2014 (3) TMI 1048 - AT - Income Tax

Disallowance on account of understatement of closing stock - change of acounting method - Held that - So far as the change of account is concerned it is a settled fact that section 145 of I.T. Act deals with method of accounting and this section has been substituted by the Finance Act 1995 w.e.f. 01.04.1997 and thereafter sec. 145(1) mandates that the income chargeable under the head business and profession or income from other sources has to be computed either under the cash method or mercantile system of accounting. Sub-section (2) mandates the Central Government to notify in the Official Gazette the Accounting Standards which are mandatorily required to be followed by any class of assessee or in respect of any class of income. The Central Government has so far notified only AS-1 and AS-2 and other Accounting Standards issued by the Institute of Chartered Accountants has only advisory status of a technical body. So far as its application vis-a-vis Income tax provisions are concerned the method of valuation by a particular method is based on commercial consideration. Any method which can give a proper computation of income for the previous year as per I.T. Law is a good method. The method of valuing the stock at cost or market price whichever is less has been accepted by different judicial forums and such change can be rejected only after bringing on record that the change if made from one method to another of valuing the stock at cost or at market cost whichever is less is driven by considerations to lower the profit only. In the present case there is nothing on record to suggest that the change was made by the assessee with any such motive and the finding given by the Assessing Officer to that effect was found to be based on assumption only. Accordingly the CIT(A) was justified in reversing the finding of Assessing Officer on the claim of assessee. This reasoned factual finding of CIT(A) needs no interference from our side. - Decided against revenue

Summary

Issues:
1. Disallowance on account of understatement of closing stock of shares by change in method of valuation.
2. Consideration of accounting standard AS-2 in valuation of shares and securities.

Analysis:
1. The appeal was filed by the revenue against the order of Commissioner of Income Tax (Appeal)-I, Pune, regarding the disallowance on account of understatement of closing stock of shares due to a change in the method of valuation. The revenue contended that the change in valuation method was not justified and that the assessee should have followed a consistent valuation method as per accounting standard AS-2. The Authorized Representative supported the order of CIT(A), arguing that the change in valuation method was appropriate and in line with AS-2. The ITAT found that the change in valuation method was made in a bonafide manner after realizing the deficiency of the earlier method, which was universally accepted. The ITAT upheld the CIT(A)'s decision to allow the assessee's claim, stating that the change was not driven by motives to lower profit, as claimed by the Assessing Officer.

2. The second issue involved the consideration of accounting standard AS-2 in the valuation of shares and securities. The Assessing Officer rejected the change in valuation method, arguing that it was made in a year when the stock market crashed, resulting in a significant decrease in profit. However, the ITAT found that the change to value the closing stock at "cost or market price whichever is lower" was a proper method of accounting, as recognized by judicial forums. The ITAT emphasized that any method providing a proper computation of income as per IT Law is acceptable. The ITAT concluded that the change in valuation method was not made to lower profit, as assumed by the Assessing Officer, and upheld the CIT(A)'s decision to reverse the findings of the Assessing Officer.

In conclusion, the ITAT dismissed the appeal filed by the revenue, affirming the CIT(A)'s decision to allow the assessee's claim regarding the valuation of closing stock of shares and securities.