TMI Blog2002 (9) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... more scientific and logical and was approved by the Accounting Standards. However, the Assessing Officer did not accept the contention of the assessee on the ground that by changing the method of valuation of the closing stock, the assessee had understated the value by Rs. 45,50,618. He, therefore, made an addition of the same. 3. Aggrieved, the assessee impugned the addition in appeal before the Commissioner (Appeals). It was submitted before the Commissioner (Appeals) that in the earlier years, the element of excise duty was being loaded in the closing stock but the excise duty was a running account, which was to be adjusted or paid on account of excise duty payable on sales. The amount of excise duty paid was adjusted against the modvat credit and the remaining amount was shown in the balance sheet as the current assets and current liabilities. It was submitted that the changed method of valuation of closing stock by excluding the excise duty was adopted to determine the correct profitability based on the advice given by the auditor. Since the change in the method of valuation was bona fide and thereafter the same method had been regularly followed, the assessee had contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner (Appeals) did not merit any interference. 6. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We find that similar issue came before us for the assessment year 1991-92 where the addition sustained by the Commissioner (Appeals) on this ground was deleted by recording the following finding in para 16 of our aforesaid order: "16. We have heard both the parties and carefully considered their rival submissions with reference to the facts, evidence and material placed on record. We find that this issue is covered in favour of the assessee and against the revenue by our aforesaid order in the case of M/s. Swaraj Engineers Ltd. In addition to this case relied upon by the assessee, same view has been taken by ITAT, Chandigarh Bench in the case of DCIT, Spl. Range, Chandigarh v. M/s. Punjab Chemicals Pharmaceuticals Ltd. in ITA No. 250/Chd./94 for the assessment year 1990-91, where the Tribunal has held as under: '6. We have carefully considered the rival submissions and examined the facts, evidence and material on record. We have also perused the orders of the authorities below. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the method of accounting followed by the assessee for valuation of closing stock net of modvat was the correct method from which it was possible to deduce correct profit therefrom. Apart from the judgments mentioned above, the latest judgment of Bombay High Court in the case of CIT v. Indo Nippon Chemical Ltd. cited supra, also supports the case of the assessee. 7. The other reasons given by the Commissioner (Appeals) in deleting the impugned addition is that the Assessing Officer was not correct in changing the valuation of closing stock of the assessee by including the gross value of the modvat without making corresponding change in the value of opening stock. This issue has been considered by them ITAT, Bombay Bench in the case of S.H. Kelkar Co. Ltd. and Calcutta High Court in the case of Berger Paints India Ltd., both cited supra. The Bombay High Court has also considered this aspect of the matter in the case of CIT v. Indo Nippon Chemical Ltd., cited supra. These judicial authorities have come to the conclusion that if corresponding effect is not given to the value of closing stock, this is bound to project a distorted picture. Therefore, the method of valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1991-92, we set aside the order of the Commissioner (Appeals) and delete the impugned addition. This ground of appeal is allowed. 7. The next issue raised in this appeal relates to sustaining an addition of Rs. 41,24,374 on account of change in the method of valuation of stock of semifinished goods work-in-progress. The assessee has also raised an alternative ground that even if the change in the method of valuation of closing stock was not accepted, the addition called for on this account was Rs. 12,24,688 and not Rs. 41,24,374. The facts of the case are that due to changes introduced in the Act, the previous year of the assessee was of 21 months i.e., from 1-7-1987 to 31-3-1989. The Assessing Officer observed that prior to the assessment year under reference, the assessee used to value the closing stock of sub-assemblies at cost or on net realizable value, which was less. Actual cost was arrived at by taking the cost of raw material plus overhead expenses. However, for the assessment year under reference, the assessee changed the system of valuation of the closing stock of sub-assemblies by apportioning the overhead expenses depending on the stage of completion of sub-asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed with these submissions. She observed that the change in the method of valuation was made only with a view to lowering the value of closing stock. Therefore, she upheld the addition by recording the following findings in para 3.3 of the appellate order: "3.3 I have given careful consideration to the submissions made by the appellant's counsel. Here again, it is observed that there was change in the method of valuation of closing stock of the sub-assemblies. In the earlier years, the actual cost was arrived at by taking into account, the cost of' raw material and overhead expenses. In this year, overhead expenses were stated to be apportioned based on actual process stage of completion of sub-assemblies. According to the appellant, the change in the method of accounting deserves to be allowed as the method being adopted now was the most scientific. Reference in this regard was made to the detailed calculations made for the purpose of valuation of closing stock of each item of sub-assemblies. The change being bona fide, it was pleaded that the new method for valuation of closing stock deserves to be accepted even if it resulted in lower valuation of closing stock. I am unable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y making addition of Rs. 41,24,374 on this account. As regards the alternate submission of the ld. counsel, it is observed that the accounting period for the year under consideration comprised of 21 months. The difference in the valuation of closing stock has been worked out taking into account the opening stock as on 1-7-1987 and closing stock as on 31-3-1989. Thus, there is no merit in the contention that addition, if any, could only be made with reference to difference in the value of stocks for the period 1-7-1988 to 31-3-1989. This contention of the appellant's counsel is rejected and addition of Rs. 41,24,374 made by the Assessing Officer is upheld." The assessee is aggrieved by the order of the Commissioner (Appeals) and has now come in appeal before us. 10. The ld. Counsel of the assessee reiterated the submissions, which were made before the authorities below. He submitted that in the manufacturing operation of various items, each product has to undergo several stages involving number of processes. In the past, the assessee used to value the closing stock by taking the entire overhead cost, though the item used to be at the initial stage of processing. This used to res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer did not allow the consequential effect in the immediate succeeding assessment year by taking the value of the closing stock adopted for this year as the opening stock of the next year. He further submitted that the assessee is a Government company and all throughout is being assessed to tax and the rate of tax is the same. Therefore, there is no intention on the part of the assessee to understate its income and tax by changing the method of valuation of closing stock. He also reiterated the alternative submission for reducing the addition to Rs. 12,24,688 on account of the reason that the previous year being of 21 months, the corresponding effect was required to be given on 1-7-1988 by taking the value of the closing stock as on 30-6-1988 as the opening stock as on 1-7-1988. 11. The ld. D.R., on the other hand, heavily relied on the orders of authorities below. He also filed written submissions. He submitted that due to change in the method of valuation of closing stock of subassemblies, it resulted in under valuation of the closing stock to the tune of Rs, 41,24,374. Thus, the change in the method of valuation of closing stock was not bona fide. Relying on the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee changed the method of valuation by apportioning the overhead cost to the sub-assemblies depending upon the stage of completion. Nowhere the Assessing Officer has recoded a finding that the changed method of valuation of the stock was faulty or the calculation made by the assessee did not project the correct method of valuation of the closing stock of these items at cost. The only objection raised by the Assessing Officer is that by changing the method of valuation of closing stock, the assessee has reduced its income by Rs. 41,24,374 and, therefore, such change was not acceptable. Even the Commissioner (Appeals) has observed that by changing the method of valuation of the closing stock, the assessee has reduced the profits by the aforesaid amount and, therefore, the change was effected only with a view to reducing the income and postponing the incidence of tax. Now, the question that requires to be considered is, whether the assessee is permitted to change the method of valuation of closing stock, if the earlier method followed by the assessee did not depict the true and correct picture of the valuation of closing stock at cost? Secondly, the very fact that the change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has since been regularly and consistently followed and accepted by the Department right from the assessment year 1990-91 till date. The mere fact that the change in the method of valuation of the closing stock has resulted in reduction of income for the assessment year under reference does not make such change as non-bona fide. What we have to see is whether the change in the method of valuation of the closing stock was bona fide and also whether the changed method has been regularly and consistently followed in the subsequent assessment years. The change in method, which is based on more scientific principle and does not alter the principle of valuation of closing stock either at cost price or market price, whichever is less, is permissible. Reliance in this regard is placed on the following judgments: (i) Corpn. Bank Ltd.'s case--It has been held that irrespective of the basis adopted for valuation in the earlier year, the assessee has the option to change the method of valuation of the closing stock either at cost price or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. The two principles applicable with regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the method of accounting is either not bona fide or is not to be accepted. Such change would be in order, if the changed method of valuation of stock conforms to the accepted commercial principles i.e. either at cost or market price, whichever is less. There is no finding recorded by the authorities below that such changed method of valuation does not conform to these standards. In the case of British Paints India Ltd., the Hon'ble Supreme Court has held that if the method of valuation of the closing stock does not conform to the accepted commercial standards, the Assessing Officer has a duty to reject such method irrespective of the fact that such method had been regularly and consistently followed and accepted in the past. Likewise, the assessee also has an option to change the method if the method followed in the past did not depict the correct picture of the closing stock i.e. the element of cost is inflated. The proper determination of the manufacturing cost for the purpose of valuation of the semi-finished goods assumes greater importance in the cases where assessees are engaged in the manufacture of sophisticated equipment/components, where in certain cases, the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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