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TMI Blog2024 (5) TMI 1366X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/2020, 17828/2020, 17964/2020, 17972/2020, 28444/2021, 29846/2021, 30448/2021, 30354/2019, 30340/2019, 30373/2019, 32237/2019 Heard Sri Ajay Vohra and Sri A Kumar learned Senior Counsels, assisted by Adv G Mini, for the petitioners and Sri Jose Joseph, learned Senior Standing Counsel for the Income Tax Department. 2. The present batch of writ petitions involve almost common questions of fact and law; therefore, the same have been heard together and are being decided by this common judgment. The facts of the lead petition, W.P.(C) No.30318/2019, are taken note of to understand the issue(s) involved in these writ petitions. W.P.(C) No.30318/2019 Facts in brief: 3. The petitioner is an individual resident and an assessee to Income Tax for the purposes of the Income Tax Act 1961 and the Rules made thereunder. The petitioner is engaged in the business of trading of jewellery and articles of gold. The petitioner established and commenced its business operation in the year 1978. It is said that the petitioner has been maintaining regular books of accounts since the inception of its business venture in the year 1978. The petitioner has been following the mercantile system of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average shall be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances. Value of Opening Inventory 22. The value of the inventory as on the beginning of the previous year shall be: (i) the cost of inventory available, if any, on the day of the commencement of the business when the business has commenced during the previous year; and (ii) the value of the inventory as on the close of the immediately preceding previous year, in any other case." Chamber of Tax Consultants v. Union of India (2018) 400 ITR 178 (Delhi) 4. The Delhi High Court in Chamber of Tax Consultants v. Union of India (supra), where Notification No.87/2016 dated 29.09.2016 notifying the ICDS was challenged, considered the following questions: "(i) Whether the amendments to Section 145 are an instance of delegation by Parliament of essential legislative powers to the Central Government? (ii) Are the ICDS an instance of excessive delegation of legislative powers? Whether the impugned ICDS are contrary to the settled law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of companies migrating to International Financial Reporting Standards ("IFRS") (to be known as Ind- AS) in the initial year of adoption and thereafter; and (iii) to suggest appropriate amendments to the Act in view of the transition to Ind-AS regime." 4.3.1 The said Committee examined 31 Accounting Standards issued by the ICAI. The Committee drafted 14 Tax Accounting Standards and recommended that the said standards be notified under the Act only for the computation of taxable income. The Committee was of the view that 'a taxpayer would not be required to maintain the books of accounts based on the AS notified under the Act'. 4.4 The position so far as Corporates are concerned is that there are two methods of accounting to be followed: One under GSR 739(E) notified by the MCA on December 7, 2006, in terms of Section 211 of the Companies Act 1956, and the other is for computation of taxable income which is as a result of the convergence of Indian Accounting Standards with the IFRS. Both have different methods of recognition of the revenue, assets, and liabilities. To address this gap, the Central Board of Direct Taxes constituted the Committee, referred to above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation but not to bring about changes to the settled principles as laid down in judicial precedents which seek to interpret and explain statutory provisions contained in the Act. If such power is permitted to be exercised by the Central Government, then, clearly, such power would be an instance of unfettered power in the hands of the Executive which is unguided and uncanalised. Article 265 of the Constitution of India provides that no tax shall be levied or collected except under the authority of law. The power under Section 145(2) of the Income Tax Act cannot permit changing the basic principles of accounting that have been recognized in the various provisions of the Act unless, of course, corresponding amendments are carried out to the Act itself. Such amendments would be consistent with an acknowledgement that, as far as the Act is concerned, changing the method of accounting for the computation of taxable income would partake in an essential legislative function. The Delhi High Court held that Section 145(2), as amended, is to be read down to restrict the power of the Central Government to notify ICDS that do not seek to override the binding judicial precedents or provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined on a case-to-case basis by applying settled principles of accrual of income. By deploying ICDS III in a manner that seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, at the earliest possible stage, irrespective of the facts, the respondents would be acting contrary to the settled position in law as explained in the decisions referred to in para 68 and to that extent para 10(a) of ICDS III would be rendered ultra vires. (vii) Para 12 of ICDS III read with para 5 of ICDS IX, dealing with borrowing costs, makes it clear that no incidental income can be reduced from borrowing costs. This is contrary to the decision of the Supreme Court in CIT v. Bokaro Steel Limited (supra) and is therefore struck down. (viii) Para 5 of ICDS IV requires an assessee to recognize income from export incentive in the year of making the claim if there is "reasonable certainty" of its ultimate collection. This is contrary to the decision of the Supreme Court in Excel Industries (supra), and is, therefore, ultra vires the Act and struck down as such. (ix) As far as para 6 of ICDS IV is concerned, the proportionate completion method, as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 2018 with retrospective effect from 01.04.2017 to give legitimacy to the ICDS, issued by Notification Nos. 87 and 88 of 2016 dated 29.09.2016. The substituted provision of Section 145A, on reproduction would read as under: "145A. Method of accounting in certain cases For the purpose of determining the income chargeable under the head "Profits and gains of business or profession", - (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145; ........." 6.1 Clause (i) of Section 145A of the Act, so substituted, provides that to determine the income chargeable to tax under the head "Profits and Gains of Business or Profession", the valuation of inventories shall be made at lower of actual cost or net realisable value computed in accordance with the Income Computation and Disclosure Standards (ICDS) notified under sub-section (2) of Section 145 of the Act. 6.2 The purpose of substituting Section 145A with retrospective effect from 01.04.2017, to apply the same in relation to Assessment Year 2017-18 and subsequent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First Out is arbitrary, illegal, violative of Article 14, 19(1) (g) and 265 of the Constitution of India and is unconstitutional and is to be rendered nugatory and unenforceable and; B. Declare that section 145A introduced by the Finance Act, 2018 w.e.f. 1.4.2017 and made applicable for the assessment year 2017-18 in substitutions of Section 145A as introduced by Finance (No.2) Act, 2018 with effect from 1.4.2017 is arbitrary, illegal, violative of Article 14, 19(1) (g) and 265 of the Constitution of India and is unconstitutional and is to be rendered unenforceable; C. Declare that in case para 16 of the ICDS-II is held to be mandatory of application, the same has to be read down to the extent of directing that the opening stock of the year of first-time adoption of the said para 16 of ICDS-II should also be valued as per the same method used for valuing closing stock of that year; D. Issue a Writ of Certiorari such other appropriate writ, order or direction quashing Exhibit-P4 notice and Exhibit-P6 intimation rejecting the reply of the petitioner. E. Pass such other appropriate writ, order or direction as this Hon'ble Court may deem just and fit in the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, the exclusion of LIFO as an appropriate method for valuing the stock/inventory leads to an unreasonable classification as there exists no rationale for creating such a classification to the exclusion of a well-established principle of valuation of stock/inventory. 8.2 Before substitution of Section 145A of the Finance Act, 2018 with effect from 01.04.2017, whereby Clause 16 of the ICDS (II) has been introduced mandating the use of First-In- First-Out (FIFO) or Weighted Average Cost, the only acceptable method for valuation of stock/inventory was LIFO. Before making FIFO mandatory, primacy was accorded to the taxpayer in its choice of the most appropriate accounting practice, so long as it demonstrated an accurate picture of the state of affairs of its business. By making FIFO mandatory, the Central Government has created a classification to the exclusion of those assessee, such as the petitioner herein, who have been consistently and regularly following LIFO as their method of stock/inventory valuation. Such a classification, apart from being devoid of any intelligible differentia, bears no rationale, as to why such taxpayers ought to be subjected to such differential treatment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l); K.G Khosla & Co.P.Ltd vs.CIT (1975) 99 ITR 574 (Del); CIT vs. Doom Dooma India Ltd. (1993) 200 ITR 496 (Gau); CIT vs. Mahavir Aluminum Ltd (2008) 297 ITR 77 (Del). 8.6 The purpose of the valuation of inventory and crediting the unsold stock is merely to balance the cost of goods entered on the other side of the account at the time of their purchase. The valuation of closing/unsold stock is not a source of income in the hands of the assessee. However, by making Clause 16 of ICDS (II) mandatory with retrospective effect from 01.04.2017, despite there being no change or enhancement in the actual value of the stock in the hands of the petitioner during the relevant period, i.e., the year of adoption of aforesaid ICDS, the consequence thereof has resulted in an enhancement to the income of the petitioner to the tune of Rs. 51.07 Crores, which the Revenue has sought to tax in the hands of the petitioner during the relevant year. Taxes under the Income Tax Act are premised on the generation of 'real' income. Mere accretion based on a notional/hypothetical/unreal income is and cannot be construed as a taxable event resulting in chargeability under the provisions of the Act. It is furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145. Provided that the inventory being securities held by a scheduled bank or public financial institution shall be valued in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145 after taking into account the extant guidelines issued by the Reserve Bank of India in this regard: Provided further that the comparison of actual cost and net realisable value of securities shall be made categorywise." 9.1 If the Court does not agree to declare the provisions of Section 16 of ICDS (II) as unconstitutional, this Court may hold that: (a) the stipulation of Clause 16 of the ICDS (II) mandating the adoption of FIFO or weighted average cost method, to the exclusion of LIFO for valuation of stock/inventory, be held as directory and not mandatory, or (b) the stipulation under Clause 16 of the ICDS (II) directing the adoption of FIFO or weighted average cost for valuation of stock/inventory be applied in the very same year, also to be the valuation of opening stock, i.e., the very same methodology b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e closing and opening stock by applying the FIFO method under Clause 16 of ICDS (II), there is no discrimination or arbitrariness. He therefore submits that the present writ petition is liable to be dismissed. 11. I have considered the submissions advanced on both sides. Discussion : 12. It is no matter of doubt that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory. The petitioner was applying the LIFO method of accounting as the standard for valuing the closing and opening stock up to 01.04.2017. Before 01.04.2017, there was no mandatory provision for adopting one or another method of Accounting Standards. The Statute also did not mandate only one method of valuing the closing and opening stock. The petitioners were free to adopt any one of the Accounting Standards as notified by the ICAI. The Parliament, after a wide range of consultation from all stakeholders and based on the recommendations of the Committee to maintain uniformity in accounting the income and valuing the stock, has made Clause 16 of ICDS (II) mandatory for the adoption of FIFO or weighted average cost method. This mandato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he well-established principles for testing any legislation before it can be declared as ultra vires. Paragraph 106 of the said judgment is extracted hereunder: "106. Before we embark upon the exercise to determine as to whether the impugned Amendment Act is ultra vires Articles 14 and 19(1)(g), it would be apposite to notice the wellestablished principles for testing any legislation before it can be declared as ultra vires. It is not necessary for us to make a complete survey of the judgments in which the various tests have been formulated and reaffirmed. We may, however, make a reference to the judgment of this Court in Budhan Choudhry v. State of Bihar [AIR 1955 SC 191; 1955 Cri LJ 374], wherein a Constitution Bench of seven Judges of this Court explained the true meaning and scope of Article 14 as follows: (AIR p. 193, para 5)" 5. It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislation as well under Article 14." 14. In the present case, the petitioners had been following the LIFO method to value its closing and opening stock and the same had been accepted by the Revenue up to 01.04.2017. It is also a well-settled law that the closing and opening stock are to be valued by applying the same method of valuation. In the case of Ramswarup Bengalimal (supra), K.G Khosla (supra), Doom Dooma India Ltd (supra), & CIT vs. Mahavir Aluminum Ltd (supra) held that opening and closing of stock of a year have to be necessarily valued on the same basis. The opening stock cannot be valued in a manner different from the valuation of closing stock. 15. In Chainrup Sampathram vs. CIT (1953) 24 ITR 481 (SC), P.M Mohd. Meerakhan vs. CIT (1969) 2 SCC 25, Sanjeev Woolen Mills vs. CIT (2005) 13 SCC 307, ALA farm vs. CIT (1991) 2 SCC 558, it has been held that the valuation of closing and unsold stock is not the source of income in the hands of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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