Principal Commissioner Of Incometax-4, Kolkata v. D.k. Basak Jewellers Pvt. Ltd

OD-13 ITAT/193/2019IA No.GA/2/2019 (Old No.GA/2965/2019) IN THE HIGH COURT AT CALCUTTASpecial Jurisdiction (Income Tax)ORIGINAL SIDE PRINCIPAL COMMISSIONER OF INCOMETAX-4, KOLKATA -Versus- D.K. BASAK JEWELLERS PVT. LTD. Appearance:Ms. Sucharita Biswas, Adv.Mr. Soumen Bhattacharyya, Adv....for the appellant. Mr. J. P. Khaitan, Sr. Adv.Ms. Swapna Das, Adv.Mr. Siddhartha Das, Adv....for the respondents. BEFORE: The Hon’ble JUSTICE T.S. SIVAGNANAM -And- The Hon’ble JUSTICE HIRANMAY BHATTACHARYYA Date : 21[st] February, 2022. The Court : This appeal filed by the revenue underSection 260A of the Income Tax Act, 1961 (the ‘Act’ in brevity) isdirected against the order dated 27[th] July, 2018 passed by theIncome Tax Appellate Tribunal, “B” Bench, Kolkata (in short the‘Tribunal’) in ITA No.2127/Kol/2016 for the assessment year 2011-12. The revenue has raised the following substantialquestions of law for consideration : “I) Whether on the facts and circumstances of the case,the Learned Income Tax Appellate Tribunal has erredin law in confirming deletion of Rs.14,43,06,905/-made by the order of the Learned Commissioner ofIncome Tax (Appeals), which amount was added by theAssessing Officer on account of difference in stockvaluation as the assessee unlawfully followed theLast In First Out (LIFO) method of accounting forvaluation of closing stock in violation of theaccounting Standard-2 ?the Learned Income Tax Appellate Tribunal has erredin law in confirming deletion of Rs.14,43,06,905/-made by the order of the Learned Commissioner ofIncome Tax (Appeals), which amount was added by theAssessing Officer on account of difference in stockvaluation as the assessee unlawfully followed theLast In First Out (LIFO) method of accounting forvaluation of closing stock in violation of theaccounting Standard-2 ? II) Whether on the facts and circumstances of the case,the Learned Income Tax Appellate Tribunal has erredin law in confirming the order of the LearnedCommissioner of Income Tax (Appeals) withoutappreciating that the assessee unlawfully followedincorrect accounting on the pretext of consistencywhereas the correct accounting standard is FIFO orWeighted Average Method according to the AccountingStandard-2 for making valuation of the inventory ?the Learned Income Tax Appellate Tribunal has erredin law in confirming the order of the LearnedCommissioner of Income Tax (Appeals) withoutappreciating that the assessee unlawfully followedincorrect accounting on the pretext of consistencywhereas the correct accounting standard is FIFO orWeighted Average Method according to the AccountingStandard-2 for making valuation of the inventory ? III) Whether on the facts and circumstances of the case,the Learned Income Tax Appellate Tribunal has erredin law in not appreciating that as per Company’srules all the companies registered under theCompanies Act must follow the First in First Out(FIFO) method for valuation of the closing stock butthe assessee has deliberately applied Last In FirstOut (LIFO) method for determining the valuation ofthe closing stock ?”the Learned Income Tax Appellate Tribunal has erredin law in not appreciating that as per Company’srules all the companies registered under theCompanies Act must follow the First in First Out(FIFO) method for valuation of the closing stock butthe assessee has deliberately applied Last In FirstOut (LIFO) method for determining the valuation ofthe closing stock ?” We have heard Ms. Sucharita Biswas, learned Counsel assisted by Mr. Soumen Bhattacharyya, learned Advocate for theappellant/revenue and Mr. J. P. Khaitan, leaned senior Counsel assisted by Ms. Swapna Das and Mr. Siddhartha Das, learnedAdvocates for the respondent/assessee. We have heard Ms. Sucharita Biswas, learned Counsel assisted by Mr. Soumen Bhattacharyya, learned Advocate for theappellant/revenue and Mr. J. P. Khaitan, leaned senior Counsel assisted by Ms. Swapna Das and Mr. Siddhartha Das, learnedAdvocates for the respondent/assessee. As could be seen from the assessment order dated 19[th]March, 2014 under Section 143(3) of the Act, the entire mattercommenced pursuant to a survey action conducted under Section 133Aof the Act in the business premises of the assessee. Theassessing officer, after taking note of the report submitted bythe survey official, proceeded to issue show cause notice to theassessee and considered the matter. In the assessment order, thesurvey report has been extensively extracted and the crux of thesame is an alleged admission by the assessee admitting a stockdifference of Rs.8,82,68,862/- and agreeing to pay a sum of Rs.3crores as additional advance tax. The assessing officer wouldstate that out of the admitted amount only a sum of Rs.1 crore hasbeen paid and, therefore, the assessment was taken up forconsideration and the assessing officer faulted the assessee innot arriving at the value of the stock by applying the First inFirst out (FIFO) method and instead of which the assessee adoptedthe Last in First out (LIFO) method. After noting the factualdetails, the assessment was completed. Aggrieved by the same, theassessee preferred appeal before the CIT(A)-IV, Kolkata whichappeal was allowed after examining the factual position. Therevenue challenged the said order by filing appeal before thetribunal which was dismissed by the impugned order. Ms. Biswas, learned counsel appearing for the appellantwould vehemently contend that the assessee having admitted bygiving a statement and agreeing to pay a sum of Rs.3 crores asadditional advance tax but having failed to comply with the samein its entirety and having deposited only Rs.1 crore, theassessing officer was fully justified in proceeding to assess theincome of the assessee. Furthermore, the rule of consistency withregard to valuation of the closing stock cannot be applied as theassessee is required to follow the accounting standard whichstates that such valuation is to be made by applying the FIFOmethod instead of LIFO method which was adopted by the assessee.The learned counsel for the appellant has extensively taken usthrough the assessment order and seeks to demonstrate before usthat there is no error in the manner in which the assessment wascompleted. The learned senior counsel for the respondent has placedreliance on the decision in the case of Commissioner of Income Taxvs. S. Khader Khan Son reported in [2008] 300 ITR 157 (Mad)wherein the court took into consideration a circular issued by theCentral Board of Direct Taxes (CBDT) dated March 10, 2003 withregard to the confession of additional income during the course ofsearch and seizure and survey operation. It is submitted that inthe said circular the Board has categorically spelt that noattempt should be made to obtain confession as to undisclosed income when search and seizure or survey operation is beingconducted.After having elaborately heard the learned counsels forthe parties and carefully considering the arguments and thematerials of record, we find that the assessing officer could nothave based his conclusion solely on the alleged admission of thedirector of the assessee during the survey operations. At thisjuncture, it would be relevant to take note of the circular issuedby the CBDT which reads as follows: income when search and seizure or survey operation is beingconducted.After having elaborately heard the learned counsels forthe parties and carefully considering the arguments and thematerials of record, we find that the assessing officer could nothave based his conclusion solely on the alleged admission of thedirector of the assessee during the survey operations. At thisjuncture, it would be relevant to take note of the circular issuedby the CBDT which reads as follows: “Instances have come to the notice of the Boardwhere assessees have claimed that they have been forced toconfess the undisclosed income during the course of thesearch and seizure and survey operations. Suchconfessions, if not based upon credible evidence, arelater retracted by the concerned assessees while filingreturns of income. In these circumstances, on confessionsduring the course of search and seizure and surveyoperations do not serve any useful purpose. It is,therefore, advised that there should be focus andconcentration on collection of evidence of income whichleads to information on what has not been disclosed or isnot likely to be disclosed before the Income TaxDepartment. Similarly, while recording statement duringthe course of search and seizure and survey operations noattempt should be made to obtain confession as to theundisclosed income. Any action on the contrary shall beviewed adversely.” The above directive issued by the CBDT is a straightanswer to the contention advanced by the learned standing counsel.Thus, if the report of the survey team is eschewed, then it has tobe seen as to in what manner the assessing officer could havecompleted the assessment. The crux of the issue revolves aroundthe valuation of the closing stock. The revenue faults theassessee for not adopting the FIFO method. The tribunal hasconsidered the correctness of the submission and pointed out thatthe assessee has consistently adopted the LIFO method which hasbeen accepted by the assessing officer in all the previous yearsand in the assessee’s own case in the respect of the assessmentyear 2009-10, the matter travelled upto the tribunal and themethod of valuation of closing stock adopting LIFO method wasapproved. Therefore, the tribunal concluded that consistency hasto be maintained in the matter. Learned counsel for the appellant would vehementlycontend that in terms of the statutory rule, the accountingstandard as prescribed under the rule ought to have been followed.The learned counsel submits that it is mandatory for the assesseeto follow the Accounting Standard –2 in terms of the relevantrules from the year 1999 and the relevant rules of the year 2006is applicable.Section 145 of the Act deals with the method ofaccounting. Sub-Section (1) of Section 145 of the Act states thatincome chargeable under the head “Profits and gains of business or Learned counsel for the appellant would vehementlycontend that in terms of the statutory rule, the accountingstandard as prescribed under the rule ought to have been followed.The learned counsel submits that it is mandatory for the assesseeto follow the Accounting Standard –2 in terms of the relevantrules from the year 1999 and the relevant rules of the year 2006is applicable.Section 145 of the Act deals with the method ofaccounting. Sub-Section (1) of Section 145 of the Act states thatincome chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to theprovisions of sub-section (2), be computed in accordance witheither cash or mercantile system of accounting regularly employedby the assessee. Sub-section (2) of Section 145 states that “TheCentral Government may notify in the Official Gazette from time totime income computation and accounting standards to be followed byany class of assessees or in respect of any class of income.Sub-Section (3) states that where the assessing officeris not satisfied about the correctness or completeness of theaccounts of the assessee, or where the method of accountingprovided in sub-section (1) of Section 145 or accounting standardas notified under sub-Section (2) have not been regularly followedby the assessee, the assessing officer may make an assessment inthe manner provided in Section 144. Section 145A of the Act, asit stood at the relevant time (A.Y. 2011-12) commences with a non-obstante clause stating that notwithstanding anything to thecontrary contained in Section 145, the method of accounting invarious types of cases have been spelt out. It is an admittedcase that the assessee has been continuously adopting the LIFOmethod which has been accepted by the revenue for all the earlierassessment years and in respect of the assessment year 2009-10,the matter travelled upto the tribunal and the manner of valuationof the closing stock done adopting LIFO method was approved.Therefore, in our considered view, the tribunal was right inaffirming the order passed by the CIT(A). An identical issue came up for consideration in the case of Commissioner of Income Tax vs.Sharad Mohanlal Shah reported in [2019] 108 taxmann.com 353 (Guj.)wherein it was held that the assessee therein was following theLIFO method and the CIT(A) therein as well as the tribunalconcurrently held that such method was already recognised in lawand in any case consistently followed in several orders and,therefore, the appeal filed by the revenue was dismissed. TheSpecial Leave Petition filed before the Hon’ble Supreme Court wasdismissed as reported in [2019] 108 taxmann.com 354 (SC). Thus, for all the above reasons, the tribunal rightlyaffirmed the order passed by the CIT(A). In the result, the appeal filed by the revenue standsdismissed and the substantial questions of law are answeredagainst the revenue.Consequently, the application for stay being IANo.GA/2/2019 (Old No.GA/2965/2019) also stands closed. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.) S.DasA/s.