2006 (12) TMI 268 - AT - Income Tax

Summary

Issues Involved:
1. Change in the method of stock valuation from FIFO to Moving Weighted Average Method.
2. Bona fides of the change in the method of stock valuation.
3. Compliance with Accounting Standards and statutory requirements.

Summary:

Issue 1: Change in the method of stock valuation from FIFO to Moving Weighted Average Method
The assessee-company, a primary dealer in Government securities, changed its method of computing the cost of securities from FIFO to Moving Weighted Average Method. This change resulted in a reduction of profit by Rs. 4,98,90,219 for the assessment year 2000-01. The assessee argued that this change was to align with industry practices and provided a more realistic picture of stock valuation.

Issue 2: Bona fides of the change in the method of stock valuation
The Assessing Authority did not accept the change, deeming the reasons unsatisfactory and added back the reduced profit to the income. However, the CIT(A) found the change bona fide, as it provided a more realistic valuation and was consistent with industry practices. The CIT(A) referenced the agenda note for the Board meeting and judicial precedents to support the bona fides of the change.

Issue 3: Compliance with Accounting Standards and statutory requirements
The revenue argued that the change did not comply with Accounting Standard-1 u/s 145(2) of the Income-tax Act, 1961, emphasizing "substance over form." They contended that a change should be mandated by statute or result in a more appropriate presentation of financial statements. The CIT(A) and the Tribunal found that the Moving Weighted Average method was a better method for the assessee's dynamic and high-volume business, and the change was consistent with the industry standard. The Tribunal concluded that the change was bona fide and in line with statutory and accounting standards.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, finding the change in the method of stock valuation from FIFO to Moving Weighted Average Method bona fide and compliant with accounting standards and statutory requirements. The appeal filed by the Revenue was dismissed.