By TIOL News Service

AHEMDABAD, JUNE 13, 2017: THE ISSUE BEFORE THE COURT IS - Whether a comparative difference in valuation of opening & closing stock due to rising turnover & market prices, which resulted in diminishing taxable profit, is no ground for making additions. YES is the verdict.

Facts of the case:

The assessee is a partnership firm and is engaged in the business of trading in diamonds. For A.Y 2003-04, the assessee filed its return which was taken in scrutiny by the AO. Besides other issues, the AO disputed the assessee's valuation of the closing stock of the polished diamonds which was taken at Rs.1.14 crores. The AO noticed that the assessee had taken the market value of the polished diamonds at Rs.12,187.65 per carat. The AO 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 AO noticed that the closing stock of the diamonds was valued at market value of polished diamonds which was taken at sales price. He 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. He therefore, after issuing notice to the assessee, revalued the closing stock of the polished diamonds and added a sum of Rs.66.90 lakhs to the income of assessee on the basis of revaluation of the closing stock.

On appeal, the HC held that,

++ the 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 AO was confirmed by the CIT(A) 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. In case of British Paints India Ltd., the Supreme Court 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 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;

++ 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 rectification at that stage, at least, the Tribunal could have accepted the request of the assessee. The Tribunal had therefore, committed serious error in rejecting the rectification application on the ground that no such argument was advanced at the time of hearing of the appeal. The second contention of counsel 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 AO 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 AO, 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 AO to carry out the directions. In the result, impugned order of the Tribunal is set aside. Assessee's request for rectification of the Tribunal's order is granted to the extent of directing that valuation of the opening stock of polished diamonds of the assessee for the assessment year 2003-04 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.

(See 2017-TIOL-1091-HC-AHM-IT)