IT Dept. Crackdowns Jewellers for manipulating Accounting Rules

As the gold prices are increasing, some of the Jewellers have violated accounting rules to put down profits and pay lower tax. The Income Tax Department has noticed a few units which violated regulations by changing the way they amount their inventories a  strategy that allow them record lower profits.

From inquiry the Income Tax Department has identified cases of some Jewellers switching from the approved FIFO (First In First Out) or Weighted Average Cost methods to the Prohibited LIFO (Last In First Out) method for inventory valuation specifically in valuing unsold gold stock, finished Jewellery and semi finished goods.

The same strategy is being used for the past six years. One of the Jewellery houses has being caught for paying approx. Rs 100 crore tax on the suppressed earnings and used the same method mentioned above.

Under the Income Computation and Disclosure Standards (ICDS II) which came into force from Assessment Year 2017-18, the LIFO has been clearly restricted. and according to the ICDS, taxpayers are only permitted to use either the FIFO or to use Weighted Average Cost method unless exceptional cases.

The gold prices in India increased post pandemic may have been tempted the Jewellers to use LIFO strategy. Prices increased from Rs 31,000 per 10 grams in 2017 to over Rs 97,000 in 2015.

One experts says, The IT department has now administrate regional offices to examine accounting records and identify any cases where LIFO was used in violation of the law. The closing stock amount does not directly generate profits, it helps in calculating profits. Incorrect statement of inventory valuations misrepresents trading results and can results in tax evasion.

Another tax consultant said that ICDS II especially in sectors like Jewellery clearly restricts methods like LIFO where the inventory items are replaceable. The tax office is well within its powers to question the perfection of profit declaration based on inappropriate inventory methods.