1 IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E , MUMBAI BEFORE SHRI R.C. SHARMA(ACCOUNTANT MEMBER) AND SHRI AMARJEET SINGH (JUDICIAL MEMBER) ITA Nos. 6579/MUM/2012 Assessment Years: 2008-09 JCIT 17(1) Vs. S.M. Steels 1st Floor, R.No. 113 161/B Reto Bunder Reay Rd. Piramal Chambers Daurkhana Lalbaugh, Parel Mumbai- 400010 Mumbai PAN No. AAAFS1036L & ITA Nos. 2539/MUM/2013 Assessment Years: 2009-10 DCIT 17(1) Vs. S.M. Steel 1st Floor, R.No. 113 B-501, Avirahi Apartment Piramal Chambers Above Adidas Lalbaugh, Parel S.V. Road, Borivali(W) Mumbai Mumbai- 400092 PAN No. AAAFS1036L (Appellant) (Respondent) Revenue By : Shri. Pradeep Arya Assessee By : Shri. I.P. Rathi Date of Hearing : 22/09/2016 Date of pronouncement : 19/10/2016 ORDER 2 PER R.C. SHARMA, ACCOUNTANT MEMBER : These are appeals filed by Revenue against order of Ld. CIT(A) for AY 2008-09 and 2009-2010, in matter of order passed under section 143(3) of Income Tax Act. 2. In both years Revenue is agrieved for deleting addition made by AO on account of under valuation of closing stock. 3. Rival contentions have been heard and record perused. 4. Facts in brief are that assessee is engaged in business of trading and supply of iron and steel and deals with variety of items. In AY 2008-09, Assessing Officer analyzed purchases of iron & steel products in month of February & March furnished by assessee which worked out average cost of purchases at Rs. 39,587/- per MT. Assessing Officer was of view that as per FIFO method of valuation, entire closing stock available as on 31/03/2008 should be out of purchases made in month of March only. A.O. found that substantial purchases were made in month of March by assessee which was lying as closing stock, value of same cannot be less than purchase price and accordingly he worked out under valuation of closing stock by taking average cost of purchase at Rs. 40,768/- per MT. (based on purchase for March 2008) Applying this rate on closing stock, Assessing Officer arrived at value of Rs. 11,35,65,175/-. Further, Assessing Officer has added proportionate amount of direct cost attributable 3 such as transport charges and Octroi charges to value of closing stock and finally arrived at value of Rs. 40803.17 per MT and worked out Rs. 9,53,622/- which was also added to value of closing stock. Thus, Assessing Officer has concluded that appellant has suppressed Rs. 42,41,946/- while valuing closing stock. 5. By impugned order Ld. CIT(A) deleted addition after observing as under: 6. I have gone through submissions of AR, contents of impugned assessment order, statement of facts alongwith material on record. I have also perused paper book. average purchase cost to assessee based on purchases made in month of February 2008 and March, 2008 comes to Rs.39,587/- per metric ton and appellant has valued closing stock at Rs.39,587/-MT on 2785.645 MT. average rate of purchase in month of March 2008 worked out by AO was Rs40,787/- .(Rs. 17,80,77,263/4368.056 MT. 40,787) This clearly shows that average rate of purchase is much more than value admitted in closing stock which has prompted Assessing Officer to make addition. It is relevant to point here submission of appellant that closing stock did not comprise only of purchases made in month of March and it comprises of various items steel purchased in whole year. In support of this contention details such as item, date of purchase and bill no, date and quantity sold ,the balance quantity left and it's value for purpose of closing stock were furnished which is available in pages 1 to 8 of paper book. 7. It is claim of appellant that most of purchases made in month of March was sold in that month itself. appellant has given details of same in pages 1 to 15 of paper book. Details such as date, name of supplier, invoice no, quantity purchased, and details for sales date, invoice no, quantity sold and balance remaining after sales are available in these pages. perusal of details clearly shows that most of purchases made in March were sold in March itself. Following are few examples :- 4 Purchases Sales Date Purchase Bill No. Qty Date Sales Bill No. Qty Bal. party party Qty 1/03/08 Prabhat 690 3.850 1/03/08 Navdeep 11627 3.850 0 Steel Trds. (M- Traders 3) Pvt. Ltd. 1/03/08 Steel 25764 7.290 3/3/08 Rajesh 4205 3.020 0 Authority Steel (I) P. of India Ltd. Ltd. 3/3/08 Rajdeep 4202 4.200 0 Steels 1/3/08 Monnet 473 20.290 5/3/08 Paragon 4240 9.485 0 Ispat & Yarn Mfg. Energy Co. Pvt. Ltd. 1/3/08 Monnet 474 6.200 5/3/08 Vijay 4245 5.780 0 Ispat & Mehta & Energy Co (M-10) Ltd. 5/3/08 Balaji 4246 6.880 0 Mktg. Agency 5/3/08 Raj 4248 4.210 0 Darshan Enterprise 26.49 26.355 0.135 25/3/08 Prabhat 744 8.220 25/3/08 Shiv AUM 11687 8.220 0 Steel Steels Pvt. Traders Ltd. P. Ltd. 25/3/08 Tirupti 499 16.300 25/3/08 Tilaknagar 11687A 16.300 0 Steel Indus. Traders (PUR) 25/3/08 Rashtriya 2007015410 0.650 25/3/08 M.K. Steel 11683 22.140 0 Ispat Corpn Nigam Ltd.(M) 25/3/08 Rashtriya 2007015411 21.490 Ispat Nigam Ltd. above clearly proves that AO has simply presumed that purchases made in month of march only can remain as closing stock with out analyzing factual position discussed above. 5 8 As far as purchase of steel is concerned, appellant has been consistently following method of weighted average cost right from inception of business. Further, as pointed out by A.R. A.O. has considered purchases made only in last month of Financial year to arrive at average cost.The relevant portion of submission in this regard is reproduced as under: " As explained in facts of case, appellant deals in variety of items of steel and hence difficulty arises in maintaining separate stock records for all items and to value closing stock by taking each item of stock separately and hence stock was valued on prices based on average purchase price since inception and same basis was accepted. There are certain stocks which are purchased against confirmed sales and delivered directly or within 2/3 days and such sales and purchases can be identified bill wise. Certain items we purchased in bulk but sold on regular basis. Hence, while valuing closing stock we have to consider average period of holding ignoring goods purchased and sold identifiable. And for this reason, we had valued closing stock by taking average purchase price of last two months." 8.1 appellant has also furnished copy of Form 3CD report to show that there is no adverse findings in respect of value of closing stock by auditor. It is also fact that for over last several years, department has been accepting closing stock valuation adopted by appellant consistently. In support of this, assessment order passed u/s 143(3) for AYs. 2005-06 to 2007-08 were furnished. perusal of which 6 indicates that department has accepted value adopted by appellant for closing stock for AY. 2005-06 & 2006-07. During AY. 2007-08, Assessing Officer attempted to add proportionate amount of direct costs incurred such as transport charges and Octroi charges to valuation of closing stock. Otherwise, average cost of purchases adopted by appellant to arrive at value of closing stock has not been disturbed by Assessing Officer. rule of consistency cannot be ignored by Assessing Officer and hence closing stock valuation adopted by Assessing Officer is not justified. 9 general rule of FIFO method of valuation is not applicable to steel items. As far as steel and related items are concerned, whatever stock received earlier goes to bottom of stock and recent ones comes to upper layer of stock and hence, last of stock is disposed off first. and it is not first of stock which is received. This can be proved by facts discussed in para -7 and what is evident is that most of stocks purchased in March was sold in March itself and conclusion drawn by Assessing Officer is factually incorrect. 10 Moreover, Accounting Standard -2 recognizes weighted average cost method for valuation of inventory. Para 16 of AS - 2 is reproduced below: "The cost of inventory to other than those dealt with within para 14 should be assigned by using first and first out are weighted average cost of formula. formula used reflect fairness but possible proximisation to cost incurred in bringing items of inventory to their present location and condition: 7 AS-2 recognizes both FIFO as well as weighted average cost. appellant has followed later and there is nothing wrong in following weighted average cost method. 11. Section 145A clearly stipulates that valuation of inventory should be in accordance with method of accounting regularly employed by appellant. When appellant has been following consistently one particular method of valuation of inventory, AO. cannot think of altering same unless he is satisfied with correctness or completeness of accounts of appellant. 12 In case Chainrup Sampatram v. CIT [1953] reported in 24 ITR 481, Hon'ble Supreme Court had laid down firstly, that profits do not arise out of valuation of closing stock. Secondly, that valuation of unsold stock at close of accounting period is necessary part of process of determining trading results and it cannot be regarded as source of such profits. addition made to closing stock cannot be regarded as source of profit which is nothing but principle of balancing. true purpose of crediting value of unsold stock is to balance cost entered on other side of account at time of their purchase so that cancelling out of entries relating to same stock from both sides of accounts would leave only transaction on which there has been actual sales to show profit or loss actually realized. revenue impact on such addition result in revenue neutral situation. Whatever addition once made to closing stock it is going to opening stock in next year. In fact, there will not be any leakage of revenue. above proposition has been laid down in case of CIT vs. Indo Nippon Chemical Company Ltd. 245 ITR 384 (Born.). 8 13 valuation of stock on basis of average prices has been held as valid in case of CIT vs. Fazilka Co.operative Sugar Mills Ltd. Reported in 255 ITR 411 ( P& H). head note is as under: "The assessee filed its return of income for assessment year 1991-92. It declared loss of Rs. 7,52,53,863. On December 7, 1992, Assessing Officer completed assessment and made addition of Rs. 10,63,977 on account of revaluation of closing stock. This addition was made on hypothesis that valuation of closing stock had to be done on basis of average price for month of March, 1991. Thus, final figure of loss was fixed at Rs. 7,37,64,371/-. This addition was affirmed by Commissioner of Income-tax (Appeals). Tribunal, however held that there was no justification in addition on account of valuation of closing stock. On further appeal to High Court. Held: dismissing appeal, that perusal of order passed by Tribunal showed that respondent-assessee had followed consistent practice of fixing value of stock on basis of average price for assessment year. This practice had been accepted by Revenue. It had been further found that despite having made addition of more than Rs. 7,00,000 in value of stock in hand no corresponding benefit was given by Revenue to assessee for assessment year 1992-93. This factual position had not been disputed. In fact, addition to value of stock in hand had not resulted in any loss to Revenue. value which had been shown by assessee has been carried forward to next year. Thus, there was no loss of tax so far as Revenue is concerned. In any case, ultimate position was that assessee had suffered loss. It had not been 9 shown that valuation shown by assessee was less than cost price. That being so, there was no infirmity in view taken by Tribunal. No substantial question of law arose from its order." 14 Assessing Officer had neither made any comment on stock statement submitted by appellant nor pointed out any defect in audited books of accounts of appellant and, therefore, Assessing Officer has considered stock of finished goods and raw-materials as has under valued based on some presumptions, surmises & conjunctures and without any evidence on record. This was held in case of ACIT vs. Maitan Smelters reported in 307 ITR (AT) 225 (CaL). valuation of inventory as per average cost method has also been approved by Himachal Pradesh High Court in case of CIT vs. H.P. State Civil Supplies Corporation Ltd reported in 309 ITR 102 (HP) It was held in case of CIT vs. Dewan Steel Ltd. reported in 311 ITR 161 that average cost method of valuation of closing stock consistently followed by aooellant and accepted by revenue in earlier years cannot be rejected and average cost method was in accordance with well accepted accounting principles. 15. All above decisions indicates that weighted average method of cost of valuation of inventory has been approved and it has been recognized by Accounting Standard 2. In present case, appellant has followed well recognized method and Assessing Officer cannot find fault with same unless Assessing Officer is not satisfied with correctness and 10 completeness of method adopted by appellant. Assessing Officer has not made any adverse comments on Audit Report also in this regard. Further, consistently department has been accepting above method of valuation and hence, it is not open to Assessing Officer to suddenly change method which has been regularly followed by appellant. AO has not given any reason as to why consistent method followed towards valuation of closing stock was disregarded by Assessing Officer. In this regard, I rely on decision of Bombay High Court in case of CIT v. Citibank N. A. reported in [1994] 208 ITR 930 (Born). head note is as under:- Held, dismissing appeals, (i) that system of accounting employed by assessee was in consonance with accounting standard prescribed in India and also outside India. contract price was fixed under contract and if, during construction period, cost incurred exceeded contract price, loss accrued to assessee to extent of excess expenditure. Such loss was not contingent because such escalation clause was not in every contract and wherever there was escalation clause, provision was made of such escalation price on estimate basis. Therefore, system of accounting employed by assessee consistently for decades could not be rejected." I further rely on decision of Jurisdictional ITAT in case of Deputy Commissioner of Income-tax v. OTIS Elevator Co. (I) Ltd reported in 284 ITR (AT) 173(ITAT, MUMBAI). Head note is as under:- 11 Method of accounting--Entirely within assessee's discretion--Power of Assessing Officer to invoke first proviso to section 145 only where system does not show true picture of profits and gains-- Income-tax Act, 1961, s. 145. Method of accounting-Contractor--Contract completion method Assessee accumulating expenditure year after year on each contract and crediting contract price in year in which contract completed and showing resultant profit in that year-- Expenditure exceeding contracted price-Shown as loss and only contracted price carried forward to next year -Loss in particular contract shown in more than one year-Provision for estimating escalation price in contract-Judicially recognized method - -Income-tax Act, 1961, s. 145. It is duty of Assessing Officer to compute income of assessee in accordance with method of accounting regularly employed by assessee. only exception to legal position is provided in first proviso to section 145 of Income-tax Act, 1961, i e., where true profits cannot be deduced from method of accounting employed by assessee. If such method of accounting depicts distorted picture of profits of business carried on by assessee, then Assessing Officer can invoke first proviso to section 145 even though such method is being employed consistently. But powers of Assessing Officer under first proviso are not arbitrary and must be exercised in judicious manner. Supreme court decision in case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) followed. 16. recent decision of Delhi High Court in case of Commissioner of Income-tax v. Jagatjit Industries Ltd. reported in 339 ITR 382 is worth mentioning here. findings of Hon.High Court was that when Department has accepted particular 12 method of accounting system followed by assessee consistently, then same cannot be rejected without valid reason. Assessing Officer has to follow doctrine of consistency. head note is as under:- Method of accounting--Rule of consistency--Mercantile system of accounting-- Prior period expenses debited in following year-- Method consistently followed by assessee and accepted by Department--No evidence of distortion of profits Method could not be rejected--Income-tax Act, 1961, s. 145. If particular accounting system has been followed and accepted and there is no acceptable reason to differ with it, doctrine of consistency would come into play. method of accounting cannot be rejected. assessee was following mercantile system of accounting. According to past business practice, expenditure spilled over to next year and was debited in second year and was allowed by Assessing Officer. Assessing Officer for assessment year in question disallowed RS.13,46,299 claimed as expenditure of prior period allowable in current year. Commissioner (Appeals) deleted disallowance and this was upheld by Tribunal. On appeal to High Court :- Held, dismissing appeal, that assessee had claimed prior period expenses on ground that vouchers for such expenses from employees/branch employees were received after March 31st of financial year. It had branch offices throughout country. It debited expenditure spill over subsequent years and Assessing Officer had been allowing it in 13 past. accounting practice had been consistently followed by it and accepted by Revenue. Nothing had been brought on record to show that there had been distortion of profits or that books of account did not reflect correct picture. In absence of any reason whatsoever, there was no warrant or justification to depart from previous accounting system which was accepted by Department in respect of previous years. /I 17. To conclude Assessing Officer has failed appreciate actual facts brought out by me in paras 7 to 9 before making this addition and at same time disregarded Rule of consistency. In view of above discussion, addition made Rs. 42,41,9461- by theAssessing Officer is hereby deleted. This ground of appeal is allowed. 6. We have considered rival contention and carefully gone through orders of authorities below and find that after giving detailed findings CIT(A) reached to conclusion that assessee has been consistently following method of weighted average cost for valuation of closing stock and nothing has been brought on record to show that there has been distortion of profits or that books of account did not reflect correct picture. In these circumstances CIT(A) concluded that there was no warrant or justification to depart from previous accounting system which was accepted by Department in respect of earlier years. detailed findings so recorded by CIT(A) has not been controverted by Learned DR by bringing any positive material on record. 14 Accordingly we do not find any reason to interfere in order of CIT(A) resulting into deletion of addition made on account of valuation of closing stock. 7. In result appeal of Revenue is dismissed. 8. Facts and circumstances in AY 2009-10 are same. Ld. CIT(A) after recording detailed findings in para 3.16 to 4.2, has deleted addition which has not been controverted by department. Accordingly following reasoning given herein above in AY 2008-09, we do not find any reason to interfere in order of CIT(A). 9. In result both appeals of Revenue are dismissed. Order pronounced in open court on 19/10/2016 . Sd/- sd/- (AMARJEET SINGH) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 19/10/2016 AG (On Tour) Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER,//True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai 15 JCIT-17(1), Mumbai v. S.M. Steel