Primary Stock Records Prevail Over Form 3CD Clerical Error: ITAT Raipur Deletes Addition

Adishwar Oils and Fats Limited Vs ACIT (ITAT Raipur)

Summary : The ITAT Raipur allowed Shri Adishwar Oils and Fats Limited’s appeal for AY 2009-10 against an addition concerning undervaluation of closing stock. The company, engaged in extraction and refining of vegetable oils, had filed its return on 29 September 2009 declaring income of Rs.82,82,030, which was initially accepted under section 143(3). Following reopening under section 148, an assessment dated 18 February 2015 determined income at Rs.1,20,05,797. The CIT(A), NFAC, Delhi, sustained the disputed stock addition by order dated 13 February 2026. The Tribunal’s order records the addition as Rs.27,61,679 in paragraph 2 and Rs.27,61,979 in paragraph 3.

The dispute concerned both the rate used to value soya oil and acid oil and the quantity of acid oil remaining in closing stock. The assessee contended that it consistently valued stock using prevailing market prices around the balance-sheet date. In contrast, the Assessing Officer adopted annual average sale prices. The assessee pointed to a decline in soya-oil prices from Rs.67,800 per MT in June 2008 to Rs.43,200 per MT in March 2009. The order records the AO’s valuation rate at Rs.52,927 per MT against the assessee’s Rs.42,536 per MT. The assessee also argued that the AO had accepted opening-stock valuation while disturbing closing-stock valuation and that any enhancement would have a consequential effect on the following year’s opening stock.

The CIT(A) considered the expression “average market price” in the tax audit report inconsistent with the assessee’s explanation of a closing-date price. On quantity, the assessee explained that Form 3CD incorrectly recorded acid-oil production at 368.168 MT instead of 308.168 MT. Opening stock of 102.662 MT, plus actual production of 308.168 MT, less sales of 365.655 MT, yielded closing stock of 45.175 MT. Although the CIT(A) recognised that the reported closing quantity of 105.175 MT resulted from the overstated production figure, relief was refused because the production register had been furnished during appellate proceedings and no revised audit report had been filed. The assessee maintained that the register and audited balance sheet were primary records corroborating the correct figures. The Revenue supported the lower authorities.

Considering sections 145 and 145A and the subsequent statutory formulation of inventory valuation, the Tribunal referred to Vatika Township, Allied Motors, Podar Cement and Zile Singh on the use of declaratory amendments in construing earlier provisions. It treated the Finance Act, 2018 substitution effective from 1 April 2017 as declaratory of the valuation method. The Tribunal held that net realisable value must reflect realisable value around the date on which the balance sheet is drawn, since an annual average could distort closing-stock value where prices fluctuate substantially. It accepted the assessee’s consistently followed valuation using prevailing prices around the balance-sheet date, set aside the CIT(A)’s finding and directed the AO to adopt that price in preference to the annual average and grant consequential relief.

On acid-oil quantity, the Tribunal held that the production register and balance sheet annexed to the return, being primary documents, must prevail over the particulars in Form 3CD, a secondary document. It noted the CIT(A)’s acceptance of the quantitative explanation and found no occasion where the assessee had failed to produce documents after reassessment. The addition on this count was deleted, consequential relief was granted, and the appeal was allowed. The order was pronounced on 6 October 2026 by Shri Partha Sarathi Chaudhury, Judicial Member, and Shri Avdhesh Kumar Mishra, Accountant Member.

Cases Discussed

• Commissioner of Income Tax Vs Vatika Township (P) Ltd., (2014) 367 ITR 466 (Supreme Court). Cited by the Tribunal with the other decisions in paragraph 12 for the principle that a later declaratory amendment may assist interpretation of an earlier provision.
• Zile Singh Vs State of Haryana, (2004) 8 SCC 1 (Supreme Court). Cited in the Tribunal’s discussion of declaratory amendments and their interpretative relevance.
• Commissioner of Income Tax Vs Shree Manjunathesware Packing Products & Camphor Works, (1998) 231 ITR 53 (Supreme Court). Invoked in the reproduced CIT(A) order to support refusal of additional evidence; the assessee distinguished the authorities relied upon by the CIT(A), and the Tribunal ultimately accepted the primary records.
• Commissioner of Income Tax Vs Podar Cement (P) Ltd., (1997) 226 ITR 625, decided on 27 May 1997 (Supreme Court). Cited by the Tribunal in support of its treatment of the later valuation provision as declaratory.
• Allied Motors (P) Ltd. Vs Commissioner of Income Tax, (1997) 224 ITR 677 (Supreme Court). Cited by the Tribunal with the other declaratory-amendment authorities in paragraph 12.
• Union of India Vs Raghubir Singh, (1989) 178 ITR 548 (Supreme Court). Cited in the reproduced CIT(A) order for its rejection of the assessee’s consistency argument; this was part of the lower appellate reasoning, not a separate finding endorsed by the Tribunal.

FULL TEXT OF THE ORDER OF ITAT RAIPUR

Per Avdhesh Kumar Mishra, AM: This appeal for Assessment Year (‘AY’) 2009-10 filed by the assessee is directed against the order dated 13.02.2026 of the Commissioner of Income Tax (Appeals), [‘CIT(A)’], National Faceless Appeal Centre (NFAC), Delhi passed under section 250 of the Income Tax Act, 1961 (‘Act’).

2. Vide sole effective ground, the assessee has challenged the addition of Rs.27,61,679/- made on account of under valuation of closing stock.

3. The relevant facts giving rise to this appeal are that the assessee is engaged in the business of extraction and refining of vegetable oils. It filed its original Income Tax Return (‘ITR’) of the relevant year on 29.09.2009 declaring income of Rs.82,82,030/-. The original ITR was picked up for scrutiny and the consequential assessment was completed accepting the returned income under section 143(3) of the Act. Later, the case was reopened under section 148 of the Act. Consequentially, the reopened assessment was completed under section 143(3) r.w.s. 148 of the Act on 18.02.2015 determining the income at Rs.1,20,05,797/-, wherein the addition of Rs.27,61,979/- was made on the issue of under valuation of closing stock. Aggrieved with the reopened assessment, the assessee filed appeal before the Ld. CIT(A), who dismissed the appeal as under:

“8.3 I have given my anxious consideration to the rival submissions. This ground pertains to the valuation of closing stock, a matter of settled legal principles. The primary issue is not the arithmetic, but the admissibility of the valuation method and the evidentiary value of documents provided post-assessment. The appellant claims a consistent practice of valuing stock at average market price) meaning the price on the closing date. However, a perusal of the Tax Audit Report in Form No. 3CD (Page 17 of the Paper Book) at Clause 12(a) clearly states: “Raw material – At Cost; Finished Goods – At Average market price.) The appellant’s Interpretation that “average” refers to the price on a single day is semantically and logically flawed. An “average” cannot be derived from a single data point. The phrase “Average market price” implies the mean of the prevailing prices over a period. If the appellant’s intention was to adopt the Net Realizable Value (NRV) as on the balance sheet date, the appropriate description should have been “At market price” or “At lower of cost or market price”. Therefore, the ambiguity in the method was created by the appellant themselves.

8.4 While the principle of consistency in accounting is important, it is not a shield against a fundamentally incorrect method of income computation. The Hon’ble Supreme Court in Union of India v. Raghubir Singh (1989) 178 ITR 548 (SC) held that consistency does not sanctify an error. Even if the appellant followed this method for years, if the method fails to disclose the true profits, the AO is empowered to reject it. In this case, valuing a commodity at the lowest price of the year on the last day, in a falling market, results in the deferment of taxable profits to a future year. This does not reflect the true income of the year. The department’s view, while stringent, ensures that profits on goods sold are matched with the costs of those goods. The AO’s interpretation, though tilted towards revenue, is not perverse.

8.5 This is a more serious issue of credibility. The appellant has submitted a detailed day-to-day production register. A examination of this register by this office confirms that the monthly totals are internally consistent. The register for March 2009 (Page 32) shows closing stock of 45.175 MT, which matches the Balance Sheet schedule. The audit report’s figure of 105.175 MT is clearly an arithmetical error derived from an overstated production figure of 368.168 MT. However, the legal issue is one of evidence. The assessment order u/s 143(3) was passed on 18.02.2015. The appellant, despite having multiple opportunities during the set-aside proceedings and the subsequent assessment, failed to produce this primary evidence before the AO. The “Day to Day production register” was submitted for the first time during the appellate proceedings on 18.07.2016 vide Written Submissions. The Hon’ble Supreme Court in CIT v. Shree Manjunathesware Packing Products (1998) 231 ITR 53 (SC) has held that while the appellate authority has the power to admit additional evidence, such power cannot be exercised to fill in the gaps and weaknesses of the appellant’s case when the appellant had ample opportunity to produce the evidence before the AO but failed to do so without reasonable cause. The appellant’s excuse of having “discontinued business” and not receiving notices is not a valid reason for non-production of statutory records like stock registers before the AO during the assessment proceedings.

8.6 Furthermore, the Tax Audit Report (Form 3CD) is a document prepared and verified by the statutory auditors. It is not the Assessing Officer’s duty to assume typographical errors. The onus was on the appellant to either file a rectification application u/s 154 of the Act to correct the Form 3CD, or to file a revised audit report. No such steps were taken for the year under appeal. The alleged overwriting on the audit report carries no legal weight as it is not an authenticated correction by the auditor.

8.7 The appellant’s action on both counts valuation method and quantity reconciliation suffers from a lack of bona fides. The valuation method adopted is contrary to the method declared in the statutory audit report. The quantitative discrepancy was not properly explained or rectified at the correct time or before the correct forum. Therefore, the AO was justified in adopting the annual average sales realization for valuing the closing stock of Refined Soya Oil. Regarding Acid Oil, in the absence of a revised audited report, the AO was justified in relying on the figures originally reported in Form 3CD. Consequently, Ground No. 1 of the appeal is dismissed.”

4. At the outset, Shri Bikram Jain, CA, Ld. Authorized Representative (‘AR’) of the assessee submitted that the addition made on account of under valuation of closing stock was nothing but revenue neutral as the closing stock of the relevant year would become opening stock of the subsequent year as the addition made in the relevant year would result consequential relief in the subsequent year. Thus, it would result a vicious cycle of addition in one year with consequential relief in the subsequent year. Further, he drew our attention to the fact that the Ld. Assessing Officer (‘AO’) accepted the assessee’s method of valuation of opening stock. However, he disturbed the valuation of closing stock only. Thus, the Ld. AO did not adopt a uniform method of valuation of opening stock and closing stock of the relevant year.

5. On merit, the Ld. AR submitted that the assessee had valued the entire stock/inventories (opening and closing) at the prevailing market rate on and around 31.03.2009, the date on which the Balance Sheet was drawn and Profit & Loss Account was finalized. Whereas, the Ld. AO had adopted the average sale price of the entire year instead of the prevailing sale price/market rate on and around 31.03.2009. To strengthen the argument that there was wide variation in the sale price/market rate of Soya Oil, the Ld. AR drew our attention to the order of the Ld. CIT, Raipur passed under section 263 of the Act, where the assessee’s submission showing average rate of Soya Oil during the relevant year was mentioned as under:

6. The Ld. AR demonstrated that the Ld. AO had taken average of the above four figures and valued the closing stock of Soya Oil @ Rs.52,927/- per MT instead of the assessee’s valuation @ Rs.42,536/- per MT. Similarly, the Ld. AO valued the Acid Oil also (applying the average sale price of the Acid Oil in FY 2008-09). He submitted that there was wide variation in sale price of soya oil and acid oil during the year which is also evident from the above four figures (para-5 of this order). The assessee had valued the closing stock at the prevailing market rate on and around 31.03.2009, the date on which the Balance Sheet was drawn and Profit & Loss Account was finalized. Such valuation was later found in the Statute under section 145A of The Act wef 01.04.2017. Such valuation was in accordance with the Accounting Standard-2 issued by the ICAI. According to which, the valuation had to be done either at the cost or Net Realizable Value (‘NRV’), which ever was lower. He emphasized on the procedure to arrive NRV, which simply defined the realizable value on and around the closing date of the Financial Year (‘FY’) and not the average sale price of the entire year.

7. The Ld. AR contended that the dispute was limited to interpretation of average realizable value. He submitted that the average price prevailing on or around the closing date of the FY had to be taken in accordance with Accounting Standard-2 (AS 2) issued by the ICAI for valuation of closing stock (effective for AY 2017-18 onwards) which clearly mentioned that the lower of the purchase cost or NRV as on and around the date on which the balance sheet drawn had to be adopted for valuation of closing stock and not the average sale price of the relevant FY. He submitted that the price of Soya Oil and Acid Oil being volatile throughout the year; hence, taking average price of the entire year would result a distorted figure/value of the closing stock much higher than the NRV as on and around the date on which the balance sheet drawn.

8. In respect to the Acid Oil, the Ld. AR submitted that the dispute was limited not only to the rate of valuation but also the quantity of the stock worked out by the Ld. AO. As far as the issue of rate of valuation, the Ld. AO had adopted the average sale price of the FY whereas the assessee had adopted the NRV as on and around the date on which the balance sheet was drawn. With respect to the quantity of closing stock of acid oil, the Ld. AR admitted that there was typographical error in the Form 3CD where production was shown at 368.168 MT instead of 308.168MT whereas the correct figure had been shown in the Balance Sheet of the assessee. He submitted that the correct quantity of closing stock would be worked out by taking opening stock of the Acid Oil at 102.662 MT plus (+) Production of 308.168 MT minus (–) Sale of 365.655 MT = Closing Stock of 45.175 MT. He submitted that the said actual figures got fortified with the day to day production register and the audited balance sheet submitted along with the ITR (except the clerical error in 3CD report). He further submitted that the Ld. CIT(A), vide paragraph 8.5 of the impugned order, had given categorical finding that the audited figure of 105.175 MT was an arithmetical error derived from an overstated production figure of 368.168 MT. The Ld. AR distinguished the cases relied upon by the Ld. CIT(A). He further submitted that the Ld. CIT(A) had not accepted the additional evidence submitted by the assessee during the course of appellate proceedings on the reasoning that the additional evidence produced for the first time before him was for filling the gap. The Ld. AR further submitted that the said evidence was not created evidence but a primary document justifying the details mentioned in the audited balance sheet filed along with the ITR. He contended that the audit report was not the primary document; hence, committing error in the audit report could not be ruled out whereas the production registers, Balance Sheet being the original documents had more sanctity than that of the audit report. Rejecting the primary documents as additional evidence on technical ground by the Ld. CIT(A) after categorical finding in favour of the assessee in para 5 of the impugned order was not justified.

9. On the other hand, the Ld. Sr. DR placed reliance on the finding of the authorities below and prayed for dismissal of the appeal.

10. We have heard both parties and have perused the material available on the record. The accounting policies adopted in valuation of stock/inventories have been disclosed in the Financial Statements. As per the section 145A Act, wef 01.04.2017, the stock/inventories have to be valued at cost or Net Realizable Value (‘NRV’), whichever is lower. The NRV is the value of the stock that can be realized upon the sale of the stock less a reasonable estimate of the costs associated with the sale of stock. However, section 145A Act was in existence in the relevant year. Even then, it is worth mentioning here sections 145 and 145A of the Act applicable in the relevant year and thereafter for proper appreciation of the law evolved over the years:

“Section 145 as on 01.04.2009 and amendment made thereafter:

(1) Income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall, subject to sub-section (2), is computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify [income computation and disclosure standards] to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) [has not been regularly followed by the assessee, or income has not been computed in accordance with the standards notified under sub-section (2),] the Assessing Officer may make an assessment in the manner provided in Section 144 i.e. Best Judgment Assessement.”

“145A as on 01.04.2009:

Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be—

(a ) in accordance with the method of accounting regularly employed by the assessee; and

(b ) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation.— For the purposes of this section, any tax, duty, cess or fee

(by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.]”

‘145A since 01.04.2010:

Notwithstanding anything to the contrary contained in section 145,—

(a) the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be— (i ) in accordance with the method of accounting regularly employed by the assessee; and (ii ) further adjusted to include the amount of any tax, duty, cess or fee

(by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation. —For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.

(b) interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received.

“Section 145A from the 01.04.2017:

For determining the income chargeable under the head “Profits and gains of business or profession”, — (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation notwithstanding any right arising as a consequence to such payment of taxes fees or cess as the case may be. ….. …..

Provided further that the comparison of actual cost and net realisable value of securities shall be made category-wise.”

11. As per the applicable provisions of the Act in the relevant year, the assessee is required to maintain books of accounts. The assessee can maintain books of accounts under cash basis or mercantile basis of accounting. During the relevant year the valuation of stock/inventory has to be done in accordance with the method of accounting regularly employed by the assessee; and further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. During the relevant year, the assessee was not required to value its stock/inventories as per the provisions of section 145A of the Act because section 145A of the Act came into existence w.e.f. 01.04.2017. During the relevant year, there was no concept of valuation of stock/inventory at the cost or NRV, whichever is lower. The concept of valuation of stock/inventory at the cost or NRV, whichever is lower was brought into the Statute with effect from 01.04.2017. Prior to that, the accounting method regularly employed by the assessee including the valuation of stock/inventory was the sole requirement for valuation of stock/inventory unless the books were not rejected under section 145 of the Act.

12. The first dispute is that whether the average annual sale/purchase price of stock/inventory is validly applied by the Ld. AO [upheld by the Ld. CIT(A)] for valuation of stock/inventory over the NRV. The principle that where a later amendment makes explicit clear that what the earlier text already conveyed is declaratory and may be used as an aid to the construction of the earlier provision has been applied by the Hon’ble Supreme Court in cases of Vatika Township (P) Ltd., (2014) 367 ITR 466, Allied Motors (P) Ltd. (1997) 224 ITR 677, Podar Cement (P) Ltd., (1997) 226 ITR 625 and Zile Singh v. State of Haryana, (2004) 8 SCC 1. Therefore, the substitution of clause (i) to section 145A of the Act, by the Finance Act, 2018, wef 01.04.2017 is nothing but only a declaration of method of valuation of stock/inventories.

13. Keeping in view the principle that where a later amendment makes explicit clear that what the earlier text already conveyed is declaratory and may be used as an aid to the construction of the earlier provision; we are of the considered view that the stock/inventories have to be valued at cost or Net Realizable Value (‘NRV’), whichever is lower. Thus, the purpose of valuation of stock/inventories is on lower side. Further, we are also of the considered view that the NRV has to be worked out based on the realizable value in and around the date on which the Balance Sheet is drawn otherwise it would result distorted figures particularly where there is substantial fluctuation in prices over the period. The assessee is duty bound to follow a regular method of accounting during the relevant AY, which it has followed consistently over the years. Thus, keeping in view the above observations, we find merit in the submission of the Ld. AR that the valuation of stock/inventories done based on the prevailing market price as on and around the date on which the Balance Sheet drawn followed regularly by the assessee is justified. We therefore, set aside the finding of the Ld. CIT(A) and direct the Ld. AO to adopt the prevailing market price as on and around the date on which the Balance Sheet drawn in this case over and above the average annual price and allow the consequential relief to the assessee on this score.

14. With respect to the working of closing stock of Acid Oil in quantitate terms, we find that the Ld. CIT(A) was satisfied with the submission of the assessee (para 8.5 of the impugned order). However, he did not admit the evidence and did not allow relief on this score on the reasoning that the evidence was produced after lapse of substantial time. But we do not see any occasion where the assessee failed to produce the documents after reassessment. The production register and Balance Sheet annexed with the ITR being primary documents have to prevail over the detail mentioned in 3CD report being secondary documents. Thus, the addition made on this score is also deleted. The assessee gets consequential relief.

15. In the result, the appeal of assessee is allowed as above.

Order pronounced in the open court on 06/10/2026.