ACIT COMPANY CIRCLE I, MADURAI V. THIAGARAJAR MILSL LTD., MADURAI

ITA 984/CHNY/2007

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7048 (ITAT-CHENNAI)
• Duration Of Justice: 12 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 17-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A SUNDARARAJAN
• Keywords: Rule 8D; Set aside
• Section: 143(3); 14A; 260A; 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI , $ % .. ' , ) * BEFORE SHRI RAMIT KOCHAR , ACCOUNTANT MEMBER AND SHRI DUVVURU R.L.REDDY , JUDICIAL MEMBER ITA NO.984/CHNY/2007 )+ + /ASSESSMENT YEAR: 2004-05 THE ASST. COMMISSIONER OF - INCOME TAX, COMPANY CIRCLE-I, MADURAI. V . M/S.THIAGARAJAR MILLS LTD., KAPPALUR, MADURAI-625 008. [PAN: AAACT 4304 R ] ( . /APPELLANT) ( /0. /RESPONDENT) DEPARTMENT BY : MR.A.SUNDARARAJAN, ADDL.CIT ASSESSEE BY : MR.R.SREENIVASAN, AR 1 /DATE OF HEARING : 18.11.2019 1 /DATE OF PRONOUNCEMENT : 05.02.2020 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER : BRIEFLY STATED THAT THE ASSESSEE IS IN BUSINESS OF MANUFACTURE AND SALE OF COTTON YARN. THIS IS SECOND ROUND OF LITIGA TION BEFORE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI ( HEREINAFTER CALLED THE TRIBUNAL) . IN THE FIRST ROUND OF LITIGATION BEFORE TRIBUNAL, THIS APP EAL FILED BY REVENUE FOR ASSESSMENT YEAR 2004-05 WAS ADJUDICATED BY TRIBUNAL VIDE ORDER DATED 03.04.2009, WHICH IS A COMMON ORDER PASSED BY TRIBU NAL FOR AY: 2002-03 TO 2004-05. THE ASSESSEE BEING AGGRIEVED BY AN APPE LLATE ORDER PASSED BY TRIBUNAL IN ITA NO. 984/MDS/2007 FOR AY: 2004-05 FILED AN APPEAL U/S 260A OF THE 1961 ACT WITH HONBLE MADRAS HIGH COURT ADMITTED AS AN TCA ITA NO.984/CHNY/2007 :- 2 -: NO. 1128 OF 2009. THE HONBLE MADRAS HIGH COURT WAS PLEASED TO PASS AN JUDGMENT DATED 04.09.2019 , WHEREIN IT WAS HELD BY HONBLE MADRAS HIGH COURT AS UNDER: TCA.NO.1128 OF 2007: 1. WHETHER THE APPELLATE TRIBUNAL WAS RIGHT IN REVE RSING THE ORDER OF THE FIRST APPELLATE AUTHORITY AND RESTORING THAT OF THE ASSES SING OFFICER FOR EXCLUDING RECEIPTS ARISING IN THE CORE BUSINESS AND NOT SPECIFIED IN E XPLANATION (BAA) TO SECTION 80 HHC? 2. WHETHER THE TRIBUNAL WAS RIGHT IN DIRECTING THE ASSESSING OFFICER TO VALUE THE OPENING STOCK ALSO ON THE BASIS AS THE CLOSING STOC K IN A CASE OF CHANGE IN VALUATION OF CLOSING STOCK WHICH WAS ACCEPTED AS BONAFIDE AND CONTRARY TO THE DECISION OF THE JURISDICTIONAL HIGH COURT? 3. AS FAR AS QUESTION ARISING OUT OF SECTION 80 HHC ( BAA) OF IT ACT, 1961 IN THE RESPECTIVE APPEAL IS CONCERNED, WE ARE OF THE VIEW THAT THE ISSUE IS PENDING BEFORE THE SPECIAL BENCH OF THE TRIBUNAL AND THEREFORE THE RE IS NO SUBSTANTIAL QUESTIONS OF LAW TO BE DECIDED NOW BY US FOR THE PRESENT. WE THE REFORE, DO NOT FIND ANY REASON TO ANSWER THIS ISSUE AT PRESENT. 4. AS FAR AS VARIANCE IN VALUATION OF THE OPENING S TOCK AND CLOSING STOCK IS CONCERNED, THE LEARNED STANDING COUNSEL SUBMITTED T HAT WHILE REMANDING THE CASE BACK TO THE ASSESSING OFFICER DIRECTED ADOPTION OF V ALUATION OF COST PRICE METHOD WITH REGARD TO VALUATION OF OPENING STOCK ON THE SA ME MANNER AS THE CLOSING STOCK. HE RELIED ON THE JUDGMENT BY THE DIVISION BENCH OF THIS COURT IN M/S.KADARI AMBAL MILLS LIMITED SUPER B-3, INDUSTRIAL ESTATE, MADURAI VS. JOINT COMMISSIONER OF INCOME TAX AND ANOTHER IN TCA.NO.430 OF 2005 DATED 20.06.2001 WHEREIN IT IS STATED THAT THE TRIBUNAL IS WRONG IN HOLDING THAT T HERE MUST BE UNIFORMITY IN THE METHOD OF VALUATION OF OPENING STOCK AS WELL AS THE CLOSING STOCK AND FURTHER SUBMITTED THAT IN A CASE REMAND BACK TO THE APPELLA TE TRIBUNAL. 5. THE LEARNED COUNSEL FOR THE REVENUE SUBMITTED TH AT THE RELEVANT PARAGRAPHS 24 AND 32 OF THE ORDER OF THE APPELLATE TRIBUNAL, DATE D 03.04.2009, ARE QUOTED BELOW FOR READY REFERENCE : ' 24. AFTER CONSIDERING THE RIVAL CONTENTIONS AND T HE MATERIALS ON RECORD, WE NOTE THAT THE ASSESSEE HAS CHANGED THE METHOD OF VA LUATION OF CLOSING STOCK FROM THE MARKET PRICE TO THE COST WHICH HAS R EDUCED THE VALUE OF THE CLOSING STOCK. AS PER THE ACCOUNTING STANDARDS, THE VALUATION OF THE STOCK SHOULD BE AT THE COST MARKET PRICE, WHICHEVER IS LE SS. THEREFORE, THERE IS NO DISPUTE THAT BY ADOPTING THE COST PRICE METHOD FOR VALUATION OF THE CLOSING STOCK, THE ASSESSEE HAS FOLLOWED THE PRINCIPLE OF A CCOUNTING STANDARDS BUT AT THE SAME TIME THE ASSESSEE SHOULD HAVE ALSO VALU ED THE OPENING STOCK ON THE SAME BASIS TO MAINTAIN THE UNIFORMITY AND TO AVOID DISTORTION OF RESULTS. THERE IS NO BAR IN ADOPTING THE METHOD OF VALUATION WHICH IS BONAFIDE BUT THE METHOD SHOULD BE ADOPTED FOR BOTH, OPENING STOCK AS WELL AS CLOSING STOCK. WE NOTE THAT THE ASSESSING OFFICE R HAS NOT DISCUSSED THIS ISSUE IN DETAIL AND IN OUR VIEW WHEN THE ASSESSEE H AS ADOPTED THE COST PRICE METHOD FOR VALUATION OF THE CLOSING STOCK, TH EN THE SAME METHOD SHOULD BE ADOPTED FOR VALUATION OF THE OPENING STOC K ALSO FOR THE ACCOUNTING YEAR UNDER CONSIDERATION. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES, QUA THIS ISSUE AND REMIT THE SAME TO T HE RECORD OF THE ASSESSING OFFICER TO DECIDE THIS ISSUE FRESH BY DOIN G THE VALUATION OF OPENING STOCK AS WELL AS THE CLOSING STOCK AT THE C OST PRICE METHOD. ITA NO.984/CHNY/2007 :- 3 -: 32. AFTER CONSIDERING THE RIVAL CONTENTIONS AND THE MATERIALS ON RECORD, WE NOTE THAT SUB-SECTION (2) AND (3) OF SECTION 14A HAVE BEEN INSERTED IN THE STATUTE BY THE FINANCE ACT, 2006 W.E.F.01.04.2007. THESE SUBSECTIONS HAVE PROVIDED THAT IF THE ASSESSING OFFICER IS NOT SATISF IED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDI TURE, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO S UCH INCOME IN ACCORDANCE WITH SUCH METHOD AS PRESCRIBED. WE FURTH ER NOTE THAT IN THE CASE OF INCOME TAX OFFICER VS. DAGA CAPITAL MANAGEME NT (P) LTD., SUPRA THE MUMBAI SPECIAL BENCH OF THIS TRIBUNAL HAS HELD THAT 'SUBSECTION (2) AND (3) OF SECTION 14A ARE PROCEDURAL IN NATURE AND HENC E RETROSPECTIVE. THEREFORE, IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, HE HAS TO DETERMINE THE EXPENDITURE AS PE R THE RULE 8D OF THE INCOME TA RULES. ACCORDINGLY, WE SET ASIDE THE ORDE RS OF THE LOWER AUTHORITIES, QUO THIS ISSUE AND REMIT THE SAME TO T HE RECORD OF THE ASSESSING OFFICER TO ASCERTAIN THE EXPENDITURE INCUR RED IN RESPECT OF THE DIVIDEND INCOME ACCORDING TO THE RULES AND DECIDE T HIS ISSUE AFTER HEARING THE ASSESSEE.' 6. HAVING CONSIDERED THE SUBMISSIONS MADE BY THE LE ARNED COUNSEL FOR THE REVENUE, WE DO NOT FIND ANY SUBSTANTIAL QUESTIONS O F LAW ARISING IN RESPECT OF THE METHOD OF VALUATION AND THEREFORE ALL THE APPEALS M AY BE REMANDED BACK TO THE TRIBUNAL AND THE LEARNED TRIBUNAL MAY PASS FINAL OR DERS ABOUT THE VALUATION OF CLOSING STOCK IN ACCORDANCE WITH LAW AFTER CONSIDER ING THE DECISION OF THIS COURT CITED SUPRA WHILE PASSING THE FRESH ORDER. THE LEAR NED TRIBUNAL UPON SUCH REMAND SHALL PASS A FRESH ORDER, WITHIN A PERIOD OF SIX MO NTHS FROM TODAY. THE ASSESSEE SHALL APPEAR BEFORE THE TRIBUNAL AT THE FIRST INSTA NCE WITHOUT ANY FURTHER NOTICE ON 17.10.2019. 7. ACCORDINGLY, THESE APPEALS ARE DISPOSED OF. NO C OSTS. 1.2 THUS, AS COULD BE SEEN FROM ABOVE JUDGMENT, THE HONBLE MADRAS HIGH COURT WAS PLEASED TO REMIT THE MATTER BACK TO THE F ILE OF THE TRIBUNAL FOR ADJUDICATION OF THE ISSUE OF VALUATION OF CLOSING S TOCK AND THAT IS HOW NOW WE ARE SEIZED OF THIS MATTER. 2. THE BRIEF BACKGROUND OF THE ISSUE IS THAT THE AS SESSEE WAS EARLIER VALUING FINISHED STOCK CONSISTENTLY AT MARKET PRICE IN PRECEDING YEARS WHICH WAS ACCEPTED BY REVENUE , WHILE IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE CHANGED THE METHOD OF VALUING FINISHE D STOCK AT COST OR MARKET VALUE WHICHEVER IS LOWER AS AGAINST VALUING THE FINISHED STOCK AT MARKET VALUE AS WAS DONE IN EARLIER YEARS. THIS L ED TO REDUCTION OF CLOSING ITA NO.984/CHNY/2007 :- 4 -: STOCK OF FINISHED GOODS AS THE SAME WAS VALUED TO L OWER OF COST OR MARKET PRICE , AS AGAINST METHOD OF VALUING STOCK OF FINIS HED GOODS AT MARKET PRICE IN THE EARLIER YEARS. THE ASSESSEE,HOWEVER, V ALUED OPENING OF STOCK OF FINISHED GOODS AT MARKET PRICE WHICH WAS METHO D ADOPTED FOR VALUING STOCK OF FINISHED GOODS IN EARLIER YEARS. THE AO A CCEPTED SAID CHANGE OF METHOD OF VALUING STOCK OF FINISHED GOODS BUT THE A O WAS OF THE VIEW, THE SAME CHANGED METHOD BE APPLIED TO OPENING STOCK OF FINISHED GOODS AS WELL WHICH LED TO ADDITIONS TO THE TUNE OF RS. 47,4 5,000/- BEING MADE BY AO WHILE FRAMING ASSESSMENT U/S 143(3) OF THE 1961 ACT , VIDE ASSESSMENT ORDER DATED 29.12.2006 . THE MATTER T RAVELLED TO LEARNED CIT(A) WHO WAS PLEASED TO DELETE THE ADDITIONS MADE BY THE AO VIDE APPELLATE ORDER DATED 23.01.2007 PASSED BY LEARNED CIT(A), BY HOLDING AS UNDER: 7.3. I HAVE CAREFULLY CONSIDERED THE FACTS AND CIRC UMSTANCES. THE APPELLANT WAS OBLIGED TO MAKE CHANGE IN ITS METHOD OF VALUATION OF STOCK AS PER THE ACCOUNTING STANDARD OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND SEC TION 145 OF THE INCOME TAX ACT, WHICH MAKES IT MANDATORY FOR COMPANIES TO FOLLOW THE ACCO UNTING STANDARDS. THE CHANGE WAS BONA TIDE. MOREOVER THE REDUCTION PROFIT DURING THI S YEAR WILL BE MADE GOOD IN THE FOLLOWING YEAR. THEREFORE, FOLLOWING THE PRINCIPLES LAID OUT BY THE SUPREME COURT IN THE CASE REFERRED SUPRA, I FIND THAT THE APPELLANT IS ENTITLED TO RE- COMPUTE HIS PROFIT BY FOLLOWING THE CHANGED METHOD OF VALUATION OF CLOSING STOCK. THE ADDITION OF RS. 47,45,000 IS HEREBY DELETED. THIS GROUND IS ALLOWED. 3. THE REVENUE BEING AGGRIEVED FILED APPEAL WITH TH E TRIBUNAL, WHICH IN THE FIRST ROUND OF LITIGATION WAS ALLOWED BY THE TR IBUNAL AND THE ISSUE WAS DECIDED IN FAVOR OF THE REVENUE, VIDE ORDER IN ITA NO.984/MDS/2007 DATED 03.04.2009 PASSED BY TRIBUNAL WHEREIN IT WAS HELD T HAT CHANGE IN METHOD OF VALUING CLOSING STOCK IS TO BE APPLIED BOTH TO T HE OPENING STOCK AND ALSO TO CLOSING STOCK, BY HOLDING AS UNDER: ITA NO.984/CHNY/2007 :- 5 -: :24. AFTER CONSIDERING THE RIVAL CONTENTIONS AN D THE MATERIALS ON RECORD, WE NOTE THAT THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION OF CLO SING STOCK FROM THE MARKET PRICE TO THE COST PRICE WHICH HAS REDUCED THE VALUE OF THE CLOSI NG STOCK. AS PER THE ACCOUNTING STANDARDS, THE VALUATION OF THE STOCK SHOULD BE AT THE COST MARKET PRICE, WHICHEVER IS LESS. THEREFORE, THERE IS NO DISPUTE THAT BY ADOPTING THE COST PRICE METHOD FOR VALUATION OF THE CLOSING STOCK, THE ASSESSEE HAS FOLLOWED THE PRINCI PLE OF ACCOUNTING STANDARDS BUT AT THE SAME TIME ASSESSEE SHOULD HAVE ALSO VALUED THE OPEN ING STOCK ON THE SAME BASIS TO MAINTAIN THE UNIFORMITY AND TO AVOID DISTORTION OF RESULTS. THERE IS NOT BAR IN ADOPTING THE METHOD OF VALUATION WHICH IS BONAFIDE BUT THE METHO D SHOULD BE ACCEPTED FOR BOTH, OPENING STOCK AS WELL AS CLOSING STOCK. WE NOTE THAT THE ASSESSING OFFICER HAS NOT DISCUSSED THIS ISSUE IN DETAIL AND IN OUR VIEW WHEN THE ASSESSEE H AS ADOPTED THE COST PRICE METHOD FOR VALUATION OF THE CLOSING STOCK, THEN THE SAME METHO D SHOULD BE ADOPTED FOR VALUATION OF THE OPENING STOCK ALSO FOR THE ACCOUNTING YEAR UNDER CO NSIDERATION. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES, QUA THIS ISSUE AND REMIT THE SAME TO THE RECORD OF THE ASSESSING OFFICER TO DECIDE THIS ISSUE AFRESH BY DOI NG THE VALUATION OF OPENING STOCK AS WELL AS THE CLOSING STOCK AT THE COST PRICE METHOD. WE HAVE ALREADY SEEN THAT HONBLE MADRAS HIGH COURT WAS PLEASED TO REMIT THIS ISSUE BACK TO THE TRIBUNAL FOR FRESH ADJ UDICATION. NOW, WE ARE SEIZED OF THIS MATTER UNDER DIRECTIONS OF THE HONB LE MADRAS HIGH COURT. WHILE REMITTING MATTER BACK TO THE TRIBUNAL FOR FRE SH ADJUDICATION , THE HONBLE MADRAS HIGH COURT REFERRED TO JUDGMENT OF D IVISION BENCH IN THE CASE OF M/S KADARI AMBAL MILLS LIMITED V. JCIT IN T CA NO. 430 OF 2005 , JUDGMENT DATED 20.06.2001.WE HAVE HEARD BOTH THE RI VAL PARTIES. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE ORDERS PASSED BY VARIOUS AUTHORITIES INCLUDING TRIBUNAL IN THE FI RST ROUND OF LITIGATION. IT WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE T HAT ONLY ONE ISSUE IS PRESENTLY BEFORE TRIBUNAL FOR ADJUDICATION VIDE DIR ECTIONS OF HONBLE MADRAS HIGH COURT WHICH CONCERNS ITSELF WITH CHANGE IN MET HOD ADOPTED FOR VALUING FINISHED STOCK IN THIS YEAR AND WHETHER THE SAME IS ALSO TO BE APPLIED TO OPENING STOCK OF FINISHED GOODS. THE MAI N BONE OF CONTENTION OF LEARNED COUNSEL FOR THE ASSESSEE IS THAT THE SAID C HANGE IN METHOD OF VALUATION OF FINISHED GOODS WAS BONAFIDE AND IS IN CONFORMITY WITH ACCOUNTANT STANDARD ISSUED BY ICAI. IT IS SUBMITTED BY LEARNED COUNSEL FOR ITA NO.984/CHNY/2007 :- 6 -: THE ASSESSEE THAT THE ASSESSEE WAS EARLIER FOLLOWIN G MARKET VALUE METHOD FOR VALUING FINISHED GOODS CONSISTENTLY IN EARLIER YEARS AND IT IS IN THIS YEAR ONLY , THE METHOD OF VALUING FINISHED GOODS WA S CHANGED TO COST OR MARKET VALUE WHICHEVER IS LOWER, WHICH METHOD OF VA LUING FINISHED GOODS IS IN CONSISTENCY WITH ACCOUNTING STANDARD ISSUED B Y ICAI. IT WAS SUBMITTED THAT AUDITORS SUGGESTED TO FOLLOW COST OR MARKET VALUE METHOD WHICHEVER IS LOWER FOR VALUING FINISHED GOODS. IT W AS SUBMITTED THAT THE AO HAS ACCEPTED THIS CHANGE OF METHOD OF VALUING FI NISHED GOODS WHILE FRAMING SCRUTINY ASSESSMENT BUT ONLY THAT THE AO HE LD THAT THIS METHOD OF VALUING FINISHED STOCK IS TO BE APPLIED TO BOTH OPE NING AND CLOSING STOCK OF FINISHED GOODS IN THE YEAR OF CHANGE WHICH HAS CAUS ED PREJUDICE TO THE ASSESSEE. IT WAS SUBMITTED THAT THE SAID CHANGED ME THOD WAS APPLIED TO CLOSING STOCK AND THE SAME WAS NOT APPLIED TO OPENI NG STOCK , AS OTHERWISE THERE WOULD HAVE BEEN CHAIN EFFECT FOR EA RLIER YEARS ALSO. THE LEARNED COUNSEL FOR THE ASSESSEE WOULD RELY ON JUDG MENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF M/S KADARI AMBAL M ILLS LIMITED V. JCIT IN TCA NO. 430 OF 2005 , DATED 20.06.2001 . THE LEARNE D DR WOULD RELY ON THE ASSESSMENT ORDER PASSED BY THE AO. 4. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. WE HAVE OBSERVED THAT ASSESSEE WAS EARLIER FOLLOWING THE MARKET VALUE METHOD FOR VALUING FINISHED GOODS CONSISTENTL Y IN PRECEDING YEARS WHICH WAS ACCEPTED BY REVENUE. THE ASSESSEE CHANGED METHOD OF VALUING FINISHED GOODS IN THE PREVIOUS YEAR RELEVANT TO IMP UGNED ASSESSMENT YEAR ITA NO.984/CHNY/2007 :- 7 -: FROM MARKET VALUE METHOD TO COST OR MARKET VALUE WHICH EVER IS LOWER METHOD . UNDISPUTEDLY, THIS CHANGED METHOD IS CONSI STENT WITH ACCOUNTANT STANDARD AS-2 ISSUED BY ICAI WHICH IS A MANDATORY S TANDARD ISSUED BY ICAI. WHEN AN EXPERT BODY LIKE ICAI ISSUES ACCOUNTI NG STANDARD WHICH IS MANDATORY IN NATURE, IT BECOME INCUMBENT ON THE ENT ITIES TO COMPULSORILY FOLLOW THE SAME OTHERWISE THEIR ACCOUNTS WILL NOT R EFLECT TRUE AND FAIR VIEW. EVEN FOR COMPUTING INCOME CHARGEABLE TO TAX AND PAY MENT OF TAXES, THE INCOME IS TO BE COMPUTED AFTER TAKING COGNIZANCE OF ASS PRESCRIBED BY ICAI, UNLESS THE ASS ARE IN VARIATION/CONFLICT WIT H PROVISIONS OF THE 1961 ACT AND IN THAT SCENARIO, PROVISIONS OF THE 1961 AC T WILL PREVAIL OVER AS. THUS, UNDISPUTEDLY METHOD OF VALUING FINISHED GOODS AT COST OR MARKET VALUE WHICHEVER IS LOWER IS AS PER AS PRESCRIBED BY ICAI AND THUS IT COULD BE SAID THAT CHANGE IN METHOD OF VALUING FIN ISHED STOCK WAS BONAFIDE AND THE ASSESSEE HAS RIGHTLY APPLIED THE S AID CHANGED METHOD TO CLOSING STOCK OF FINISHED GOODS. THIS WILL ALSO SA TISFY THE MANDATE OF SECTION 145A AS WAS EXISTING IN THE STATUTE FOR REL EVANT PERIOD. ONCE THERE IS A CHANGE IN METHOD OF VALUING STOCK WHICH IS HEL D TO BE GENUINE AND BONAFIDE AND THERE IS NO INTENT TO DEFRAUD REVENUE BY CHANGING METHOD OF VALUING STOCK, SOME INCONVENIENCE IS LIKELY TO TAKE PLACE IN THE FIRST YEAR AS THE CLOSING STOCK OF PRECEDING YEAR WHICH HAS BE COME OPENING STOCK OF THE YEAR UNDER CONSIDERATION WAS VALUED AT EARLIER METHOD AND IF THE CHANGED METHOD IS APPLIED ALSO TO OPENING STOCK, TH EN THERE WILL BE TAXING OF THE SAME INCOME TWICE ONCE IN PRECEDING YEAR WHE N STOCK WAS VALUED AT OLD METHOD AND IN THIS YEAR WHEN THE CHANGED MET HOD IS APPLIED EVEN ITA NO.984/CHNY/2007 :- 8 -: TO OPENING STOCK OF THE CURRENT YEAR UNDER CONSIDER ATION, UNLESS OTHERWISE THE CHANGED METHOD IS APPLIED TO OPENING STOCK OF P RECEDING YEAR ALSO AND SO ON , WHICH WILL LEAD TO CHAIN REACTION OF OP ENING OF ASSESSMENT FOR SEVERAL PRECEDING YEARS WHICH IS NOT DESIRABLE AS U LTIMATELY OVER ALL EFFECT IS TAX NEUTRAL. IN OUR CONSIDERED VIEW, THE LEARNED CIT(A) HAS RIGHTLY HELD THAT THERE IS NO NEED TO APPLY CHANGED METHOD OF VA LUING STOCK OF FINISHED GOODS TO OPENING STOCK OF FINISHED GOODS HELD BY AS SESSEE AT THE BEGINNING OF PREVIOUS YEAR RELEVANT TO IMPUGNED AY: 2004-05 WHICH CAN CONTINUED TO BE VALUED AS PER OLD METHOD. THE DECIS ION OF HONBLE MADRAS HIGH COURT IN THE CASE OF KADHURI AMBAL MILLS LIMIT ED V. JCIT IN TCA NO.430 OF 2005 , JUDGMENT DATED 20.06.2011 IS CLEAR LY APPLICABLE. THE DECISION OF HONBLE MADRAS HIGH COURT IS REPRODUCED HEREUNDER: 5. HEARD THE LEARNED COUNSEL AND PERUSED THE DOCUM ENTS ON RECORD. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS CHANGED THE METHOD OF VALUATION OF STOCK FROM MARKET PRICE TO COST PRICE. THE ASSESSES VALUED THE CLOSING STOCK ON THE BASIS OF COST PRICE BUT VALUED THE OPENING STOC K ON THE BASIS OF MARKET PRICE. FOR THE EARLIER ASSESSMENT YEARS, THE ASSESSEE VALU ED THE CLOSING STOCK OF FINISHED GOODS AT MARKET PRICE. THE AUDITOR OF THE ASSESSEE OBJECTED THE SAME AND ALSO ADVISED TO VALUE THE CLOSING STOCK AT COST OR MARKE T PRICE, WHICHEVER IS LESS. THEREFORE, THE ASSESSEE HAS CHANGED THE METHOD OF A CCOUNTING WITH REGARD TO VALUATION OF CLOSING STOCK FROM MARKET PRICE TO COS T PRICE. THE ASSESSING OFFICER ACCEPTED THE METHOD OF VALUATION OF THE CLOSING STO CK AT COST PRICE WITHOUT QUESTIONING THE BONAFIDE OF THE ASSESSEE. SO, THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HIMSELF HAD ACCEPTED THE VALUATIO N OF THE CLOSING STOCK AS ON 31.03.1994 AS DECLARED BY THE APPELLANT/ASSESSES. I N RESPECT OF THE OPENING STOCK, THE ASSESSEE VALUED THE OPENING STOCK AS ON 01.04.1993 AT MARKET PRICE. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW TH AT VALUATION IN RESPECT OF THE OPENING STOCK AND CLOSING STOCK SHOULD BE VALUED IN THIS UNIFORM METHOD I.E., COST PRICE. THE DISPUTE IS AS TO WHETHER DIFFERENT METHO DS COULD BE ADOPTED, ONE FOR THE OPENING STOCK AND ANOTHER FOR CLOSING STOCK. TH E SAID CONTROVERSY IS ALREADY SETTLED BY THIS COURT IN THE CASE OF CIT VS. CARBOR ANDUM UNIVERSAL LIMITED REPORTED IN 149 ITR 759 (MAD) . IN THAT JUDGMENT, T HE ISSUE WAS AS TO WHETHER THE CLOSING STOCK IS TO BE VALUED IN THE SAME METHO D AS WHAT WAS APPLIED TO THE OPENING STOCK. THE HIGH COURT AFTER CONSIDERING THE PRINCIPLES OF VALUATION AND ALSO SERIES OF CASE LAWS HELD AT PAGE 765 AS FOLLOW S:- ON A DUE CONSIDERATION OF THE MATTER, WE ARE INCL INED TO AGREE WITH THE VIEW OF THE TRIBUNAL. IF THE ASSESSEE IS CALLED UPO N TO APPLY THE NEW METHOD OF VALUATION TO THE OPENING STOCK OF THE ACC OUNTING YEAR AS WELL, THEN, IN CONSEQUENCE, THE VALUE OF THE CLOSING STOC K OF THE YEAR PREVIOUS TO ITA NO.984/CHNY/2007 :- 9 -: THE ACCOUNTING YEAR WILL ALSO GET ALTERED AND THAT WILL RESULT IN THE MODIFICATION OF THAT ASSESSMENT FOR THE PREVIOUS YE AR.IT IS FOR THIS REASON, THE TRIBUNAL HAS STATED THAT THOUGH BY ADOPTION OF THE NEW METHOD OF VALUATION FOR THE CLOSING STOCK ALONE THE ASSESSES MAY, APPEAR TO GET SOME UNINTENDED BENEFIT, IN COURSE OF TIME IT WILL GET A DJUSTED AND THE REVENUE WILL NOT BE A LOSER. EVEN APART FROM THIS REASON, I F THE REVENUE'S CONTENTION THAT THE NEW METHOD SHOULD BE ADOPTED BOTH TO OPENI NG STOCK AND CLOSING STOCK-EVEN IN THE FIRST YEAR OF THE INTRODUCTION OF THE NEAR METHOD IS ACCEPTED, THEN IT WILL LEAD TO THE POSITION THAT TH E ASSESSEE CANNOT AT ALL CHANGE THE METHOD OR THE ASSESSES HAS TO REVALUE TH E CLOSING STOCK OF THE PREVIOUS YEAR WHICH WILL BE THE OPENING STOCK OF TH IS YEAR, AND SUCH A REVALUATION ON THE NEW BASIS AS PER THE ASSESSES IS NOT ORDINARILY POSSIBLE. THAT WHEN A NEW METHOD OF VALUATION OF STOCK IS ADO PTED IN ANY PARTICULAR YEAR, THE ASSESSES CAN ON THAT BASIS LEAVE INTACT, THE VALUATION OF THE OPENING STOCK ON THE OLD METHOD HAS BEEN LAID DOWN IN A SERIES OF CASES-' 6. THE ABOVE JUDGMENT WAS ALSO CONSIDERED BY THE BO MBAY HIGH COURT IN THE CASE OF MELMOULD CORPORATION VS. COMMISSIONER OF INCOME TAX REPORTED IN (1993) 202 ITR 789. IN PAGE NOS. 792 TO 794 IT WAS HELD AS FOL LOWS:- ' WE ARE NOT HERE CONCERNED WITH WHETHER THIS IS TH E CORRECT METHOD OR AN ACCEPTABLE METHOD FOR DETERMINING COST PRICE. AT NO STAGE OF THE PROCEEDINGS WAS THE QUESTION EVER RAISED AS TO WHET HER IT WAS PERMISSIBLE FOR THE ASSESSEE TO REVALUE ITS STOCK BY NOT INCLUD ING IN THE COST PRICE OVERHEAD EXPENSES. THE TRIBUNAL HAS NOT DEALT WITH THIS ASPECT, VIZ. THE MANNER IN WHICH THE CLOSING STOCK HAS BEEN VALUED I N THE PRESENT CASE. THEREFORE,, THE DECISION OF THE SUPREME COURT IN TH E CASE OF CIT VS. BRITISH PAINTS INDIA LTD. (1991) 188 ITR 44 IS NOT ATTRACT ED TO THE QUESTION BEFORE US FOR CONSIDERATION. THE DECISION OF THE TRIBUNAL IS ON THE FOOTING THAT SINCE THE CLOSING STOCK WAS VALUED BY ADOPTING A CE RTAIN METHOD, THE SAME METHOD SHOULD BE ADOPTING IN VALUING THE OPENI NG STOCK. IN OTHER WORDS, THE CHANGE IN THE METHOD OF VALUATION, ACCOR DING TO THE TRIBUNAL, SHOULD COMMENCE WITH VALUING THE OPENING STOCK OF A NY PREVIOUS YEAR BY THE NEW METHOD WHICH IS TO BE ADOPTED FOR VALUING T HE CLOSING STOCK AS WELL. THE ASSUMPTION SO MADE BY THE TRIBUNAL APPEAR S TO BE CONTRARY TO THE NORMALLY ACCEPTED ACCOUNTING PRINCIPLES. MR.BHU JALE HAS DRAWN OUR ATTENTION TO A BOOKLET CALLED 'VALUATION OF STOCK A ND WORK-IN-PROGRESS- NORMALLY ACCEPTED ACCOUNTING PRINCIPLES' BROUGHT OU T BY INDIAN MERCHANTS* CHAMBER ECONOMIC RESEARCH AND TRAINING F OUNDATION AND WRITTEN BY SHRI G.P.KAPEDIA. AT PAGE 4 OF THIS BOOK LET THERE IS A DISCUSSION ABOUT CHANGE FROM ONE VALID BASIS TO ANOTHER VALID BASIS. IT STATES : ' 2. WHERE A CHANGE FROM ONE VALID BASIS TO ANOTHER VALID BASIS IS ACCEPTED, CERTAIN CONSEQUENCES NORMALLY FOLLOW. THE OPENING STOCK OF THE BASE YEAR OF CHANGE IS VALUED ON THE SAME BA SIS AS THE CLOSING STOCK- WHETHER THE CHANGE IS TO A HIGHER LE VEL OR TO A LOWER LEVEL, THE REVENUE NORMALLY DOES NOT SEEK TO REVISE THE VALUATION OF EARLIER YEARS. IT NEITHER SACKS TO RAISE ADDITIONAL ASSESSMENTS, NOR DOES IT ADMIT RELIEF UNDER THE TERROR OR MISTAKE' P ROVISIONS. 3. IT IS NOT POSSIBLE TO DEFINE WITH PRECISION WHAT AMOUNTS TO A CHANGE OF BASIS. IT IS A CONVENIENCE, BOTH TO THE T AX PAYER AND TO THE REVENUE, NOT TO REGARD EVERY CHANGE IN THE METH OD OF VALUATION AS A CHANGE OF BASIS. IN PARTICULAR, THE REVENUE EN COURAGES THE VIEW THAT CHANGE WHICH INVOLVES NO MORE THAN A GREA TER DEGREE OF ACCURACY, OR A REFINEMENTS- SHOULD NOT BE TREATED A S A CHANGE OF BATTLER WHETHER THE CHANGE RESULTS IN A HIGHER OR A LOWER VALUATION. ITA NO.984/CHNY/2007 :- 10 -: IN SUCH CASES THE NEW VALUATION IS APPLIED AT THE E ND OF THE YEAR WITHOUT AMENDMENT OF THE OPENING VALUATION.' (UNDER LINING OURS)- THE SAME PRINCIPLE HAS BEEN ADOPTED BY THE KARNATAK A HIGH COURT IN CIT VS. CORPORATION BANK LTD., (1988) 1T4 ITH 616. IT H AS SAID (HEADNOTE): 'THE TWO PRINCIPLES APPLICABLE WITH REGARD TO THE VALUATION OF STOCK ARE THAT THE ASSESSES IS ENTITLED TO VALUE THE CLOS ING STOCK EITHER AT COST PRICE OR MARKET VALUE WHICHEVER IS LOWER, AND THAT THE CLOSING STOCK MUST BE THE VALUE OF THE OPENING STOCK IN THE SUCCEEDING YEAR. IT IS THUS, CLEAR THAT IRRESPECTIVE OF THE B ASIS ADOPTED FOR VALUATION IN THE EARLIER YEARS, THE ASSESSEE HAS TH E OPTION TO CHANGE THE METHOD OF VALUATION OF THE CLOSING STOCK AT COS T OR MARKET PRICE, WHICHEVER IS LOWER, PROVIDED THE CHANGE IS BONA FID E AND FOLLOWED REGULARLY THEREAFTER,' THUS, THE VALUE OF THE CLOS ING STOCK OF THE PRECEDING YEAR MUST FOE THE VALUE OF THE OPENING ST OCK OF THE NEXT YEAR. THE CHANGE, THEREFORE, HAS TO BE EFFECTED BY ADOPTING THE NEW METHOD FOR VALUING THE CLOSING STOCK WHICH WILL, IN ITS TURN, BECOME THE VALUE OF THE OPENING STOCK OF THE NEXT YEAR. IF , INSTEAD, A PROCEDURE IS ADOPTED FOR CHANGING THE VALUE OF THE OPENING STOCK, IT WILL LEAD TO A CHAIN REACTION OF CHANGES IN THE SEN SE THAT THE CLOSING VALUE OF THE STOCK OF THE YEAR PRECEDING WILL ALSO HAVE TO CHANGE AND CORRESPONDINGLY THE VALUE OF THE OPENING STOCK OF THAT YEAR AND SO ON. THIS WAS POINTED OUT BY THE MADRAS HIGH COUR T IN THE CASE OF C1T VS. CARBORANDUM UNIVERSAL LTD., (1984) 149 ITR 759. IN THE CASE BEFORE THE MADRAS HIGH COURT ALSO THE VALUATIO N OF OPENING STOCK HAD BEEN DONE BY THE COMPANY ON THE BASIS OF TOTAL COST I.E., COST INCLUDING OVERHEADS WHILE IT CHANGED ITS METHO D OF VALUATION FOR THE CLOSING STOCK TO 'DIRECT COST' I.E. COST W ITHOUT OVERHEADS. THIS CHANGE IN METHOD WAS MADE BONE FIDE AND THE AS SESSES SAID THAT IT WOULD FOR ADOPTING THIS METHOD CONSISTENTLY IN THE FUTURE JUST AS IN THE PRESENT CASE. THE COURT IN THAT CASE HELD ; 'THE CHANGE WAS A BONA FIDE ONE AND WAS A PERMANENT ARRANGEMENT WHICH WAS TO FOE FOLLOWED YEAR AFTER YEAR THE CHANGE WOUL D HAVE TO BE ACCEPTED NOTWITHSTANDING THE FACT THAT DURING THE ASSESSMENT YEAR IN QUESTION, WHICH WAS THE FIRST YEAR WHEN THE CHANGE OF METHOD WAS BROUGHT ABOUT A PREJUDICE OR DETRIMENT MIGHT BE CAUSED TO THE REVEN UE, BECAUSE THE OPENING STOCK WAS VALUED AT TOTAL COST WHILE CLOSIN G STOCK WAS VALUED AT DIRECT COST.' IT SAID (HEADNOTE): IF THE ASSESSEE IS CALLED UPON TO APPLY THE NEW MET HOD OF VALUATION TO THE OPENING STOCK OF THE ACCOUNTING YEAR AS WELL, THE V ALUE OF THE CLOSING STOCK OF THE YEAR PREVIOUS TO THE ACCOUNTING YEAR WILL AL SO HAVE TO GET ALTERED WHICH WILL RESULT IN A MODIFICATION OF THE ASSESSME NT OF THAT PREVIOUS YEAR.' 7. FOLLOWING THE JUDGMENT OF THIS COURT CITED SUPRA AND AGREEING WITH THE JUDGMENT OF THE BOMBAY HIGH COURT, WE ARE OF THE VI EW THAT THE TRIBUNAL IS WRONG IN HOLDING THAT THERE MUST BE UNIFORMITY I N THE METHOD OF VALUATION OF OPENING STOCK AS WELL AS THE CLOSING S TOCK. IN THE INSTANT CASE THE ASSESSING OFFICER HAS ACCEPTED THE VALUATION OF THE CLOSING STOCK AS ON 31.03.1994 AT COST PRICE AND ALSO BONA FIDE OF THE ASSESSEE IS NOT IN DISPUTE. FURTHER, THE ASSESSEE HAS FOLLOWED THE NEW METHOD CONSISTENTLY. THEREFORE, THE ORDER OF THE TRIBUNAL IS WRONG IN RE JECTING THE CONTENTION OF ITA NO.984/CHNY/2007 :- 11 -: THE ASSESSEE. HENCE, WE SET ASIDE THE ORDER OF THE TRIBUNAL AND RESTORE THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS). IN THESE CIRCUMSTANCES, WE ANSWER THE ABOVE QUESTIONS OF LAW IN FAVOUR OF THE ASSESSES AND AS AGAINST THE REVENUE. THE TAX CASE ( APPEALS) STANDS ALLOWED. NO COSTS. HOWEVER, FOR A LIMITED VERIFICATION, WE ARE RESTOR ING THE MATTER BACK TO THE FILE OF THE AO FOR VERIFICATION OF THE ASSESSEE S CONTENTION THAT THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE ABOVE NEW ME THOD OF VALUING INVENTORY IN SUCCEEDING YEARS ALSO AND NO ATTEMPT I S MADE TO SUPPRESS INCOME CHARGEABLE TO TAX OF THE RELEVANT AY . FURTH ER, ON PERUSAL OF THE ORDER OF THE LD.CIT(A) , IT IS ALSO OBSERVED BY US THAT DIFFERENT METHODS ARE APPLIED BY ASSESSEE FOR VALUING DIFFERENT COMPO NENTS OF INVENTORY, AS UNDER: RAW MATERIALS AND STORES AT COST FINISHED GOODS AT LOWER OF COST AND MARKET VALUE PROCESS STOCK AT COST WASTE AT NET REALIZABLE VALUE IF THE ASSESSEE HAS TO CHANGE METHOD OF VALUING INV ENTORY IN COMPLIANCE WITH AS-2 ISSUED BY ICAI, THEN CHANGED METHOD OF VA LUATION HAS TO BE APPLIED TO ALL THE COMPONENTS OF INVENTORY AS PRESC RIBED UNDER AS-2 AND THE ASSESSEE CANNOT BE ALLOWED TO PICK AND CHOSE ME THOD OF VALUING INVENTORY TO APPLY METHOD TO SOME COMPONENTS OF INV ENTORY AND LEAVING OUT OTHER COMPONENTS OF INVENTORY. IN THAT SCENARIO , IT WILL LOSE THE CHARACTER OF BEING A CHANGE OF METHOD LACKING BONAF IDE AND GENUINENESS WARRANTING CHANGE OF METHOD OF VALUATION OF INVENTO RY. SO, ALSO FOR LIMITED VERIFICATION BY THE AO, WE ARE REMITTING MA TTER BACK TO THE FILE OF THE AO , WHEREIN THE ASSESSEE IS DIRECTED TO JUSTIF Y AS TO WHY IT IS ADOPTING ITA NO.984/CHNY/2007 :- 12 -: DIFFERENT METHOD FOR VALUING DIFFERENT COMPONENTS O F INVENTORIES AND WHETHER THE SAID DIFFERENTIAL METHODS FOR VALUING D IFFERENT COMPONENTS OF INVENTORY ARE CONSISTENT WITH AS PRESCRIBED BY ICAI . THE ASSESSEE IS DIRECTED TO GIVE JUSTIFICATION BEFORE AO FOR ADOPTI NG DIFFERENT METHOD OF VALUING DIFFERENT COMPONENTS OF INVENTORY AND TO PR OVE THAT THESE DIFFERENTIAL METHODS ARE CONSISTENT WITH AS-2 PRESC RIBED BY ICAI AND HENCE ACCORDINGLY, THERE WAS NO INTENT TO REDUCE TA X BY APPLYING NEW METHOD OF VALUING FINISHED GOODS . WE ORDER ACCORDI NGLY. 5. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I N ITA NO.984/CHNY/2007 FOR AY: 2004-05 IS PARTLY ALLOWED FOR STATISTICAL P URPOSES. ORDER PRONOUNCED ON THE 05 TH DAY OF FEBRUARY, 2020 IN CHENNAI. SD/- SD/- ( $ % . . ' ) ( DUVVURU R.L.REDDY ) ) /JUDICIAL MEMBER ( ) ( RAMIT KOCHAR ) /ACCOUNTANT MEMBER /CHENNAI, 4 /DATED: 05 TH FEBRUARY, 2020. TLN 1 /)5 65 /COPY TO: 1. . /APPELLANT 4. 7 /CIT 2. /0. /RESPONDENT 5. 5 /)) /DR 3. 7 ( ) /CIT(A) 6. + /GF