2007 (6) TMI 196 - HC - Income Tax

When the change of accounting method is bona fide and is recognized in accounting principles, the resultant variation in income cannot be forced to be taxed upon the assessee revenue submit that there is reduction in profit in year of change of method of accounting - assessee was entitled to value its opening stock in one way and the closing stock in another AO is not justified in treating the amount of reduction as income of assessee

Summary

Issues:
Interpretation of Accounting Standard 2 for valuation of stock and its impact on income tax assessment.

Analysis:
The case involves an appeal filed by the Revenue against the order of the Income-tax Appellate Tribunal concerning the valuation of opening and closing stock by the assessee. The primary issue revolves around whether the Tribunal was correct in allowing the assessee to value its opening and closing stock differently during a year when Accounting Standard 2 was already in effect. The Revenue argued that the discrepancy in valuation methods led to a reduction in total income, justifying the inclusion of Rs. 19.64 lakhs in the assessee's total income.

Regarding the facts of the case, the assessee, a company, changed its method of stock valuation for the assessment year 2001-02, leading to a revised return of income. The Assessing Officer made an addition to the income due to this change, which was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal allowed the appeal, citing the change as bona fide and relying on a previous court judgment. The Revenue contended that the difference in valuation methods impacted the total income and should be included.

The court analyzed the Accounting Standard 2 issued by the Institute of Chartered Accountants of India, which mandates the valuation of inventory at purchase cost price less commission and discount. The court noted that the change in accounting method was not made with a mala fide intention and was in compliance with the standard. It emphasized that discrepancies in profitability due to such changes are expected in the initial year but should not be taxed if the method is bona fide and in line with accounting principles. Referring to a previous judgment, the court highlighted that a change in accounting method must be accepted by the Revenue if it is bona fide and recognized by the commercial world.

Ultimately, the court upheld the Tribunal's decision, stating that the principles applied were valid and supported by evidence. It concluded that no substantial question of law arose for consideration, leading to the dismissal of the tax case. The judgment emphasized the importance of following accounting standards in determining the valuation of stock and recognized the legitimacy of bona fide changes in accounting methods, even if they result in temporary discrepancies in income.