Income Tax Department Starts Action Against Jewellers Using Accounting LIFO to Pay Less Tax

Income Tax Department Starts Action Against Jewellers Using Accounting LIFO to Pay Less Tax

The Income Tax Department has discovered that some jewellery businesses have been using accounting tricks to reduce their taxable income. This has been happening for around five to six years. One such company reportedly had to pay around Rs 100 crore in back taxes after being caught underreporting profits.

The main issue is how these jewellers have been valuing their inventory. They have switched from the FIFO method (first-in, first-out) to LIFO (last-in, first-out), which goes against income tax rules. This change made it seem like their closing gold stock, including unused raw gold, semi-finished items, and unsold jewellery, was worth less, which showed lower profits and helped them pay less tax.

Under FIFO, older gold is sold first, so the closing shows the cost of newer, more expensive gold. This increases the value of closing stock and shows a higher profit. But under LIFO, the most recently purchased gold is sold first, leaving older, cheaper gold in the stock. It shows the higher cost of goods sold, which lowers the profit.

The income tax department has ordered the officials to find the cases where LIFO has been used, as many jewellers are accused of wrongly benefiting from the increased price of gold to avoid tax payment. The price of Gold has increased from Rs 35,000 per 10 grams in 2019 to Rs 1,01,640 per 10 grams at present.

An expert explains that from the financial year 2016-17, the Income Tax Act, under the rules of ICDS II, only allows companies to use either FIFO or the weighted average cost method to value their inventory. LIFO has been clearly disallowed. One jeweller had challenged this, but the court rejected that and supported the rule. Selecting one method over the other can affect the timing of profit recognition, as the prices of gold have been increasing rapidly over the past few years.

Tax authorities are allowed to inspect how businesses keep their accounts and decide whether the profit calculations are accurate. The experts have warned that whichever method is used, it must fairly reflect the true cost of bringing the items to their current condition and must be used consistently over time.