LIFO Method can be used for Valuation of Stocks: ITAT [Read Order]

In the case of M/s. Roopshree Jewellers (P) Ltd. vs. ITO, the Kolkata Bench of Income Tax Appellate Tribunal ( ITAT ) held that Last-In-First-Out (LIFO) method of accounting can be used for valuation of stocks, if the assessee hadn’t deviated from the method of accounting adopted.

The assessee, M/s. Roopshree Jewellers (P) Ltd, has a business of manufacturing and selling of Gold & Diamond Studded Jewellery. They filed its return of income for the AY 2010-11, and declared total income of Rs.6.10 Lakhs.  As there were different varieties of Jewellery items manufactured and sold by the assessee, they found it impractical to keep item wise details of stock. The assessee informed the Assessing Officer (A.O.) that they followed LIFO method of accounting since the inception of the business.

The Assessing Officer observed that the assessee were unable to identify the items of jewellery that were there in the opening stock, purchase and closing stock. According to the assessee, it was just an assumption that the jewellery which was purchased last was the first to be sold and on that basis what was left was out of the earlier purchase.

Unable to accept the method adopted by the assessee, the A.O. observed that inventories are to be valued as per the method prescribed by Under the Accounting Standards (AS) 2 issued by the Institute of Chartered Accountants of India (ICAI). AS-2 prescribes using either First-In-First-Out (FIFO) method of accounting or weighted average method. The A.O. was of the opinion that as the assessee is a company, it is bound by the AS-2.

The A.O. observed that in the absence of records to indicate as to whether the sales were out of the jewellery of the opening stock or out of the purchases made during the year, an estimate of the cost of gold, which may be charged as an expense in arriving at the profit for tax purposes, has got to be made. The question was whether these expenses should be, determined on the basis of LIFO assumption, as made by the assessee, or FIFO assumption. The A.O. observed that FIFO assumption approximates more closely to the reality. He observed that LIFO method adopted by the assessee is not giving true profit of the year and hence method adopted by the assessee company was rejected. The A.O. accordingly adopted the weighted average method as prescribed in AS-2 of ICAI to reach nearer to true profit The assessee had declared the value of closing stock at Rs 8,64,58,552/-. Accordingly, the A.O. added the difference of Rs 3,91,71,167/- to income of the assessee on account of undervaluation of closing stock.

The assessee appealed before CIT(A). the counsel for the assessee contended that there was no deviation in the method of accounting employed during the year as could be evident from the tax audit report, wherein the tax auditor had not reported any deviation adopted by the assessee. It was submitted that the valuation of the closing stock of last year which was the opening stock the year under consideration was duly accepted by the AO in the earlier year and therefore cannot be disturbed. It was further submitted that LIFO method is a recognized method for the purpose of valuation of the closing stock. The assessee placed reliance on the decision of Madhya Pradesh High Court in the case of CIT vs J.P. Patel wherein it was held that LIFO method is well recognized method and once a recognized method has been taken recourse to and the same has been adopted, there is no reason to discard the same. CIT(A) granted relief to the assesse and deleted the addition. Revenue Appealed before ITAT.

The Bench Comprising of Judicial Member A.T. Varkey & Accountant Member M. Balaganesh relying on the decision of various courts found that the CIT(A) had rightly deleted the addition made by the A.O.  and confirmed the earlier decision of the Tribunal in ACIT vs Jewell India Jewellers, wherein it was observed “It is quite natural that jewellery being a fashion industry, the old stocks would most of the times remain with the assessee and the revenue cannot expect the old stocks to be sold out first though it would remain in the wish list of the jeweller. We find that the aforesaid valuation exactly fits into the accepted method of valuation for a jeweller as approved in the decision of Cochin Tribunal in ITO vs. Sree Padmanabha Jewellery Mart.”