The appeal by the Revenue and the cross-objection by the assessee arise out of the order dt. 26th August, 1993 of the CIT(A)-II, Indore, pertaining to the asst. yr. 1989-90.
2. We take under the appeal of the Revenue first. The first grievance of the Revenue is that the CIT(A) erred in deleting the addition of Rs. 42,745 made on account of undervaluation in silver, silver ornaments account Briefly stated, the assessee is a firm engaged in the business of purchase and sale of gold and silver ornaments. The account year consisted of 17 months. The AO found that the assessee had 6506 gms. of silver bullion, which was valued @ Rs. 6,500 per kg. The assessee had 5,462 gms. of closing stock of silver fancy ornaments, which was valued @ Rs. 5,000 per kg. Likewise, the assessee had 25,421 gms. of silver ornaments in closing stock which was valued @ Rs. 4,800 per kg. The AO did not accept the above valuation of the closing stock. Applying the sale rate as disclosed in the last sale bill of the above articles, the AO increased the value of closing stock which resulted in an addition of Rs. 1,862 in silver bullion account, Rs. 10,378 in silver fancy ornaments account and Rs. 30,505 in silver ornaments account aggregating in all to Rs. 42,745 which he added to the income of the assessee on account of undervaluation of closing stock.
3. Before the CIT(A), it was contended that the assessee has consistently been following the method of valuation of closing stock at lower of the cost or market price. It was also submitted that closing stock consisted mainly of the opening stock. The submission of the assessee was not acceptable to the CIT(A) in toto. According to him, for want of evidence it is not acceptable that the closing stock consisted of mostly of the opening stock. He was of the view that in the absence of point to point tally of sales with purchases, neither the principle of last in first out nor that of first in first out can be applied in this case. He, therefore, held that the closing stock represents part of the closing stock and part of purchases made during the year. He accordingly expressed the view that closing stock should be valued at the average cost price calculated on the basis of value of opening stock and the purchases made during the year. He found that the average purchase price of silver ornaments worked out to Rs. 4,500 per kg. and since the assessee had itself valued the closing stock @ Rs. 4,500 per kg., no addition was called for. For similar reason, no addition was necessary in silver fancy ornaments account. He also recorded the finding that a small quantity of silver bullion was also valued by the assessee at more than the average cost price and, therefore, no addition is called for in this account as well. He, therefore, deleted the impugned addition of Rs. 42,745. The Revenue is dissatisfied.
4. We have heard the arguments advanced by the learned representatives of the parties. The learned Departmental Representative highlighted the point that the assessee had itself submitted before the AO that the closing stock was valued on the basis of market rates on closing date of accounting year. He, therefore, submitted that the impugned addition made by the AO is justified. The learned counsel for the assessee, on the other hand, submitted that the recognised method of valuation of closing stock is at cost or market rate, whichever is lower. Since closing stock had consisted mostly of opening stock, the assessee had valued the closing stock accordingly, whereas the AO adopted market rate. He, however, submitted that the CIT(A) deleted the impugned addition on the ground that in the absence of point to point tally of sales with purchases, the principle of LIFO or FIFO was not applicable.
He, therefore, rightly held that the closing stock should be valued at the average cost price calculated on the basis of value of opening stock and the purchases made during the year. It was on application of the above method that he found that no addition on account of undervaluation of closing stock was called for. His decision deserves to be confirmed.
5. On consideration of the rival submissions, we are inclined to agree with the stand of the assessee. On facts, which remain uncontroverted, we find no infirmity in the order of the CIT(A) which is hereby upheld.This ground of the Revenue fails.
6. The next grievance of the Revenue relates to deletion of addition of Rs. 72,132 made under S. 40A(3). The AO found that the assessee had purchased gold ornaments from 5 persons to whom payments exceeding Rs. 10,000 was made in cash in violation of S. 40A(3). On query, it was explained to the AO that those payments were made for purchases from poor villagers for old gold articles. They needed the immediate cash.
It was claimed that such payments were covered by r. 6DD(j). The explanation was not acceptable to the AO for want of satisfactory evidence. Before the CIT(A), it was contended that the purchase memos itself prove that all the five persons were villagers. Two of the sellers had also deposed in their affidavits that they were agriculturists, one of them deposed that he had no bank account and that they had sold the old gold ornaments on the condition that they would receive payments in cash. The copies of two affidavits were also filed before the CIT(A). It was argued before him that there were exceptional circumstances in which the assessee made payments in cash.
The submissions of the assessee found favour with the CIT(A). He observed that the assessee is carrying on business in the town of Burhanpur, which is surrounded by many tribal villages. He further noted that as per Gold Control Act, the assessee is required to maintain complete address of sellers which has duly been maintained.
He, therefore, held that there is nothing to doubt the genuineness of the transaction. He, therefore, ultimately held that the assessees case is covered by r. 6DD(j). He accordingly deleted the impugned addition.
The Revenue is dissatisfied.
7. We have heard the learned representative of the parties. It is observed from the assessment order that the assessee had furnished the explanation that the sellers are villagers who had sold the old gold ornaments as they required immediate cash payment. There is no inkling in the assessment order that the AO had required the assessee to substantiate the above explanation with evidence. It is not in dispute that the assessee has maintained necessary particulars including the complete addresses of the sellers as required under the Excise Act and Rules. Since the complete addresses of the villagers are available, the identity can easily be established by necessary inquiries, if need be.
The signatures of the sellers are available on the respective receipt vouchers, copies of which are available at pp. 10-11 of the paper-book.
The impugned transactions being with the villagers, who normally do not have bank accounts and resort to selling their old gold ornaments when cash is needed by them, we hold that there did exist unavoidable circumstances for making cash payments to them. We, therefore, agree with the findings of the CIT(A) and decline to interfere.
9. In the cross-objection, the first ground regarding maintenance of addition of Rs. 50,153 on account of undervaluation of closing stock of gold ornaments has not been pressed. It is, therefore, dismissed as not pressed. The remaining grounds are only in support of the order of the CIT(A).
Since we have already upheld the order of the CIT(A) in appeal of the Revenue, these grounds have become infructuous and are dismissed as such.
11. In fine, the appeal of the Revenue as also the cross-objection of the assessee are dismissed.