1983 (8) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Change in the method of valuation of closing stock.
2. Whether the new method should be applied to both opening and closing stock.
3. Bona fide nature and consistency of the new method.

Summary:

1. Change in the method of valuation of closing stock:
The assessee, a company registered under the Indian Companies Act, changed its method of valuing closing stock from "total cost" to "direct cost" for the assessment year 1971-72. The ITO added back Rs. 17,80,329, representing the difference due to the new valuation method, stating that the new method did not reflect true profits and was inconsistent.

2. Whether the new method should be applied to both opening and closing stock:
The AAC allowed the change in the method of valuation but directed the ITO to revalue the opening stock as well. The Tribunal, however, upheld the assessee's right to apply the new method only to the closing stock, noting that any distortion in profits would adjust over time as the new method would be consistently applied in future years.

3. Bona fide nature and consistency of the new method:
The Tribunal found the change in the method of valuation to be bona fide and intended for consistent future application. The court agreed, stating that the assessee is entitled to change the method of valuation of stock from "total cost" to "direct cost" and apply it to the closing stock alone in the first year of change. The court cited various precedents, including CIT v. Ahmedabad New Cotton Mills Co. Ltd. and Indo-Commercial Bank Ltd. v. CIT, supporting the assessee's right to change the method of valuation even if it results in a temporary detriment to the Revenue.

Conclusion:
The court answered the question in the affirmative, supporting the Tribunal's decision to delete the addition of Rs. 17,80,329 and allowing the change in the method of valuation of closing stock to "direct cost" for the assessment year 1971-72. The Revenue was directed to pay the costs of the assessee.