Quick Summary
As gold prices surge to historic highs, several jewellers have come under the Income Tax Department's radar for allegedly manipulating inventory valuation methods to underreport profits and reduce tax liability. Sources familiar with the probe told that the department has detected instances of 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-particularly in valuing unsold go
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FAQ :
The department is investigating jewellers for allegedly manipulating inventory valuation methods to underreport profits and reduce their tax liability, particularly by using the prohibited LIFO method.
LIFO (Last-In-First-Out) assumes the most recently purchased inventory is sold first. It's prohibited under ICDS II because it can inflate the cost of goods sold, lower reported profits, and reduce taxes, especially when inventory costs are rising.
The Income Computation and Disclosure Standards (ICDS II) permit the use of either the FIFO (First-In-First-Out) or Weighted Average Cost method for inventory valuation, unless exceptional conditions apply.
Rising gold prices post-pandemic made the LIFO strategy more tempting for jewellers, as it allowed them to significantly reduce reported profits and taxes by valuing unsold stock at older, lower prices.
Jewellers found using the LIFO method in violation of the law may face audits, reassessments, penalties, back taxes, and potentially prosecution.
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