Opening Stock Must be Revalued by Same Method as used in Valuation of Closing Stock: ITAT to AO in Gopu Nandilath Case [Read Order]

The Cochin Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the Assessing Officer (AO) must revalue the opening stock using the same method applied for the revaluation of the closing stock and remanded the matter back to the file of the AO for fresh adjudication.

Gopu Nandilath Gopalakrishnan (assessee) an individual engaged in the business of dealing in domestic appliances. The assessee had originally filed a return disclosing an income of ₹2,06,37,450. The AO completed the assessment at a total income of ₹6,07,26,452

The addition of ₹3,77,16,583 was made because the assessee had valued the closing stock by excluding the component of VAT. The AO invoked the provisions of Section 145A of the Income Tax Act to include the tax/duty component in the closing stock valuation.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (appeals)[CIT(A)]. The CIT(A) upheld the AO's action. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.

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The assessee argued that if the AO adopted an inclusive method (including tax/duty) for valuing closing stock, the opening stock must also be revalued using the same method.

The two-member bench comprising Inturi Rama Rao (Accountant Member) and Anikesh Banerjee (Judicial Member) noted that Section 145A mandates that inventory valuation must be adjusted to include the amounts of tax, duty, cess, or fees actually paid to bring the goods to their location and condition.

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The tribunal found merit in the assessee's contention regarding the opening stock. It relied on the decision of the Delhi High Court in CIT v. Mahavir Alluminium, which, in turn, followed the Privy Council's ratio that adjustments must be made in the opening stock when the closing stock is revalued.

The tribunal ruled that the valuation of the opening stock was also required to be revalued on the same basis adopted for the revaluation of the closing stock by following this binding precedent.

The tribunal set aside the matter and directed the AO to revalue the opening stock accordingly, after providing the assessee an opportunity to be heard. In the result, the appeal filed by the assessee was partly allowed for statistical purposes.

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