In a major revelation, the Income Tax Department has unearthed a clever accounting ploy allegedly used by several jewellers to reduce tax liabilities amid rising gold prices.

The jewellers may have secretly shifted from the permitted FIFO (First In, First Out) method to the now-banned LIFO (Last In, First Out) approach to present reduced profits on paper — a tactic that could significantly shrink their tax burden.

Under FIFO, the older (and cheaper) stock is considered sold first, leaving the newer, more expensive inventory on hand — thereby increasing the value of unsold stock and reflecting higher profits.

However, by using LIFO, jewellers claim to sell the latest (costlier) gold first. The older, cheaper gold remains in their books, artificially lowering the value of closing inventory — and, in turn, the declared profit and tax liability.

This trick is problematic because India’s Income Tax Act, since FY 2016-17, strictly prohibits the use of LIFO. Under ICDS II (Income Computation and Disclosure Standards), only FIFO or the weighted average cost method is allowed for inventory valuation.

The Income Tax Department is reportedly gearing up to take action against jewellers found indulging in this accounting manipulation, which could include penalties, income reassessments, and potential prosecution in serious cases.

With gold prices continuing to climb, authorities are expected to tighten scrutiny over the sector to curb such evasive practices.

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