Income Tax Appellate Tribunal - Mumbai
Classic Ornaments Private ... vs Deputy Commissioner Of Income Tax - ... on 5 May, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, MUMBAI
BEFORE SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER
SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER
ITA No. 4726/MUM/2025
(Assessment Year : 2020-21)
Classic Ornaments Private Limited,
401, Jewel Crown, Bhagwan Bhavan,
99/103, Tambakanta Lane, Mumbadevi,
Mandvi, Mumbai - 400003 ............... Appellant
PAN: AADCC6799G
v/s
Deputy Commissioner of Income Tax -
4(1)(1),
Room No.640, Aayakar Bhawan, .................. Respondent
M.K. Road,
Mumbai- 400020
Assessee by : Shri Jigar Mehta
Revenue by : Shri Virabhadra Mahajan, Sr.DR
Date of Hearing - 12/02/2026 Date of Order - 05/05/2026
ORDER
PER SANDEEP SINGH KARHAIL, J.M.
The assessee has filed the present appeal against the impugned order dated 28.05.2025, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi ["learned CIT(A)"], for the assessment year 2020-21.
2. In this appeal, the assessee has raised the following grounds: -
"1. The learned National Faceless Appeal Centre ("ld. NFAC") erred in law and facts in confirming the addition of Rs.1,36,55,830/- to the total income of the appellant without appreciating the fact that the appellant had valued his closing stock for the ITA No. 4726/Mum/2025 (A.Y. 2020-21) 2 year under consideration at Cost or Net Realisable Value (NRV) whichever is lower which is in accordance with Income Computation and Disclosure Standards (ICDS).
2. The Id. NFAC erred in law and facts in estimating the stock of the appellant without rejecting the books of accounts of the appellant.
3. All the above grounds of appeal are independent and without prejudice to each other."
3. The solitary grievance of the assessee is against the addition made on account of the valuation of closing stock.
4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is engaged in the manufacturing and selling of gold ornaments on a semi- wholesale basis. For the year under consideration, the assessee filed its return of income on 04.11.2020, declaring a total income of Rs. 12,99,07,410/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, upon perusal of the stock details submitted by the assessee, it was observed that there was no bifurcation of 18 ct., 22 ct., and gold bars provided in the opening and closing stock. Further, it was noted that during the relevant financial year, gold prices rose approximately 25%. Accordingly, the assessee was asked to show cause why the addition for undervaluation of the closing stock should not be made. In response, the assessee submitted that it does not hold any stock of gold bars. Further, the gold bars are transferred to workers as early as possible for making ornaments. The assessee also submitted that it is a dealer in casting jewellery, which is made in 22 ct. gold only. Thus, the assessee submitted that 18 ct. jewellery is being made on an order basis and the assessee does not ITA No. 4726/Mum/2025 (A.Y. 2020-21) 3 hold any stock of 18 ct. gold ornaments at the end of the year. Further, all stock at the end of the year consists of 22 ct. gold ornaments. It was also submitted that the valuation of closing stock follows the principle of cost or market value, whichever is less. The assessee submitted that since it is not possible to identify which gold bar was purchased on which date and what the value for the same was when it was converted into ornaments, an average price of the same is being considered. As regards the upward movement in gold prices considered at 25%, the assessee submitted that the same cannot be taken on a presumptive basis. It was also submitted that the valuation of the inventory on cost or market value, whichever is less, is also in accordance with the accounting principles of ICDS-II.
5. The Assessing Officer ("AO"), vide order dated 17.09.2022, passed under section 143(3) read with section 144B of the Act, disagreed with the submissions of the assessee and held that there was no bifurcation of 18 ct., 22 ct., and gold bars provided in the opening and closing stock, and further, an average rate of opening and purchase was applied irrespective of the class of goods. The AO held that the onus lies on the assessee to provide the aforesaid bifurcation. As regards the submissions that the assessee follows the principle of cost or market value, whichever is lower, for valuation of closing stock, the AO held that even if it is assumed the assessee valued the stock on cost basis, the assessee has not provided the cost and in the absence of any proof of the cost of closing stock, the same is to be valued at market value, which is the only verifiable rate available. Accordingly, the AO made an ITA No. 4726/Mum/2025 (A.Y. 2020-21) 4 addition of Rs. 1,36,55,830/- on account of undervaluation of the closing stock by the assessee.
6. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee, reiterating the findings of the AO. The relevant findings of the learned CIT(A) are reproduced as follows:
"2. The ground of appeal objects to addition of Rs.1,36,55,830/- due to undervaluation of the closing stock.
2.1 The assessee's arguments are rejected owing to the fact that onus lies on the assessee to provide bifurcation of 18CT, 22CT & Gold Bar in Opening & Closing Stock. The assessee has taken an average rate irrespective of class of Goods. Assessee himself states " Your honour we would like to state that we the assessee follows the principal of "Cost or Market Value whichever is less" for valuation of closing stock. The closing stock is being valued by following the same principal. It is not possible for the assessee to identify which gold bar was purchased on which date and what was the value for the same for when it was converted in gold ornaments, so average price for the same is been considered." The assessee despite his own admission has failed to take market value in account for calculation of Gold rates. Even the cost, if it is assumed that assessee has valued the stock on cost basis, has not been provided by the assessee. In the absence of any proof of cost of closing stock, the closing stock is valued at market value which is the only verifiable rate available. This is therefore a clear case of under valuation of stock.
2.2 On the basis of discussion made above and reply filed by the assessee, as assessee indulged in undervaluation of closing stock amounting to Rs.1,36,55,830/-. Rs.1,36,55,830/- is added back to the total income of assessee under the head business and profession.
The addition of Rs. 1,36,55,830/- due to undervaluation of closing stock is confirmed."
Being aggrieved, the assessee is in appeal before us.
7. During the hearing, the learned Authorised Representative ("learned AR") submitted that the assessee has no gold bars in its stock, as gold bars are transferred to workers for the manufacturing of ornaments as soon as possible. The learned AR submitted that the assessee values its stock at the lower of cost and net realisable value. It is further submitted that the assessee consistently adopted the Weighted Average Cost formula to determine the cost of its inventory in accordance with Accounting Standard-2 ("AS-2"). ITA No. 4726/Mum/2025 (A.Y. 2020-21) 5
8. On the other hand, the learned Departmental Representative vehemently relied upon the orders passed by the lower authorities.
9. Having considered the submissions of both sides and perused the material available on record, we find that the assessee, in its Tax Audit Report for the year under consideration, forming part of the paper book from pages 44-63, has declared Nil stock of gold bars. Further, as per the assessee, since it was not possible to identify which gold bar was purchased on which date and when it was converted into gold ornaments, the assessee valued the same at the average price in item-wise stock valuation. However, the AO disagreed with the submissions of the assessee and held that the onus lies on the assessee to provide a bifurcation of 18 ct., 22 ct., and gold bars in the opening and closing stock.
10. From the perusal of the details of item-wise stock valuation, forming part of the paper book from pages 88-90, we find that the assessee has provided the valuation of 18 ct., 22 ct., and gold bars in its opening and closing stock. As per the assessee, such valuation has been done by adopting the principle of "cost or market value, whichever is less", which is in consonance with AS-2 and ICDS-II, which states that inventory is to be valued on cost or market value, whichever is less. As per the assessee, for determining the cost of inventory, it has followed the Weighted Average Cost formula prescribed in AS-2 for the valuation of inventories. The AO, in the assessment order, recorded a categorical finding that even if it is assumed the assessee used the cost basis, the cost itself has not been provided by the assessee. Accordingly, ITA No. 4726/Mum/2025 (A.Y. 2020-21) 6 in the absence of proof of the cost of closing stock, the AO proceeded to consider the market value and concluded that there was an undervaluation of stock. Therefore, in the present case, even though the assessee has claimed that all details pertaining to the valuation of inventory on cost as per the prescribed methodology were placed before the AO, it is evident from the record that the same have not been examined by any of the lower authorities. We find that even though the assessee has reiterated its submissions before the learned CIT(A). However, the learned CIT(A) has recorded verbatim identical findings as laid down by the AO. Thus, it is evident that the valuation of the inventory by the assessee at cost, adopting the Weighted Average Cost formula as claimed, has not been examined by any of the lower authorities. Vide its submission dated 24.02.2026, the assessee has placed on record the quantitative details of gold ornaments. However, the same also needs verification and examination.
11. During the hearing, the learned AR submitted that a similar query vide notice issued under section 142(1) was raised in the assessee's own case for the assessment year 2021-22, and the assessee was asked to show cause as to why an addition should not be made for undervaluation of closing stock. It was further submitted that after consideration of the assessee's submissions, the AO concluded the scrutiny proceedings without making any addition, inter alia, on this issue. In order to substantiate the aforesaid submission, the assessment order dated 22.12.2022 and the show cause notice dated 06.12.2022 for the assessment year 2021-22 were placed on record. From the perusal of the show cause notice, we find that even though a similar issue ITA No. 4726/Mum/2025 (A.Y. 2020-21) 7 was raised in the immediately subsequent assessment year. However, there is no material on record indicating whether the assessee provided details of the cost of closing stock for the assessment year 2021-22, i.e. the basis on which the AO valued the closing stock at market value in the year under consideration.
12. Therefore, taking into consideration the overall facts and circumstances of the present case, we deem it appropriate to restore the matter to the file of the Jurisdictional AO for de novo adjudication with the direction to the assessee to provide the complete details of the valuation of inventory on cost by adopting the Weighted Average Cost formula, as per the relevant guidelines. We further direct that if the assessee's accounts are found to have been drawn adhering to the principles of relevant Accounting Standards, then no additions be made in the hands of the assessee. Since the matter has been restored to the file of the AO for fresh consideration, the assessee shall be at liberty to furnish any other information/details in support of its claim. With the above directions, the impugned order is set aside, and the grounds raised by the assessee are allowed for statistical purposes.
13. In the result, the appeal by the assessee is allowed for statistical purposes.
Order pronounced in the open Court on 05/05/2026
Sd/- Sd/-
VIKRAM SINGH YADAV SANDEEP SINGH KARHAIL
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 05/05/2026
Prabhat
ITA No. 4726/Mum/2025 (A.Y. 2020-21) 8
Copy of the order forwarded to:
(1) The Assessee;
(2) The Revenue;
(3) The PCIT / CIT (Judicial);
(4) The DR, ITAT, Mumbai; and
(5) Guard file.
By Order
Assistant Registrar
ITAT, Mumbai.