The Commissioner Of Income-Tax, Panchkula v. Sh. Kuldeep Chand Jain (Huf

ITA No. 165 of 2014 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 165 of 2014 (O&M) Date of Decision: 8.9.2015 The Commissioner of Income-tax, Panchkula Versus ....Appellant. Sh. Kuldeep Chand Jain (HUF) ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? Yes 3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Yogesh Putney, Advocate for the appellant. Ms. Radhika Suri, Senior Advoate with Ms. Rinku Dahiya, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been filed by the revenue under Section260A of the Income Tax Act, 1961 (in short “the Act”) against the orderdated 23.9.2013 (Annexure A-3) passed by the Income Tax AppellateTribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as“the Tribunal”) in ITA No. 705/CHD/2013 for the assessment year 2009-10, claiming the following substantial question of law:- Whether on the facts and circumstances of the case,the Ld. ITAT was right in deleting the addition madeu/s 145(3) at ` 58,28,390/- on account of valuation ofclosing stock by ignoring the fact that invoking ofprovisions of Section 145(3) were validly invoked asthe assessee had valued the closing stock on LIFOthe Ld. ITAT was right in deleting the addition madeu/s 145(3) at ` 58,28,390/- on account of valuation ofclosing stock by ignoring the fact that invoking ofprovisions of Section 145(3) were validly invoked asthe assessee had valued the closing stock on LIFO basis as per his previous practice? 2.A few facts necessary for disposal of the present appeal asmentioned therein are that the assessee filed the return of income on24.9.2009 for the assessment year 2009-10 declaring a total income of` 9,15,800/-. Notice under Section 143(2) of the Act was issued to theassessee on 23.9.2010. The cognizance over the issue of valuation ofclosing stock was taken on the basis of the details submitted by theassessee and it was found that the closing stock was valued at ` 814.47per gram which was much more down to the purchase cost and as perstandard norms and practice, the closing stock should be valued eitherat market rate or cost price whichever is lower. The Assessing Officerframed the assessment vide order dated 13.12.2011 (Annexure A-1) bymaking an addition of ` 58,29,237/- on account of undervaluation ofclosing stock. The Assessing Officer observed that the assessee hasfailed to give any reasonable and justified explanation for not rejectinghis books of account and for accepting his method of valuation of closingstock by adopting Last In First Out (LIFO) method. Feeling aggrieved,the assessee filed an appeal before the Commissioner of Income Tax(Appeals), Panchkula [hereinafter referred to as “the CIT(A)”]. The CIT(A), Panchkula vide order dated 8.4.2013 (Annexure A-2) partly allowedthe appeal and deleted the addition of ` 58,28,390/- made by theAssessing Officer on account of undervaluation of closing stock afterrejecting the books of account of the assessee. Against the order,Annexure A-2, the revenue filed an appeal whereas the assessee filedcross-objections before the Tribunal. The Tribunal vide order dated23.9.2013 (Annexure A-3) dismissed the appeal filed by the revenueupholding the deletion of ` 58,28,390/- on account of valuation of ITA No. 165 of 2014 inventory by the assessee and allowed the cross-objections filed by theassessee against addition of ` 1,50,000/- and restored the matter to theAssessing Officer to re-decide the same. Hence, the present appeal bythe revenue. ITA No. 165 of 2014 inventory by the assessee and allowed the cross-objections filed by theassessee against addition of ` 1,50,000/- and restored the matter to theAssessing Officer to re-decide the same. Hence, the present appeal bythe revenue. 3.Learned counsel for the revenue submitted that the truevalue of the closing stock could not be ascertained or determined byadopting the LIFO method and, therefore, valuation adopted by theAssessing Officer was justified. He has placed reliance upon thejudgment of the Apex Court in Commissioner of Income-Tax v. British Paints India Ltd. (1991) 188 ITR 44 in support of his contention. 4.Controverting the aforesaid submission, learned counsel forthe assessee-respondent submitted that the Tribunal had recorded afinding of fact that the assessee had been following the LIFO method forearlier years as well and in such a situation, there was no occasion todeviate from the method of accountancy being followed by the assessee.The Assessing Officer has failed to show that the true value could not bedetermined except to urge so. Reference was made to the followingjudgments:- I.United Commercial Bank v. Commissionerof Income Tax (1999) 240 ITR 355 (SC); II.Commissioner of Income-Tax v. Sant RamMangat Ram (2005) 275 ITR 312 (P&H); 5.After hearing learned counsel for the parties, we do not findany merit in the appeal. The assessee is engaged in the business ofsale and purchase of jewellery. The Tribunal had noticed that theassessee was following LIFO method for valuing its closing stock fromyear to year which is one of the prescribed methods of accounting ITA No. 165 of 2014-4- standards issued by the Institute of Chartered Accountants of India forvaluation of inventory. The said method was also followed by theassessee in the assessment year 2007-08 and in the said year, theAssessing Officer had made an addition of ` 32,08,977/- on account ofvaluation of closing stock of gold ornaments. The Tribunal in ITA No.1378/Chd/2010 relating to the assessment year 2007-08 in the case ofthe assessee upheld the decision of the CIT(A) deleting the additionmade by the Assessing Officer with the following observations:- “10.We have heard the rival contentions andperused the record. The assessee is engaged in thebusiness of sale and purchase of jewellery. Theassessee, in order to value its closing stock isfollowing LIFO method which is one of the prescribedmethod of accounting standards issued by theInstitute of Chartered Accountants of India forvaluation of inventory. The said method of valuing theclosing stock of gold ornaments has been consistentlyfollowed by the assessee from year to year. Similarmethod was followed by the assessee in assessmentyear 2007-08. The Assessing Officer in assessmentyear 2007-08 had made an addition of Rs.32,08,977/-on account of valuation of closing stock of goldornaments. The Tribunal in ITA No. 1378/Chd/2010relating to assessment year 2007-08 in DCIT Vs. ShriKuldeep Chand Jain, HUF, vide order dated24.04.2012, had held as under: “4.We have carefully perused the rival submissions, facts of the case and relevantrecord. The brief facts of the case are that theappellant is a wholesale & retail sarafamerchant. The assessee filed return of incomeon 31.10.2007, declaring income ofRs.29,20,088/-. A survey u/s 133A of the Actwas conducted, on the business premises ofthe assessee, on 13.10.2009, during whichappellant surrendered an additional income ofRs.26 lacs (Rs.17 lacs on account ofunexplained old gold and diamond jewelleryand Rs.9 lacs on account of excess cashfound). The AO framed assessment u/s 143(3)at an income of Rs.61,29,065/- after makingdisallowance of Rs.32,08,977/- on account ofunder valuation of closing stock. AO alsorejected the books of account of the appellantand treated the surrendered amount of Rs.26lacs as deemed income. 5.In the course of assessment proceedings,the assessee informed the AO, that LIFOmethod of accounting was followed in valuationof closing stock. The contention of theassessee was not found acceptable by the AO.The AO referred to A.S.-2, that specifies of onlythree methods of determining the cost ofinventories i.e. specific identification method, FIFO and Weighted average cost method. TheAO made an addition of Rs.32,08,977/-following the weighted average cost method ofthe closing stock. The ld. CIT(A), onappreciation of the case laws and submissionsfiled before her, gave her findings in para 5.2 ofthe appellate order, which are reproducedhereunder:- “5.2. I have carefully considered thesubmissions filed by the appellant, it wasinformed that the AO has accepted thecalculation error in the closing stockvaluation and has rectified the same bypassing order u/s 154 dated 30.06.2010 videwhich the difference in stock stand reducedfrom Rs.32,08,977/- to see that during theA.Y. 2003-04, 2005-06 and 2006-07assessment for which was completed u/s143(3), the method of valuation of closingstock has been accepted by the AOincluding by the AO who has passed theassessment order for the year under appeal.Therefore, the AO cannot reject the methodof valuation of closing stock which isconsistently followed by the appellant andhas also been accepted by the AO in thepast. I agree with the appellant that rule of consistently has to be followed andobserved. Further, it is seen that theHon'ble Punjab and Haryana High Court inappellant's own case CIT vs. Sant RamMangat Ram (195 CTR 345) observed asunder:- “It is an admitted position that from theinception of its business, the assesseehad continuously adopted the samemethod of valuation of the closing stockand no objection was raised by theDepartment in any of the previous years.Rather, the competent authority acceptedthe method adopted by the assessee andaccordingly, made assessment. Thisbeing the position, we do not find anyvalid ground to accept the argument ofShri Bindal that the method adopted bythe assessee for valuation of the stockwas legally impermissible and on thataccount, the additions made by theInspecting Assistant Commissionershould be restored. In UnitedCommercial Bank v. CIT (1999) 240 ITR3545, their Lordships of the SupremeCourt held that the method which wasconsistently followed by the appellant- bank for valuing the stock-in-trade couldnot be rejected by the accessingauthority in a particular year.” There is merit in the appellant's submissions that theprinciple of judicial discipline requires that the order ofthe Higher Appellate Authority should be followedunreservedly by the subordinate authorities.Therefore, in view of the above stated facts, assesseehaving consistently employed the same method ofvaluation of closing stock and AO having noquestioned the same and in fact having accepted it inthe previous assessment years, it is held that themethod of valuation of closing stock could not berejected. Therefore, the addition made by the AOwhich by her order of rectification u/s 154 standsreduced to Rs.19,45,073/- on account of difference invaluation of closing stock is deleted. This ground ofappeal is allowed.” There is merit in the appellant's submissions that theprinciple of judicial discipline requires that the order ofthe Higher Appellate Authority should be followedunreservedly by the subordinate authorities.Therefore, in view of the above stated facts, assesseehaving consistently employed the same method ofvaluation of closing stock and AO having noquestioned the same and in fact having accepted it inthe previous assessment years, it is held that themethod of valuation of closing stock could not berejected. Therefore, the addition made by the AOwhich by her order of rectification u/s 154 standsreduced to Rs.19,45,073/- on account of difference invaluation of closing stock is deleted. This ground ofappeal is allowed.” 6.A bare perusal of the findings of CIT(A) revealsthat on the basis of the doctrine of consistency inrelation to method of calculation of inventory as alsothe decision of the jurisdictional High Court inassessee's own case, she recorded findings in favourof the assessee. Having regard to the fact-situation ofthe case, decision of the Hon'ble Jurisdictional HighCourt, relied upon by the ld. CIT(A), and therelevance of consistency principle in the matter, we dothat on the basis of the doctrine of consistency inrelation to method of calculation of inventory as alsothe decision of the jurisdictional High Court inassessee's own case, she recorded findings in favourof the assessee. Having regard to the fact-situation ofthe case, decision of the Hon'ble Jurisdictional HighCourt, relied upon by the ld. CIT(A), and therelevance of consistency principle in the matter, we do not find any infirmity in the findings of the CIT(A), andhence, the same are upheld. Thus, the ground ofappeal of the revenue is dismissed.” 6.The Tribunal upheld the order of the CIT(A) in deleting theaddition of ` 58,28,390/- by holding that the assessee had beenconsistently following the LIFO method of valuation of its inventory. 7.Apex Court in United Commercial Bank's case (supra)dealing with a case of valuation of stock held that a method ofaccounting adopted by the tax-payer consistently and regularly cannotbe discarded by the revenue on the view that different method ofkeeping accounts or of valuation ought to have been adopted by theassessee. The broad principles of valuation of stock had beensummarized by the Supreme Court as under:- “(1)That for valuing the closing stock, it is open tothe assessee to value it at the cost or market value,whichever is lower; (2)In the balance-sheet, if the securities andshares are valued at cost but from that no firmconclusion can be drawn. A taxpayer is free toemploy for the purpose of his trade, his own methodof keeping accounts, and for that purpose, to valuestock-in-trade either at cost or market price. (3)A method of accounting adopted by thetaxpayer consistently and regularly cannot bediscarded by the departmental authorities on he viewthat he should have adopted a different method ofkeeping accounts or of valuation. (4)The concept of real income is certainlyapplicable in judging whether there has been incomeor not, but, in every case, it must be applied with careand within their recognized limits. (5)Whether the income has really accrued orarisen to the assessee must be judged in the light ofthe reality of the situation. (6)Under section 145 of the Act, in a case whereaccounts are correct and complete but the methodemployed is such that in the opinion of the Income-taxOfficer, the income cannot be properly deducedtherefrom, the computation shall be made in suchmanner and on such basis as the Income-tax Officermay determine.” 8.Following the aforesaid pronouncement, a Division Bench ofthis Court in Sant Ram Mangat Ram's case (supra) had held asfollows:- “It is an admitted position that from the inception of its (5)Whether the income has really accrued orarisen to the assessee must be judged in the light ofthe reality of the situation. (6)Under section 145 of the Act, in a case whereaccounts are correct and complete but the methodemployed is such that in the opinion of the Income-taxOfficer, the income cannot be properly deducedtherefrom, the computation shall be made in suchmanner and on such basis as the Income-tax Officermay determine.” 8.Following the aforesaid pronouncement, a Division Bench ofthis Court in Sant Ram Mangat Ram's case (supra) had held asfollows:- “It is an admitted position that from the inception of its business, the assessee had continuously adopted thesame method of valuation of the closing stock and noobjection was raised by the Department in any of theprevious years. Rather, the competent authorityaccepted the method adopted by the assessee andaccordingly, made assessment. This being theposition, we do not find any valid ground to accept theargument of Shri Bindal that the method adopted bythe assessee for valuation of the stock was legally impermissible and on that account, the additionsmade by the Inspecting Assistant Commissionershould be restored.” 9.Undisputedly, in the earlier years, the revenue had acceptedthe LIFO method for valuation of closing stock of the assessee. Learnedcounsel for the revenue could not demonstrate that the approach of theTribunal was erroneous or perverse in any manner warrantinginterference by this Court. 10.Now we proceed to examine the judgment in British PaintsIndia's case (supra) relied upon by the learned counsel for the revenue.The Supreme Court held that before the Assessing Officer can adoptmethod of valuation of stock different from the one adopted by theassessee, the Assessing Officer is required to determine whether or notincome chargeable under the Act can be properly deduced from thebooks of account and the question must be decided with reference to therelevant material and in accordance with correct principles. Theprinciple of law enunciated therein is well recognized but in view offactual matrix noticed hereinbefore in the present case, it does notadvance the case of the revenue. 11.In view of the above, no substantial question of law arises inthis appeal. Accordingly, finding no merit in the appeal, the same ishereby dismissed. (AJAY KUMAR MITTAL) JUDGE September 8, 2015 (RAMENDRA JAIN) JUDGE