followed by the ass....
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....ising as a consequence to such payment. Explanation 2.-For the purposes of this section,- (a) "public financial institution" 83 shall have the meaning assigned to it in clause (72) of section 2 of the Companies Act, 2013 (18 of 2013); (b) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43; (c) "scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36. 11. The issue in the present case arose because the Auditor had pointed out the net effect on account of increase in profit of Rs.1,14,67,009/- as per ICDS-II - valuation of inventories in Column-13(e) of the Audit Report. Accordingly, the adjustment was made to the returned income u/s 143(1) of the Act. The assessee contends that in case the ICDS-II is to be applied to the closing stock, the same should also be applied to the opening stock. Reliance was placed upon the case of P.A. Jose (supra) order dated 20.05.2024 which relates to the assessment year 2017-18 in which the respondents were directed to either accept the valuation based on the....
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....osing and unsold stock is not the source of income in the hands of the assessee. However, by applying the method of FIFO w.e.f. 1st April, 2017, the income of the assessee has increased to the tune of Rs. 51.07 crores without any real income. It is relevant to note that the substitution of s. 145A with retrospective effect from 1st April, 2017 by the Finance Act, 2018 is to give relief to those assessee's who had adopted the FIFO to value their stock in the asst. yr. 2017-18 and to save their returns from being declared as incorrect/invalid. This retrospective operation is with said purpose and objective. However, if an assessee did not apply the FIFO to value its opening and closing stock as it was not mandatory, requiring such an assesses to apply FIFO to value their stocks for the asst. yr. 2017-18 would result in an uncalled-for outcome. Therefore, the retrospective amendment in substituting s. 145A would not apply to those assessee's who had not applied FIFO for valuing their stock in the asst. yr. 2017-18, as these assesses have been following LIFO consistently and had filed their returns before the Finance Act, 2018 was enacted. Therefore, in the case of the assessee's, the ....