Gujarat High Court
Veera Exports vs Asst. Commissioner Of Income Tax Circle ... on 5 June, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
C/SCA/9990/2012 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 9990 of 2012
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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VEERA EXPORTS....Petitioner(s)
Versus
ASST. COMMISSIONER OF INCOME TAX CIRCLE 6 & 1....Respondent(s)
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Appearance:
MR J.P.SHAH, ADVOCATE for MR MANISH J SHAH, ADVOCATE for the
Petitioner(s) No. 1
MRS MAUNA M BHATT, ADVOCATE for the Respondent(s) No. 1
RULE SERVED for the Respondent(s) No. 2
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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C/SCA/9990/2012 JUDGMENT
Date : 05/06/2017
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)
1. The petitioner assessee has challenged the order of the Income Tax Appellate Tribunal ('the Tribunal' for short) dated 09.02.2012 in following factual background. The petitioner is a partnership firm and is engaged in the business of trading in diamonds. For the assessment year 200304, the petitioner had filed the return of income which was taken in scrutiny by the Assessing Officer. Besides other issues, the Assessing Officer disputed the assessee's valuation of the closing stock of the polished diamonds which was taken at Rs.1.14 crores (rounded off). We may clarify that there was no dispute on the valuation of the rough diamonds adopted by the assessee. The Assessing Officer noticed that the assessee had taken the market value of the polished diamonds at Rs.12,187.65 per carat. The Assessing Officer required the assessee to produce the stock register and manufacture register of diamonds. It was conveyed by the assessee that it did not maintain quality and quantity vice details of polished diamonds. The Assessing Officer noticed that Page 2 of 12 HC-NIC Page 2 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT the closing stock of the diamonds was valued at market value of polished diamonds which was taken at sales price. The Assessing Officer was of the opinion that the market value of the polished diamonds would depend on various quality parameters, details of which were not maintained by the assessee. The Assessing Officer therefore after issuing notice to the assessee, revalued the closing stock of the polished diamonds and added a sum of Rs.66.90 lakhs (rounded off) to the income of the assessee on the basis of revaluation of the closing stock.
2. The assessee carried the matter in appeal. The Commissioner of Income Tax (Appeals) confirmed the view of the Assessing Officer and rejected the assessee's appeal on this point. The assessee has thereupon approached the Tribunal. The Tribunal by its judgment dated 30.04.2008, rejected the assessees contention in this regard making following observations:
"12. The fact that the assessee is not maintaining any stock register and even the valuation submitted by the assessee as regards to the closing stock is without any basis. In case, there is no stock register, which only cautions the assessing officer against the falsity of the returns made by Page 3 of 12 HC-NIC Page 3 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT the assessee. He cannot say that merely because there is no stock register the account books must be falls. But at the same time, the keeping of a stock register is of great importance because that is a means of verifying the assessee's accounts by having a quantitative tally. If in any case, after taking into account the absence of a stock register coupled with other materials, it is felt that correct profits and gains cannot be deduced from the accounts, resort to the first proviso can be bad. This view was held by the Hon'ble Apex Court in the case of S.N.Namasivayiam Chettiar v. CIT (1960) 38 ITR 579. In this case, the Hon'ble Supreme Court referred to Pandit Bros. v. CIT (1954) 26 ITR 159 (Punjab) and observed that the want of stock register was, in that particular case, not a very serious defect because the account books had been found and accepted as correct and disclosed a true state of affairs, and that case did not lay down as a proposition of law that the want of stock register was not such a serious defect as to make the fist proviso inapplicable. In the present case before us. The assessee has adopted the valuation of opening and closing stock without any basis and it has adopted the value as certified by a diamond expert dated 142003. The valuation of closing stock is always done either or the cost price or market price whichever is lower. Where the market value has fallen before the date of valuation and on that date the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market valued and thus anticipate the loss which he will probable incur at the time of sale of goods. No doubt, where a n assessee, following a particular method of valuation consistently for year to year, his rading results on tha basis can supply base for computation of taxable income of the assessee. However, an assessee cannot be permitted to claim a notional basis for stock valuation only for tax purposes without Page 4 of 12 HC-NIC Page 4 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT following and adopting the same in his books of account. The mere fact that such basis has not been questioned in the pas is not ground to say that it should be accepted all along. In view of the above discussion, we feel that CIT(A) is quite reasonable in upholding the addition on account of valuation of closing stock by the Assessing Officer. Accordingly, we uphold the order of lower authorities on this issue and the appeal of assessee is dismissed."
3. After the appeal was so dismissed by the Tribunal, the assessee preferred a Misc. Civil Application seeking rectification of the order by the Tribunal. In such application dated 30.03.2010, the assessee raised one single issue viz. that the Revenue as well as the Tribunal having discarded the assessee's method of valuing closing stock and substituted such methodology by another formula, same principle must apply for valuing the opening stock. Since this was not so provided by the Tribunal, the order of the Tribunal suffered from error on the face of the record which needed to be rectified. The assessee besides others, relied upon the decision of the Supreme Court in case of Commissioner of Income Tax v. British Paints India Ltd. reported in (1991) 188 ITR 44.
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C/SCA/9990/2012 JUDGMENT
4. The Tribunal by the impugned order dated 09.02.2012 rejected the application for rectification filed by the assessee on the single ground that no such issue was canvassed before the Tribunal at the time of hearing of original appeal. It is this order of the Tribunal the assessee has challenged in this petition.
5. Learned advocate Shri J.P.Shah for the petitioner contended that if the method of valuation of the closing stock was to be changed, the same must reflect in valuation of the opening stock, failing which, the assessee would be subjected to tax on income which had not accrued. He placed heavy reliance on the decision of the Supreme Court in case of British Paints India Ltd. (supra). He also relied upon the decision of Delhi High Court in case of Commissioner of Income Tax v. Mahavir Alluminium Ltd. reported in (2008) 297 ITR 77 (Delhi). He submitted that merely because a contention was not raised, would not be the ground for the Tribunal to reject the rectification application. He submitted that the principle that the closing stock and opening stock must be valued on same principles is so clearly and firmly established that the Tribunal on Page 6 of 12 HC-NIC Page 6 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT its own ought to have provided for the same while rejecting the assessee's appeal and accepting the Revenue's methodology of valuing the closing stock.
6. On the other hand, learned counsel Shri M.R.Bhatt for the Revenue opposed the petition contending that the petitioner never raised the issue of revaluing the opening stock on the same basis as valuation of closing stock. The Tribunal therefore rightly did not examine this question in the rectification application. He further submitted that facts necessary for revaluing the opening stock were not available before the Tribunal. The assessee had not maintained proper details of the quality and weight of the polished diamonds.
7. Facts emerging from the record are very clear. The petitioner assessee who is in the business of trading of diamonds, had valued its closing stock of polished diamonds in particular manner. The Revenue objected to such methodology suggesting that the valuation of the closing stock was not properly done. The substituted formula for valuing closing stock as adopted by the Assessing Officer was confirmed by the Page 7 of 12 HC-NIC Page 7 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT Commissioner of Income Tax (Appeals) and the Tribunal. In short, this was a case where the Revenue's contention about correct formula for valuing closing stock became final. If that be so, the same principles would apply also for valuing the opening stock. Only then the correct tax liability of the assessee could be ascertained. Merely decreasing the closing stock valuation by Rs.66.90 lakhs, the Revenue cannot categorize it as the additional income of the assessee. In plain terms, same exercise would have to be undertaken for revaluing the opening stock and whatever the difference would reflect the true computation of the assessee's income for the year under consideration.
8. In case of British Paints India Ltd. (supra), the Supreme Court held and observed that any system of accounting which excluded for the valuation of closing stock of costs other than the costs of raw materials for the goods in process and finished products was likely to result in a distorted pictures of two states of business for the purpose of computing the chargeable income. It was observed that such a system might produce a lower valuation of the opening stock Page 8 of 12 HC-NIC Page 8 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT and the closing stock, thus, showing a comparative low difference between the two and in a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. It was also possible that the profit of one year was likely to be shifted to another year which would be incorrect since, for the income tax purpose, each year is a self contained unit. While doing so, it was observed that;
" It is a wellrecognised principle of commercial accounting to enter in the profit and loss account the value of the stockin trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. As stated by the Lord President in Whimster and Co. v. CIR [1925] 12 TC 813, 823 (C. Sess.):"
9. In the decision in case of Mahavir Alluminium Ltd. (supra), Division Bench of Delhi High Court observed that where there is change in valuation at one end, then there must be necessarily a corresponding change at the other and otherwise a true profit could not be reflected. The Court referring to the decision of Privy Council in case of CIT v. Ahmedabad New Cotton Mills Co. Ltd. reported in AIR 1930 PC 56 and the circular of the CBDT dated Page 9 of 12 HC-NIC Page 9 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT 23.12.1998 further observed as under:
"16. We are of the opinion that in the present case, there is no question of any double benefit being given to the assessed. Paragraph 23.13 of the guidance note itself makes it clear that whenever any adjustment is made in the valuation of inventory, this will affect both the opening as well as the closing stock. It is also to be noted that if any adjustment is required to be made by a statute, (as for example Section 145A of the Act), effect to the same should be given irrespective of any consequences on the computation of income for tax purposes.
Section 145A of the Act begins with as non obstante clause, and therefore, to give effect to Section 145A of the Act, if there is a change in the closing stock as on 31st March, 1999, there must necessarily be a corresponding adjustment made in the opening stock as on 1st April, 1998."
10. Upshot of the above discussion is that when the Revenue or the Tribunal was modifying or substituting the method of valuation of closing stock of the assessee in a particular year as a necessary corollary, the same methodology would have to be applied for the purpose of computation of the opening stock for that year also. The issue being absolutely clear, perhaps the Tribunal on its own, could also have provided for it while disposing of the Tax Appeal itself whether specifically so argued by the assessee or not. When the assessee therefore applied for Page 10 of 12 HC-NIC Page 10 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT rectification at that stage, at least, the Tribunal could have accepted the request of the assessee. The Tribunal therefore, committed the serious error in rejecting the rectification application on the ground that no such argument was advanced at the time of hearing of the appeal.
11. The second contention of Shri Bhatt that the assessee did not maintain necessary details of quality or volume of the polished diamonds, should pause no challenge. It was precisely because of this reason that the Assessing Officer discarded the method of valuation of closing stock adopted by the assessee. The modified and if we may use the expression 'improved' method of valuation as provided by the Assessing Officer, could also have been and in fact should have been adopted for the purpose of valuation of the opening stock. For working out final details, the Tribunal can always leave it to the Assessing Officer to carry out the directions.
12. In the result, impugned order of the Tribunal dated 09.02.2012 is set aside. Petitioner's request for rectification of the Tribunal's order dated Page 11 of 12 HC-NIC Page 11 of 12 Created On Sun Aug 13 23:54:54 IST 2017 C/SCA/9990/2012 JUDGMENT 30.04.2008 is granted to the extent of directing that valuation of the opening stock of polished diamonds of the assessee for the assessment year 200304 shall be done on the same basis as the Assessing Officer has applied for the purpose of valuation of the closing stock of that year.
13. Petition is disposed of accordingly.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) ANKIT Page 12 of 12 HC-NIC Page 12 of 12 Created On Sun Aug 13 23:54:54 IST 2017