Closing stock accepted in preceding year automatically constitutes opening stock for subsequent year.

ORDER

1. This appeal under Section 260A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) has been preferred by the Revenue against the order passed by the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur (hereinafter referred to as “the Tribunal”) in G.D. Pansari And Sons v. ITO [ITA No.172/Jodh/2018, dated 15-5-2019] for the Assessment Year 2014-15, whereby the Tribunal allowed the appeal preferred by the respondent-assessee and deleted the additions/disallowances made by the Assessing Officer and sustained by the Commissioner of Income Tax (Appeals).

2. The appeal was admitted by this Hon’ble Court vide order dated 07.01.2020 on the following two substantial questions of law:

“1. Whether the ld. ITAT was justified in deleting the addition of Rs.7,95,50,000/- by completely ignoring the facts brought on record by the AO regarding evasion of tax by the assessee by suppressing the profits earned from sale of shares by showing fictitious loss from trading of commodities where the assessee had overvalued the opening stock as a result of purchases related party at much higher rates as compared to prevailing market rates?

2. Whether the ld. ITAT was justified in allowing interest claim of Rs.1,65,50,000/- by completely ignoring the fact that the credit for which interest has been claimed to be paid by the assessee has already been proven to be false credit against which no transaction had taken place?”

2.1. Brief facts of the case are that the respondent-assessee, an HUF, filed its return of income for the Assessment Year 2014-15 on 29.11.2014, declaring total income of Rs.4,88,060/-. The case was selected for scrutiny and assessment under Section 143(3) of the Act was completed on 29.12.2016.

2.2. During the course of assessment proceedings, the Assessing Officer examined, inter alia, the transaction relating to purchase of Guar Dal by the respondent-assessee from M/s Ganganagar Guar Gum Pvt. Ltd., a related concern in which the Karta of the respondent-assessee-HUF was a director holding 20.25% shareholding.

2.3. The respondent-assessee had shown purchase of 1600 quintals of Guar Dal at the rate of Rs.70,000/- per quintal. The respondent-assessee claimed that the purchase had taken place on 31.05.2012/20.06.2012, whereas the Assessing Officer treated the purchase as having been made on 31.03.2013. The Assessing Officer also examined the difference between the purchase price and the prevailing market rate, the relevant entries and supporting material and other circumstances surrounding the transaction.

2.4. The respondent-assessee had shown the aforesaid quantity of Guar as closing stock as on 31.03.2013. The Assessing Officer, however, doubted the valuation of the corresponding opening stock as on 01.04.2013 and recomputed the value by adopting the prevailing market rate, resulting in an addition of Rs.7,95,50,000/-.

2.5. The Assessing Officer also disallowed the interest claimed by the respondent-assessee on the outstanding credit in the account of M/s Ganganagar Guar Gum Pvt. Ltd.

2.6. The Commissioner of Income Tax (Appeals), vide order dated 10.01.2018, upheld the assessment order. Aggrieved thereof, the respondent-assessee preferred an appeal before the Tribunal. Vide order dated 15.05.2019, the Tribunal allowed the appeal preferred by the respondent-assessee and deleted the additions/disallowances which are the subject matter of the present appeal.

3. Learned counsel appearing for the respondent-assessee submits that the controversy concerning the treatment of the opening stock is covered by the settled legal position laid down by the Hon’ble Supreme Court and subsequently recognised by this Court.

3.1. Learned counsel places reliance upon V.K.J. Builders & Contractors (P) Ltd. v. CIT [2009] 318 ITR 204 (SC)/[Civil Appeal No.5197 of 2009, decided on 06.08.2009, reported Court observed in paragraph 4:

“4. We find merit in this civil appeal. It is the fundamental principle of accountancy that the figure of the closing stock of the earlier year has to form the opening stock of the next accounting year. In the present case, we find that after the alleged suppression of the work-in-progress came to be detected, a declaration was filed under the KVS Scheme on the basis of the order passed by the AO on 27th Feb., 1998 which declaration was accepted by the designated authority (presumably after obtaining the report from the AO). In the circumstances, the AO ought not to have rejected the application of the assessee under s. 154.”

3.2. Learned counsel further relies upon Mahendra Mills Ltd. v. P.B. Desai, Appellate Assistant Commissioner of Income Tax [1975] 99 ITR 135 (SC) [Civil Appeal No.1793 of 1970, dated 04-03-1975] , wherein the Hon’ble Supreme Court observed in paragraph 10:

“10. The observations of this Court, quoted above, fully apply to the facts of the case in hand. It will bear repetition that the closing stock for the asst. yr. 1959-60, as entered in the books of the assessee, was Rs. 5,89,439, and as found by the ITO was Rs. 8,04,121. Since the closing stock of one assessment year furnishes the figure of the opening stock for the succeeding year, it follows that the record showing the closing stock of one asst. yr. 1959-60 formed a part of the evidence relevant to the assessment for the asst. yr. 1960-61. Thus, to the extent of ascertaining the closing and opening stock positions, the two assessments telescoped into each other. Indeed, it was on this basis that the AAC had by his decision dt., 30th June, 1965, allowed the assessee’s appeal regarding asst. yr. 1960-61. The Tribunal’s finding, that the value of the closing stock for asst. yr. 1959-60 should be Rs. 5,89,439 had completely replaced the ITO’s finding in regard to that fact w.e.f. the date of the ITO’s order relating to asst. yr. 1959-60. If the ITO’s finding with regard to the closing stock for asst. yr. 1959-60 was relevant to and part of the ‘record of appeal’, the Tribunal’s decision which superseded that finding was equally so within the contemplation of s. 35 of the Act. It cannot be gainsaid that the mistake in regard to the opening stock for asst. yr. 1960-61 being Rs. 8,04,121 was quite apparent when the AAC undertook to rectify his appellate order dt., 30th June, 1965, the correct figure of valuation finally determined by the Tribunal being Rs. 5,89,439. Thus considered, it is clear that for the purpose of ascertaining the true stock position the record of the assessment for asst. yr. 1959-60, including the Tribunal’s decision, was not extraneous or irrelevant to the record of the appeal and could legitimately be looked into for the purpose of correcting the mistake by the AAC.”

3.3. Learned counsel further places reliance upon CIT v. Hindustan Zinc Limited [D.B. Income Tax Appeal No.23/2003, decided on 02-05-2017], by a Co-ordinate Bench of this Hon’ble Court, wherein, while dealing with questions relating to valuation of closing stock, this Court observed:

“The question No.3 related to disallowance on account of change in valuation of closing stock. This issue too has already been settled by the Apex Court in the judgment reported in 318 ITR (SC) 204 and 99 ITR (SC) 135, holding therein that closing stock becomes the opening stock of the next year and as such the Income Tax Appellate Tribunal was justified to adjust the alleged loss of Rs.78,43,000/- by excluding the interest on government loan and office expenses from the cost of closing stock.

The question No.4 pertains to valuation of closing stock of more cake etc. This issue has also been settled by the Supreme Court in the judgment reported in 318 ITR (SC) 204 and 99 ITR (SC) 135, by holding that the closing stock becomes the opening stock of the next year. As such, this issue is also decided in terms of the finding given with regard to question No.3.

The question No.5 also deserves to be decided in the same terms as that pertains to a deletion of addition on account of valuation of closing stock of slow and non moveable stores and spares less by 25%.”

3.4. Learned counsel submits that the aforesaid judgments settle the legal position that the closing stock of one assessment year forms the opening stock of the succeeding assessment year and that, for the purpose of determination of the true stock position, the two assessment years are interlinked.

3.5. Learned counsel submits that the Tribunal has considered the aforesaid position in the facts of the present case and, upon noticing that the closing stock as on 31.03.2013 had been accepted by the Department, has rightly deleted the addition made by changing the valuation of the corresponding opening stock as on 01.04.2013.

4. Learned counsel appearing for the Revenue has been heard.

5. This Court observes that the legal proposition advanced by learned counsel for the respondent-assessee is settled by the judgments relied upon. In V.K.J. Builders & Contractors (P) Ltd. (supra), the Hon’ble Supreme Court has expressly held that the figure of closing stock of the earlier year forms the opening stock of the next accounting year. In Mahendra Mills Ltd. (supra) Appellate Assistant Commissioner of Income explained the interrelationship between the two assessment years and held that, to the extent of ascertaining the closing and opening stock positions, the two assessments “telescoped into each other”.

6. The aforesaid principle has also been recognised by this Court in Commissioner of Income Tax, Udaipur (supra), wherein this Court specifically observed that the issue concerning valuation of closing stock “has already been settled by the Apex Court” and reiterated that the closing stock becomes the opening stock of the next year.

7. This Court finds that the aforesaid settled legal position has direct bearing on the controversy arising in the present appeal. The Tribunal, after considering the material on record, found that the disputed quantity of Guar had been shown as closing stock as on 31.03.2013, that the Department had accepted such closing stock and that the books of account had not been rejected. The Tribunal further found that no material had been brought on record to explain the change in valuation of the same stock on 01.04.2013.

8. This Court finds that the Tribunal, on the aforesaid factual foundation, deleted the addition of Rs.7,95,50,000/- by observing that when the Department had accepted the closing stock shown as on 31.03.2013, the impugned addition made by doubting the value of the opening stock was not justified.

9. As regards the second substantial question of law, this Court finds that the Tribunal recorded that the relevant outstanding credit pertained to the preceding year and further noticed that the Assessing Officer had not doubted the outstanding amount in the account of M/s Ganganagar Guar Gum Pvt. Ltd. On that basis, the Tribunal deleted the disallowance of interest.

10. Learned counsel appearing for the Revenue, on being confronted with the aforesaid judgments and the findings recorded by the Tribunal, does not oppose the position advanced on behalf of the respondent-assessee.

11. This Court finds that, in view of the settled legal position noticed hereinabove, the findings recorded by the Tribunal and the fact that the Revenue does not oppose the position advanced on behalf of the respondent-assessee, no further adjudication is called for in the present appeal.

12. Consequently, the order dated 15.05.2019 passed by the Tribunal does not call for interference. The appeal is, accordingly, dismissed. The substantial questions of law are answered accordingly.