TRIBHUVANDAS BHIMJI ZAVERI TRADING CO., MUMBAI V. ADDL CIT 14(1), MUMBAI

ITA 6259/MUM/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8592 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 19-01-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 03-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MALTHI R SRIDHARAN

Judgement Text

I.T.A NO.6259/ MUM/2010 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. 1 IN THE INCOME TAX APPELLATE TRIBUNAL, SMC BENCH, MUMBAI. [BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER ] I.T.A NO.6259/ MUM/2009 ASSESSMENT YEAR: 2005-06 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. .. APPELL ANT 241-243, ZAVERI BAZAR, MUMBAI-02. PA NO.AAAFT 0951 B VS ADDL. CIT 14(1) ,. RESPONDEN T ERNEST HOUSE, NARIMAN POINT, MUMBAI APPEARANCES: REEPAL G TRALSHAWALA, FOR THE APPELLANT MALTHI R SRIDHARAN, FOR THE RESPONDENT O R D E R 1. THE SHORT ISSUE THAT I AM REQUIRED TO ADJUDICATE IN THIS APPEAL IS WHETHER OR NOT THE CIT (A) WAS JUSTIFIED IN UPHOLDING THE V ALUATION OF CLOSING STOCK ON MARKET VALUE AS MADE BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S.143(3) OF THE INCOME TAX ACT, 1961 FOR THE ASSE SSMENT YEAR 2005-06. 2. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NO TED THAT THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION OF STOCK I.E. O N COST BASIS FROM THE METHOD REGULARLY FOLLOWED EARLIER I.E. O N MARKET VALUE BASIS . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CHANGE IN VALUATION METHOD IS NOT BONAFIDE AND, THEREFORE, HE REJECTED THE SAME. THE AO PROCEEDED TO VALUE TH E CLOSING STOCK ON THE BASIS OF MARKET PRICE. AGGRIEVED, THE ASSESSEE CARRIED T HE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE CIT (A) WA S OF THE VIEW THAT THE METHOD WHICH HAS BEEN REGULARLY AND CONSISTENTLY FO LLOWED BY THE ASSESSEE I.E. I.T.A NO.6259/ MUM/2010 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. 2 VALUATION OF STOCK AT MARKET PRICE OUGHT TO HAVE B EEN FOLLOWED BY THE ASSESSEE IN THE CURRENT YEAR, AS THE CHANGE IN VALUATION MET HOD IS NOT BONAFIDE. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFO RE THE TRIBUNAL. 3. I HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS A LSO THE APPLICABLE LEGAL POSITION. 4. I FIND THAT IN CASE THE CLOSING STOCK IS VALUED AT MARKET PRICE, WHEN COST PRICE OF THE CLOSING STOCK IS LESS THAN THE MARKET PRICE, IT RESULTS IN A SITUATION THAT ANY APPRECIATION IN THE VALUATION OF SUCH CLOS ING STOCK IS BROUGHT TO TAX. IT IS ONLY ELEMENTARY THAT THE APPRECIATION IN THE VAL UATION OF STOCK IN TRADE UNLESS SOLD, CANNOT BE BROUGHT TO TAX. IN THE LAND MARK CASE OF CHAINRUP SAMPATRAM V CIT, 24 ITR 481, HONBLE SUPREME COURT HAD, INTER ALIA, OBSERVED AS UNDER: IT IS WRONG TO ASSUME THAT THE VALUATION OF THE CL OSING STOCK AT MARKET RATE HAS, FOR ITS OBJECT, THE BRINGING INTO CHARGE ANY APPRECIATION I N THE VALUE OF SUCH STOCK. THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD STOCK IS T O BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE OF THE ACCOUNT AT THE TIME OF THE IR PURCHASE, SO THAT THE CANCELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FROM BOTH SI DES OF THE ACCOUNT WOULD LEAVE ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS ACTUALLY REALISED ON THE YEAR'S TRAD ING. AS POINTED OUT IN PARAGRAPH 8 OF THE REPORT OF THE COMMITTEE ON FINANCIAL RISKS ATTACHIN G TO THE HOLDING OF TRADING STOCKS, 1919, 'AS THE ENTRY FOR STOCK WHICH APPEARS IN A TR ADING ACCOUNT IS MERELY INTENDED TO CANCEL THE CHARGE FOR THE GOODS PURCHASED WHICH HAV E NOT BEEN SOLD, IT SHOULD NECESSARILY REPRESENT THE COST OF THE GOODS. IF IT IS MORE OR L ESS THAN THE COST, THEN THE EFFECT IS TO STATE THE PROFIT ON THE GOODS WHICH ACTUALLY HAVE BEEN SO LD AT THE INCORRECT FIGURE ................... FROM THIS RIGID DOCTRINE ONE EXCEPTION IS VERY GENERALLY RECOGNISED ON PRUDENTIAL GROUNDS AND IS NOW FULLY SANCTIONED BY CUSTOM, VIZ., THE ADOPTION OF MARKET VALUE AT THE DATE OF MAKING UP ACCOUNTS, IF THAT VALUE IS LESS, THAN COST. IT IS O F COURSE AN ANTICIPATION OF THE LOSS THAT MAY BE MADE ON THOSE GOODS IN THE FOLLOWING YEAR, AND M AY EVEN HAVE THE EFFECT, IF PRICES RISE AGAIN, OF ATTRIBUTING TO THE FOLLOWING YEAR'S RESUL TS A GREATER AMOUNT OF PROFIT THAN THE DIFFERENCE BETWEEN THE ACTUAL SALE PRICE AND THE AC TUAL COST PRICE OF THE GOODS IN QUESTION' (EXTRACTED IN PARAGRAPH 281 OF THE REPORT OF THE CO MMITTEE ON THE TAXATION OF TRADING PROFITS PRESENTED TO BRITISH PARLIAMENT IN APRIL 19 51). WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF AP PRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOUL D CARE TO SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALISATION. THIS IS THE THEORY UNDERLYI NG THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS THE LOW ER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCO UNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS OF COURSE, SUCH PRINCIPLES HAVE BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS UNREALISED PROFITS IN THE SH APE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF AN ACCOUNTING YEAR A ND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOUNT IN A BUSINESS THAT IS CONTINUING ARE NOT BR OUGHT INTO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALISED. AS TRULY OBSERVED BY ONE OF THE LEARNED JUDGES IN WHIMSTER & CO. V. COMMISSIONERS OF INLAND REVENUE [ 1926] 12 TAX CAS. 813, 837, 'UNDER THIS LAW (REVENUE LAW) THE PROFITS ARE THE PROFITS REALISED IN THE COURSE OF THE YEAR. WHAT SEEMS AN EXCEPTION IS RECOGNISED WHERE A TRADER PUR CHASED AND STILL HOLDS GOODS OR STOCKS I.T.A NO.6259/ MUM/2010 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. 3 WHICH HAVE FALLEN IN VALUE. NO LOSS HAS BEEN REALIS ED. LOSS MAY NOT OCCUR. NEVERTHELESS, AT THE CLOSE OF THE YEAR HE IS PERMITTED TO TREAT THES E GOODS OR STOCKS AS OF THEIR MARKET VALUE'. 5. IN VIEW OF THE ABOVE LEGAL POSITION, IT IS FREE FRO M DOUBT THAT THE CORRECT METHOD OF VALUATION OF CLOSING STOCK IS VALUATION OF COST PRI CE OR MARKET PRICE WHICHEVER IS LOWER AND THAT SUCH VALUATION ALSO ENSURES THAT WHILE ACCRETI ON IN THE VALUATION OF CLOSING STOCK IS NOT BROUGHT TO TAX, ANY FALL IN VALUATION OF CLOSING ST OCK IS TAKEN INTO ACCOUNT WHILE COMPUTING THE COMMERCIAL PROFITS. THE METHOD OF ACCOUNTING W HICH HAS BEEN SOUGHT TO BE FOLLOWED BY THE ASSESSEE IS THE CORRECT METHOD OF COMPUTING THE VALUATION OF CLOSING STOCK WHEREAS, THE METHOD WHICH WAS FOLLOWED BY THE ASSESSEE IN PRECED ING YEAR WAS, AS EVIDENT FROM THE ABOVE OBSERVATION OF THE HONBLE SUPREME COURT, WAS NOT IN ACCORDANCE WITH THE CORRECT LEGAL POSITION. THE CHANGE IN METHOD WHICH LEADS T O CORRECT LEGAL POSITION CANNOT BE SAID TO BE NOT BONAFIDE. IN THIS VIEW OF THE MATTER, IN MY HUMBLE UNDERSTANDING, THE AUTHORITIES BELOW WERE CLEARLY IN ERROR IN INSISTING UPON THE A SSESSEE FOLLOWING A METHOD OF VALUATION OF CLOSING STOCK WHICH WAS CLEARLY CONTRARY TO THE SET TLED LEGAL POSITION. I, THEREFORE, UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE AO TO RE-COMPUTE THE INCOME BY TAKING INTO ACCOUNT THE CORRECT METHOD OF VALUATION OF CLOSING STOCK. THE ASSESSEE GETS RELIEF ACCORDINGLY. 6. IN THE RESULT, THE APPEAL STANDS ALLOWED. PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARI NG I.E. ON 27 TH JANUARY, 2011 SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 27 TH JANUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),25, MUMBAI 4. COMMISSIONER OF INCOME TAX, 14 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH SMC, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.6259/ MUM/2010 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. 4 I.T.A NO.6259/ MUM/2010 TRIBHUVANDAS BHIMJI ZAVERI TRADING CO. 5