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2016 (9) TMI 1047 - BOMBAY HIGH COURT

2016 (9) TMI 1047 - BOMBAY HIGH COURT - [2016] 389 ITR 259 - Change in method of valuation of stock - from “lowest price during the year” to the “weighted average cost” formula - Held that:- So long as the change made by the assessee in his method of accounting is bona fide and amounts to a permanent arrangement to be followed, the Revenue has no cause to complain. The conclusion drawn by the Tribunal that the change in the method of valuation adopted by the assessee, namely, from “lowest price .....

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.C. GUPTE, JJ. Mr. P.J. Pardiwala, Senior Counsel a/w Ms. Vasanti Patel for the applicant None for the respondent 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 .....

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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 1976-77 and 1977-78. Regarding Questions (a) and (b) :3. Up to the end of the accounting year relevant to Assessment Year 1975-76, the assessee, who is a manufacturer of scooters, three wheelers and their parts, had .....

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was on the footing that after coming into effect of the Manufacturing and Other Companies (Auditor's Report) Order, 1975, the assessee, in consultation with its auditors, decided to change the method of ascertaining the cost for the purpose of stock valuation so as to adopt a more scientific method of determining the cost. This change in the method of determining the cost took into account both opening quantities (their value being already declared in the earlier assessment year as value of .....

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ts being shown in the accounting year relevant for A.Y. 1977-78 less by ₹ 12,03,509/. The Assessing Officer did not accept the change and made an addition of ₹ 12,03,509/. 4. On appeal, the Commissioner of Income Tax (Appeals) [ CIT(A) ] set aside the order of the Assessing Officer, deleting the addition, holding that the change in the method of valuation of closing stock was bonafide and proper. On further appeal, the Tribunal set aside the order of CIT(A) and restored the order of .....

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ax 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 provid .....

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counting and the Assessing Officer is not empowered to reject the method employed except in cases covered by the proviso to subsection (1) or subsection (2) of Section 145 of the Act. 6. In the first place, it is important to note that what the assessee has changed in the present case is the method of ascertaining the cost for the purpose of stock valuation and not the method of accounting employed by the assessee for the purpose of stock valuation as such. The method, as before, continues to be .....

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ds on the footing that this change amounts to a change in the method of accounting, the assessee was well within its rights to bring about such change. So long as the assessee adopts such change bona fide and proposes to employ the new method regularly, no fault can be found with the same, as explained by us below. 7. As held by the Madras High Court in the case of Indo Commercial Bank Ltd. Vs. Commissioner of Income Tax, 44 ITR 22, it is the assessee and not the Department that has the choice o .....

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can reject the accounts as the basis for the computation of the income of the assessee, if the income cannot be properly deducted from the accounts based on the system of the assessee's choice. Section 13, however, does not expressly or impliedly 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 empl .....

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ner 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 of the regular basis of accounting must be accepted by the department .....

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for income tax purposes the assessee should be entitled to make use of any method of accounting that he chooses to adopt, but he must follow the selected method 'regularly' and is not to be allowed to change his system of bookkeeping from year to year or so frequently as to prevent a fair estimate of his income, profits and gains, de anno in annum from being ascertained. 9. In the light of the above statement of law, what one needs to consider whilst accepting or rejecting a new accounti .....

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ng, mining or processing. The order requires that in the case of manufacturing, mining or processing companies, the auditor's report on the accounts must include a statement whether the company is maintaining proper records to show full particulars including quantitative details and situation of fixed assets; whether these fixed assets have been specifically verified by the management; and whether the same have been properly dealt with in the books of accounts. The auditor must further certi .....

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ted 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 requireme .....

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he cost of items remaining in the closing stock on the basis of the lowest purchase price during the year with further reduction in the cost by following the weighted average cost formula. The method of determining the cost of items remaining in the closing stock is a part of a system of valuation of closing stock and if this method is changed, it would automatically lead to a change in the valuation of the closing stock. This is inevitable for the first year of change. What we need to consider .....

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