Income Tax Appellate Tribunal - Cochin
Income-Tax Officer vs Sree Padmanabha Jewellery Mart on 29 August, 1986
Equivalent citations: [1986]19ITD816(COCH)
ORDER
A. Satyanarayana, Accountant Member
1. These appeals are by the revenue against the order of the Commissioner (Appeals) dated 1-6-1985 for the assessment years 1981-82 to 1984-85, for which the previous years ended on 31-3-1981, 31-3-1982, 31-3-1983 and 31-3-1984, respectively.
2. The assessee-firm is a dealer in gold and silver jewellery. The main issue involved in these appeals relates to the valuation of closing stock. For the assessment year 1981-82, the assessee declared the value of closing stock of gold jewellery of 18507.59 gms. at Rs. 12,71,808. The ITO obtained monthwise purchases and sales, details of opening stock and details of closing stock. From those particulars he valued the closing stock at Rs. 13,58,527. Rejecting the valuation of closing stock of the assessee, he made an addition of Rs. 86,519 for the assessment year 1981-82. Similarly for the assessment years 1983-84 and 1984-85 he made additions of Rs. 29,320 and Rs. 1,44,941, respectively. But for the assessment year 1982-83 as per the ITO's valuation the value of the closing stock was less than the value admitted by the assessee by Rs. 348. The details of the working of the value of closing stock for all these years is given in the respective assessment orders.
3. Aggrieved by the action of the JTO, the assessee preferred appeals before the Commissioner (Appeals). Before the Commissioner (Appeals), the assessee contended that right from the assessment year 1969-70, the assessee-firm had been consistently following a particular method of valuation of its closing stock and such a method had been frequently examined and accepted by the department. In that background, the assessee urged that the present efforts of the ITO to unsettle this accepted method of valuation would not only affect the taxable income of the firm but will also distort the results. Before the Commissioner (Appeals), the assessee filed computation statements for the assessment years 1977-78 onwards. The Commissioner (Appeals), in the course of his order, explained as under how the assessee valued the closing stock in the earlier years :
The quantity of stock left at the end of any year is first ascertained by reference to the detailed books of account maintained by the appellant-firm. From out of this, the quantity of jewellery relatable to the stock carried forward from the previous year is ascertained and isolated. Any excess over the last year's stock is considered to be out of current year's purchase. The last year's stock is valued at its cost to business. The current year's left over is valued at a moving average which represents the average price paid for all purchases made by the firm in the year of account.
The Commissioner (Appeals) gave a finding that the assessee had consistently followed the above system of valuation of its closing stock year after year. Considering that the assessee's procedure of valuation does not result in any understatement of income and that it had been followed by it consistently for over 15 years, be held that no modification of the valuation of the closing stock was called for. Thus, he accepted the valuation of the closing stock of the assessee for all these years and allowed the assessee's appeals.
4. Aggrieved by the order of the Commissioner (Appeals), the revenue preferred the present appeals. At the time of hearing, the departmental representative relied on the orders of the ITO and urged for their upholding. The counsel for the assessee filed a paper book of 14 pages and supported the order of the Commissioner (Appeals). His arguments were to the following effect : For the assessment year 1981-82 the assessee had 18,507.59 gms. of gold jewellery. The purchases and sales of gold jewellery in the accounting year relevant to the assessment year 1981-82 amounted to 68,457 gms. and 67,737 gms., respectively. Current year's purchase exceeded the sales by 720 gms. This quantity of 720 gms. was valued at the average purchase rate of the accounting year. The balance of 17,787 gms. was valued at the same rate as the closing stock of the prior accounting year. The same system of valuing the closing stock was followed by the assessee consistently from 1976-77 assessment year onwards. Such method of valuation of closing stock by the assessee had been accepted by the department up to the assessment year 1980-81. For the first time, the ITO meddled with the valuation of the assessee's closing stock in the assessment year 1981-82 and continued the practice for the later assessment years also. A reference may be made to the assessee's letter dated 1-12-1981 addressed to the ITO in this regard. The option to choose the method of valuation of the closing stock is left to the assessee and not to the department. The assessee in this case is following the last-in, first-out method. Reference may be made to the commentary of Sampat lyengar's Law of Income-tax, 7th edn., Vol. 4/pp. 3445fand 3448. Where an assessee had been following a particular method of valuing the closing stock and that method had been accepted by the department for several years, the department is not entitled to disturb the same method. Reliance is placed on the following decisions :
Order of the Tribunal, Bombay Bench in Fourth I TO, Film Circle, v. R.R. Enterprises 25 Taxes and Planning 57, I A C v. Sant Ram Mangat Ram [1986] 26 Taxman 91 (Chd. - Trib.), IAC v. Cosmopolitan Trading Corporation [1985] 14 ITD 327 (Jp.) (SB) and CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 ITR 442 (AP).
5. We have considered the rival submissions. The High Court in the case of Concordia Corporation Ltd. v. CIT [1952] 22 ITR 344 (Trav.-Coch.) held that the assessee has the option to decide as to whether to value his stock at cost or at market price. Here in this case the assessee has adopted the system of valuing the closing stock on the cost basis by following the last-in first-out method. Although it is mentioned in the grounds of appeal filed by the revenue that the assessee is following the principle of first come first go, no material was placed before us to support the same. The Calcutta High Court in the case of British Paints India Ltd. v. CIT [1978] 111 ITR 53 held that, whatever is the method, it must be one recognised by accounting practice and sanctioned by commercial practice that the method adopted and regularly followed over a period and accepted by the revenue should not be departed from unless there is good reason for the same. The Andhra Pradesh High Court in the case of Margadarsi Chit Funds (P.) Ltd. (supra) reiterated the view of the Kerala High Court quoted above and held that the choice of accounting for income on an acceptable basis is that of the assessee and not of the department. The Court further observed as under :
... This is, however, not an unlimited choice, because the ITO has always the liberty to examine the system of accounting regularly employed by the assessee, to determine whether the system of accounting is defective, and whether by following such system of accounting, correct profits can be deduced from the account books maintained by the assessee. The ITO's power to substitute a system of accounting for the one followed by the assessee flows from the provisions of Section 145 of the Income-tax Act, 1961. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and re cord a clear finding that the system of accounting followed by the assessee is such that correct profit cannot be deduced from the books of account maintained by the assessee.
[Emphasis supplied] (p. 442) In the present case, the Commissioner (Appeals) in the course of his order explained the system of accounting of the closing stock followed by the assessee and gave a finding that this system has been consistently followed by the assessee in valuing the closing stock year after year. The assessee's contention that the system of valuing the closing stock adopted by it for the last several years, i.e., from the assessment year 1969-70 onwards, has been accepted by the department is not challenged by the revenue before us. Further in the present case, the ITO did not refer to any inherent defect in the system of accounting followed by the assessee. He has also not recorded a clear finding that the system of accounting followed by the assessee for valuing its closing stock was such that correct profit could not be deduced from the books of account maintained by the assessee. Further from the system of accounting of closing stock adopted by the assessee and as explained by the Commissioner (Appeals) in his appellate order, we do not find any defect in the system. In these circumstances, we hold that the ITO was not justified in rejecting the assessee's closing stock valuations and making the additions. The order of the Commissioner (Appeals), on this point, is confirmed.
6. For the assessment year 1981-82, another grievance of the revenue is that the Commissioner (Appeals) ought to have directed the ITO to disallow one-fourth dieselising expenditure of the car as the assessee has debited it as a revenue expenditure in their profit and loss account. We agree with the Commissioner (Appeals) in holding that comprehension does not take him to treat a portion of the conversion charges also as on a personal account. We dismiss this ground.
7. For the assessment year 1982-83 another grievance of the revenue is that the Commissioner (Appeals) ought to have noticed that the assessee has again claimed dieselisation expenditure this year as in last year for the same car which being a duplication of last year's claim, disallowed it or in any other appropriate manner corrected the ITO in the light of the decision of the Supreme Court in Kapurchand Shrimal v. CIT [1981] 131ITR451. This does not arise out of the order of the Commissioner (Appeals). Hence, we dismiss this ground also.
8. In the result, the appeals are dismissed.