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Method of valuation of stock consistently followed by assessee and accepted by AO in preceding years, cannot be changed by AO without any substantial reason: ITAT
Question before Jaipur bench of ITAT was Whether method of valuation of stock consistently followed by assessee and accepted by the AO in the preceding years, can not be changed by AO without any substantial reason?
Facts of the case
The assessee trading in agricultural commodities had filed return of income for relevant AY. During assessment the AO noted that the assessee had valued closing stock of Sesame of 12,946.80 kg at Rs. 10,23,080/-. This valuation was done by the assessee on average cost basis. However, the AO noted that as per the Audit Report, the valuation of closing stock had to be done on market price or cost price whichever was lower. Similarly, the closing stock of Souf (Fennel seed) of 76,004 kg was valued at Rs. 29,60,979/-. The valuation of closing stock of Urad of 8,942.90 kg was shown at Rs. 2,31,985/-. The AO applied FIFO Method for valuation of closing stock of these three commodities and consequently made an addition of Rs. 5,11,840/- on account of under valuation of closing stock. On appeal, the CIT(A) upheld the order of AO.
Tribunal held that,
as per the details of closing stock as on 31st March, 2013 there are 10 commodities which are shown as part of the closing stock and valued on the basis of average cost or market price whichever is less. The AO in the assessment proceedings has selected only 3 commodities for revaluation of closing stock and applied FIFO method which has resulted in addition of Rs. 5,11,840/-. It is also not in dispute that the assessee has been consistently following the average cost method for valuation of closing stock and, therefore, when the opening stock of the assessee is based on the average cost then valuing the closing stock by applying a different method will distort the result. The AO has not disturbed the method adopted by the assessee in preceding years and the assessment year under consideration is the first year in which the AO has applied a different method and that too only for valuation of the closing stock of selected 3 commodities, namely, Til (Sesame), Souf (Fennel seed) and Urad Dal. It was found that the action of the AO in applying FIFO Method only on selected 3 commodities is highly arbitrary and against the principle of consistency. Even if the AO finds that the assessee has deliberately undervalued the closing stock, then the valuation of the entire closing stock of the assessee was required to be done by the AO by applying a consistent method. Hence, this action of the AO in applying a different method for selected commodities and remaining closing stock was valued on the basis of a different method being average cost method applied by the assessee is not permissible;
once the assessee has been following the consistent method of valuation of closing stock which is one of the recognized method and was also accepted by the AO in the preceding years then without any cogent and material evidence brought on record to show that the method adopted by the assessee does not reflect all the components of the cost of goods forming part of the closing stock, the AO cannot substitute such method applied by the assessee.. Accordingly in view of the facts and circumstances of the case, it is found that the AO has acted in an arbitrary manner without bringing any evidence that the assessee has suppressed the material facts regarding the valuation of closing stock. Hence we delete the addition made by the AO on this account.