TMI Blog2016 (9) TMI 1047X X X X Extracts X X X X X X X X Extracts X X X X ..... ORAL JUDGMENT : (Per S.C. Gupte, J.) 1. By this Reference under Section 256(1) of the Income Tax Act, 1961 ( the Act ), the Income Tax Appellate Tribunal ( the Tribunal ) has referred the following questions of law for our opinion : (a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the change in the method of valuation of closing stock of stores, spares, tools, raw materials, auto spare parts and work-in-progress, by adopting the weighted average cost basis instead of adopting the cost on the basis of lowest purchase price during the year , was not justified and accordingly upholding the addition of ₹ 12,03,509/made by the Income-Tax Officer on the said issue? (b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in rejecting the change in the method of valuation of closing stock? (c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that packing expenses did not qualify for export market development allowance under Section 35B? 2. The Assessment Years involved in the present Reference are 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee insofar as the closing stock was concerned. The proviso to subSection (1) of Section 145 of the Act (then in force), which deals with 'method of accounting', empowers the Assessing Officer to change the basis or manner of accounting in the event the accounts are correct and complete to the satisfaction of the Income Tax Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot be properly deduced therefrom. So also, under subsection (2) of Section 145 of the Act, which was applicable at the relevant date, if the Income Tax Officer was not satisfied about the correctness or completeness of the accounts of the assessee; or where no method of accounting has been regularly employed by the assessee, the Officer was empowered to make an assessment in the manner provided under Section 144 of the Act. The assessee's case is that the Assessing Officer could not have rejected the method of accounting employed by the assessee without having found under the proviso to Subsection (1) of Section 145 that income cannot be properly deduced from the method employed or without being satisfied under Subsection (2) that no method of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpliedly sanction a rejection of the assessee's accounts, if nothing more is established than that the assessee has changed his method of accounting. If an assessee bona fide changed his method of accounting and satisfied the requirement of regular employment thereafter of that changed method of accounting, the only basis for the rejection of the accounts would be that the income, profits and gains could not be properly deduced from the accounts maintained on the basis of the changed method of accounting. 8. The Madras High Court proceeded to quote in this behalf the following text from Law and Practice of Income-tax by Kanga and Palkhivala, fourth edition, Volume 1 dealing with the decision of our Court in the case of Sarupchand Vs. Commissioner of Income Tax, : Sarupchand's case (supra) is a clear authority for the proposition that it is open to an assessee to make a clean change of the regular method adopted by him up to that time, provided, he satisfied the department on proper evidence that he has in fact changed the regular basis of accounting and has not merely abandoned or changed it for a casual period to suit his own purposes. A bona fide change o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... internationally. These required the historical cost of inventories to be accounted by using the FirstinFirstout (FIFO) formula or the Weighted Average Cost formula. The weighted average cost formula adopted by the assessee, thus, accorded with the international standards and was a more scientific formula or method than the earlier used lowest cost of purchase in the year formula. In fact, both the Assessing Officer as well as the CIT(A) came to an express finding that the formula adopted by the assessee was more scientific than the one which was adopted earlier. The adoption of the new method by the assessee is accordingly clearly bona fide. 10. As for the requirement of regular employment of the method of accounting, it is pertinent to note that the Tribunal does not dispute that the new system of accounting was followed by the assessee in the subsequent assessment years as well. This clearly supports the assessee's case that the method was meant to be adopted as a regular method for the future. The Tribunal appears to have been swayed by the fact that by means of this new method of determining the cost, the assessee was having the benefit of taking the cost of items r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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