2004 (9) TMI 569 - AT - Income Tax

Method of Accounting - Addition in valuing the closing stock by including Modvat credit - Challenged the order passes by CIT u/s 263 for the assessment year 1996-97 - HELD THAT - It is true that that section 145 came into effect from 1-4-1997 i.e. applicable for assessment year 1997-98. Still the fact remains that the auditing is done by the Auditors in accordance with the guidelines issued by the Institute of Chartered Accountants of India (ICAI). Assessee cannot overlook the guidelines. The guidelines issued by ICAI was mandatory and assessee had no choice. It is not disputed that after the change, assessee was following the method regularly and consistently. Even the bona fide of the change has not been challenged. It is true that the assessee was taking rate of interest in the preceding years as it was at the time of realisation. But this method was forced to be changed due to change in the Accounting Standards (AS-11) prescribed by ICAI. It was to be taken as on the last day of the accounting period. Perusal of the decision of the jurisdictional High Court in Melmould Corpn. s case 1993 (2) TMI 82 - BOMBAY HIGH COURT makes it clear that if the change is bona fide , one time loss occurred due to the change cannot be rejected outrightly. In this case, the Hon ble High Court held that the assessee could not be required to revalue the opening stock by excluding all overhead expenses when the assessee has been permitted to revise the method of valuing the closing stock for that year, as the assessee has decided to adopt this new method of valuation henceforth. The stand of the Revenue that though the change adopted by the assessee was right, the only objection of the Revenue that it should be in accordance with section 145 and section 145 came into effect from the subsequent year and therefore the change made by the assessee during the year under consideration is to be rejected. This stand is without any merits. It is true that the Income-tax Act is a code by itself. Section 145 is applicable even if there is no change of method in the accounting principles prescribed by ICAI. But here is a change that is mooted by the ICAI which is binding on the assessee i.e. the auditors who did the auditing and they are bound to follow the guidelines issued by the ICAI. In the circumstances, the change adopted by the assessee is bona fide and the objection by the Revenue on this count is to be dismissed. In the result, the appeal by the assessee is allowed.

Issues Involved:
1. Addition of Rs. 13,41,512 in valuing the closing stock by including Modvat credit.
2. Rejection of the claim for adopting net interest concept while computing deduction u/s 80HHC.
3. Deletion of addition made on account of Modvat credit to the value of the closing stock amounting to Rs. 25,51,281.
4. Examination of the order passed u/s 263 regarding under-estimation of profit and excess deduction u/s 80-IA.

Summary:

1. Addition of Rs. 13,41,512 in valuing the closing stock by including Modvat credit:
The CIT(Appeals) remanded the matter back to the Assessing Officer with specific observations regarding the inclusion of Modvat credit in the valuation of closing stock. The Tribunal found that this issue is covered in favor of the assessee by the Supreme Court decision in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275. The assessee had accounted for both purchases and closing stock net of Modvat credit. Respectfully following the Supreme Court judgment, this ground was allowed.

2. Rejection of the claim for adopting net interest concept while computing deduction u/s 80HHC:
The assessee's claim for adopting the net interest concept while computing deduction u/s 80HHC was rejected by the CIT(Appeals). The Tribunal noted that a similar issue was remanded to the Assessing Officer in the assessee's own case for the assessment year 1995-96. Following the Tribunal's previous decision, the matter was remanded back to the Assessing Officer for fresh consideration. This ground was allowed for statistical purposes.

3. Deletion of addition made on account of Modvat credit to the value of the closing stock amounting to Rs. 25,51,281:
The Revenue's appeal objected to the deletion of the addition made on account of Modvat credit to the value of the closing stock. The Tribunal noted that this issue had already been decided in favor of the assessee in the assessee's appeal for the same assessment year, following the Supreme Court decision in Indo Nippon Chemicals Co. Ltd.'s case. Consequently, this ground of the Revenue failed, and the appeal was dismissed.

4. Examination of the order passed u/s 263 regarding under-estimation of profit and excess deduction u/s 80-IA:
The CIT noticed that the assessee had under-estimated profits by Rs. 36,94,620 due to a change in accounting policy and allowed excess deduction u/s 80-IA including interest income as business income. The CIT held that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue. The Tribunal, however, found that the change in accounting policy was bona fide and mandatory as per Accounting Standard (AS-11) issued by ICAI. The Tribunal held that the change was consistently followed and accepted by the Revenue in subsequent years. The Tribunal set aside the CIT's order, allowing the assessee's appeal.

Conclusion:
The appeals were decided in favor of the assessee, with the Tribunal allowing the grounds related to Modvat credit and remanding the issue of net interest concept for fresh consideration. The Tribunal also set aside the CIT's order u/s 263, recognizing the bona fide change in accounting policy.

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