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2013 (4) TMI 602 - AT - Income TaxMethod of accounting - Change in method valuation of closing stock Rejection of the same subsequent to which additions were made in the income of the assessee - As per revenue AS-II issued by the ICAI is not a valid reason for the change adopted by the assessee and it is not for the assessee s legitimate business needs. Also once the Companies Act mandates the following and compliance of the Accounting Standards issued by the ICAI the CIT (A) s observation that the ICAI Guidelines do not override the Income- tax Act causes no detriment to the case of the assessee and as such the Ld. CIT (A) clearly erred in upholding the addition made by the A.O. Held that - The Companies Act in Section 211 prescribes that the assessee shall follow the Accounting Standards issued by the ICAI in preparing its financial statements and AS-II relevant to the year under consideration the same has been conformed by the assessee by way of change in its method of valuation of closing stock it cannot be but said that the action of the assessee in changing its method of valuation of closing stock was bona fide. In Jackson Engineers (P) Ltd. vs. ITO 1989 (2) TMI 159 Hero Honda Motors Ltd. vs. JCIT 2005 (5) TMI 265 Jaipur Taj Enterprises Ltd. vs. ITO 1991 (9) TMI 121 and DCIT vs. Venus Wire Industries Ltd. 2004 (9) TMI 569 it has been repeatedly held that if there is a bona fide change in the method of accounting which is consistently followed no adverse inference can be drawn against the assessee. Thus change in method of valuation of closing stock in conformity with AS-II has been held to be a bona fide change. Appeal filed by the assessee is allowed.
Issues:
1. Validity of addition of Rs.3,06,53,000 on account of rejection of change in the method of valuation of closing stock. Detailed Analysis: The appellant, in this case, challenged the addition of Rs.3,06,53,000 made by the Assessing Officer due to the rejection of the change in the method of valuation of closing stock. The appellant contended that the change was made in accordance with Accounting Standard-2 (AS-II) issued by the Institute of Chartered Accountants of India (ICAI), which became mandatory from April 1, 1999. The appellant argued that the change in valuation method was scientific and rational, resulting in lower valuation as per AS-2 guidelines. The CIT (A) upheld the addition, stating that the change lacked valid reasons and legitimate business needs. However, the appellant cited various court cases where changes in valuation methods in line with AS-2 were allowed, emphasizing the consistency in following the new method in subsequent years. The appellant further argued that the Companies Act, 1956, mandated compliance with ICAI's Accounting Standards, including AS-II. The appellant referred to the decision in 'CIT vs. Corborandum Universal Ltd.' where a change in the method of valuation of stock was considered bona fide and justified. The Tribunal noted that the change in the valuation method was consistent with AS-II and had been followed in subsequent years, as seen in various court cases. The Tribunal disagreed with the CIT (A)'s view that the ICAI Guidelines did not justify the change and held that the change in valuation method was indeed bona fide. The Tribunal emphasized that compliance with Accounting Standards under the Companies Act supported the appellant's position, leading to the allowance of the appeal. In conclusion, the Tribunal allowed the appeal filed by the appellant, overturning the addition made by the Assessing Officer and the decision of the CIT (A). The Tribunal found that the reasons given by the Assessing Officer and the CIT (A) were insufficient to reject the change in the method of valuation of closing stock adopted by the appellant. The Tribunal held that the change was bona fide and consistent with AS-II, in line with legal precedents, and therefore justified.
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