2017 (2) TMI 1226 - HC - Income Tax

Change in method of valuation - acceptance of 5% as the basis for valuing the Slow Moving Stock - Held that - Revenue s contention that the acceptance of 5% as the basis for valuing the Slow Moving Stock being unscientific, is baseless in our opinion. Once the engineering expert examined all the heads of stock and valued them, to the best of his judgment, and in the absence of any finding that the 5% was not relatable to such valuation without an alternative valuation or that it is a flawed method of valuation, the AO could not have rejected what was offered as the reduced value of the Slow- Moving Stock. There is nothing on the record to doubt the bonafides of the valuation. In the event of likelihood of the stocks realising a higher amount than the value shown, the same would be reflected in the subsequent year in the income or profit of the assessee, the Revenue s contention is without any merit. Nor do we find any reason to subscribe and uphold the AO s adverse observations that the change in method of valuation was without basis. In fact the observations of the CAG in this case led to the change and adoption of AS-2, which was not previously resorted to. - Decided against revenue

Summary

Issues:
Valuation of Slow-Moving Stock for Assessment Years 2006-07, 2007-08, 2008-09 & 2009-10.

Analysis:
The Revenue challenged the Income Tax Appellate Tribunal's (ITAT) order affirming the valuation of Slow-Moving Stock by the assessee, a public sector unit engaged in fertilizer manufacturing. The Comptroller and Auditor General (CAG) highlighted the need for realistic valuation of Slow-Moving Stock. An engineering valuer appraised the stock, and the assessee valued it at ` 47.76 crores based on the valuation report. The Assessing Officer (AO) rejected this valuation, leading to additions in assessment, citing lack of scientific basis despite the assessee following AS-2. The Commissioner of Income Tax (Appeals) upheld the AO's decision. However, the ITAT accepted the assessee's valuation, emphasizing the genuineness and bona fide nature of the claim. The ITAT noted the change in valuation method based on CAG's remarks and the engineering valuer's report, concluding that the valuation was not arbitrary but actual loss incurred. The ITAT also referred to the Bombay High Court's judgment on Section 145A, supporting the assessee's valuation method due to the deterioration of non-moving stock.

The High Court found the Revenue's contentions unjustified, emphasizing that the assessee had consistently reflected the full value of stock and had valid reasons for the changed valuation method. The Court rejected the Revenue's argument that the 5% valuation basis was unscientific, stating that the engineering expert's valuation was bona fide. The Court highlighted that any potential increase in stock value would reflect in subsequent years' profits. Additionally, the Court dismissed the AO's adverse observations, noting that the change in valuation method was prompted by CAG's remarks and adoption of AS-2, indicating a valid basis for the change. Consequently, the Court found no substantial questions of law in the appeals and dismissed them.