2011 (4) TMI 506 - HC - Income Tax

Application u/s 154 - Valuation of closing stock - Since the closing stock of one assessment year furnishes the figure of the opening stock for the succeeding year, it follows that the record showing the closing stock of assessment year 1959-60 formed a part of the evidence re1evant to the assessment for the assessment year 1960-61 - Merely because in the original return, there was a mistake on the part of the assessee, such fact cannot be a ground for refusing the prayer of rectification, when the mistake is apparent from the record and the dispute is also not debatable in view of the law settled by the Supreme Court long ago - the point regarding the method of valuation had already been examined by the Assessing Officer in the Assessment year 1986-87 and he had also examined the closing stock for that year - Held that while passing order for the Assessment Years 1987-88 and 1988-89, the Officer ignored his own finding made for the Assessment year 1986-87 by not following the well-settled law of accountancy that the closing stock of an Assessment year should be the opening stock of the next Assessment year and thus, there was a glaring mistake apparent on the record - Decided in favor of the assessee

Issues Involved:
1. Change in the method of accounting for valuing work-in-progress.
2. Rejection of the appellant's application for rectification under Section 154 of the Income-tax Act.
3. Treatment of closing stock of one year as the opening stock of the subsequent year.
4. Applicability of Section 154 for rectifying the alleged mistake.

Issue-wise Detailed Analysis:

1. Change in the Method of Accounting for Valuing Work-in-Progress:
The appellant, a Central Government Undertaking, changed its method of accounting for valuing work-in-progress starting from the Assessment Year 1986-87. The new method involved two steps: valuing work-in-progress at the contracted rate and then deducting an estimated figure representing anticipated loss. This method was not accepted by the Department, which led to the undervaluation of work-in-progress by Rs.1,31,88,000/-. The Assessing Officer found this method contrary to Sections 3 and 4 of the Income-tax Act and the principles of the mercantile system of accounting. The appellant argued that the method was in conformity with the National Accounting Standard, but the Assessing Officer did not find any specific direction supporting this claim.

2. Rejection of the Appellant's Application for Rectification under Section 154:
The appellant filed an application for rectification under Section 154 of the Income-tax Act, arguing that the Assessing Officer did not allow certain deductions based on the Department's own treatment of provisions for loss on incomplete contracts in earlier years. The Deputy Commissioner of Income-tax rejected this application on the ground that the returned income had been accepted without any modification, leaving no scope for rectification under Section 154.

3. Treatment of Closing Stock of One Year as the Opening Stock of the Subsequent Year:
The appellant contended that the closing stock of the Assessment Year 1986-87, as determined by the Assessing Officer, should be taken as the opening stock for the Assessment Year 1987-88. This principle is supported by the Supreme Court's decision in Mahendra Mills Ltd. vs. Appellate Assistant Commissioner of Income-tax, which states that the closing stock of one year furnishes the figure of the opening stock for the succeeding year.

4. Applicability of Section 154 for Rectifying the Alleged Mistake:
The Tribunal held that the deviation from the long-followed system of accounting was not justified and that the loss to be allowed must be an accrued loss, not a contingent liability. The Tribunal dismissed the appeal, stating that the Assessing Officer was not required to adjust the valuation of the stock in the Assessment Years 1987-88 and 1988-89 based on the stand taken in the Assessment Year 1986-87. The Tribunal's decision was based on the argument that rectification under Section 154 was not applicable as it required a probe into the facts.

Judgment:
The High Court found that the Assessing Officer, having rejected the changed method of valuation for the Assessment Year 1986-87 and determined the closing value of the work-in-progress higher by Rs.1,31,88,000/-, should have followed the same principle in the subsequent years. The court held that the mistake was apparent on the face of the record and justified rectification under Section 154. The court set aside the Tribunal's order and remanded the matter to the Assessing Officer for reassessing the returns for the Assessment Years 1987-88 and 1988-89 by treating the closing stock of the previous years as the opening work-in-progress for the subsequent years.

Conclusion:
The appeal was allowed, and the matter was remanded to the Assessing Officer for reassessment, with the formulated question answered in the negative against the Revenue. No order as to costs was made.

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