Case Law Details

Case Name : ITO Vs M/s. Mahendra Traders (ITAT Kolkata)
Appeal Number : IT Appeal No.-1673/2009
Date of Judgement/Order : 18/11/2015
Related Assessment Year : 2006-07

Brief of the case:

  • The ITAT Kolkata in the case of M/s Mahendra Traders held that it is generally accepted prudent practice that the closing stock to be valued at lower of cost or net realizable value. Further, net realizable value means the value which the goods would fetch at the time of actual sale.
  • Thus, when there is alteration in contract with the major buyer resulting into fetching lesser sale price in future, the assessee was justified in valuing the stock taking into consideration the reduced sale price.

Facts of the case:

  • The assessee firm was engaged in trading of Iron and Steel, it got dissolved on 30.06.2005. After dissolution firm was converted into proprietorship concern with effect from 1.7.20005 and accounts for the period 1.7.2005 to 31.3.2006 are prepared separately.
  • The firm in its tax audit report stated that valuation of stock has been done at cost or net realizable value whichever is higher.The AO found that the assessee is adopting First in First out (FIFO) method for valuation of stock. He also observed that MS scrap purchased between 9.6.2005 to 27.6.2005 were lying in closing stock as on the date of dissolution. Accordingly, AO substituted the value of closing stock in accordance with valuation method of cost of net realizable value whichever is higher, in which he adopted Rs. 18,470 as net realizable value (average final sale price made on 30.6.2005).As such AO made an addition of Rs. 12,54,947/-.
  • On appeal to CIT(A) , the addition was deleted by him on the ground that the assessee had valued stock as per generally accepted prudence norm-cost or net realizable value whichever is higher and the otherwise so stated in tax audit report was mere a typo error.
  • Aggrieved by the order of CIT(A) , revenue is in appeal before ITAT.

Contention of the Assessee:

  • The assessee submitted that due to typographical error (typo)  it was erroneously stated  inadvertence that the valuation of stocks are done at the higher of cost of net realizable value instead of lower of cost or net realizable value.
  • Further, the same was brought the notice of AO even before the show cause notice issued to assessee asking for explanation in difference in valuation of stock.
  • Further, the net realizable value had been adopted lower than the latest sales price realized because Tata Motors who was the main buyer of MS scraps changed its long term contract with effect from 1.7.2005 and brought down the rate per MT substantially.

Contention of the Revenue:

The learned counsel for the department supported the order of AO and justified the addition made on account of undervaluation of closing stock.

Held by ITAT Kolkata:

  • ITAT observed that in the notes to the accounts forming integral part of the financial statements it was clearly stated the valuation of inventories have been made at the lower of cost or net realizable value. It is therefore, the plea of the assessee that that a typographical error had crept in in the Form 3CD of the tax audit report was understandable.
  • The valuation of stock at cost or net realizable price whichever is lower is an accepted and established rule of commercial practice as was held by the Hon’ble Supreme Court in the case of Chainrup Sampatram vs CIT reported in (1953 (24 ITR 481 (SC).
  • Further, the AO had taken the last realized sale price of M.S Scrap as the net realizable value for the purpose of valuation of closing stock as on the date of dissolution. But while doing so AO had overlooked one crucial fact that the main buyer of the assessee M/s Tata Motors Ltd had reduced the rate per MT of M.S. scrap to Rs.15107.4 per MT with effect from 1.7.2005.
  • As such the net realizable value which assessee could realized should be such reduced price and the same had been used by the assessee while working out the value of closing stock.
  • Thus, tribunal held that the assessee had valued the stock in accordance with generally accepted prudence norms and followed it consistently, as such the same could not be interfered.
  • In result the appeal filed by the revenue was dismissed.
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