2004 (12) TMI 733 - AT - Income Tax

Summary

Issues Involved:
1. Change in the method of stock valuation by the assessee.
2. Frequent changes in the method of stock valuation.
3. Bona fide considerations for changing the method of stock valuation.
4. Consistency in the method of stock valuation.
5. Tax avoidance and intent to defraud the revenue.

Issue-wise Detailed Analysis:

1. Change in the method of stock valuation by the assessee:
The primary issue was the change in the method of stock valuation by the assessee from realizable value to the lower of cost or market price in the assessment year 1997-98, which led to a reduction in profit by Rs. 2,65,54,316. The assessing officer (AO) made an addition of this amount to the total income, suspecting the change was not bona fide and was intended to avoid tax liability.

2. Frequent changes in the method of stock valuation:
The assessee changed the method of stock valuation multiple times:
- In assessment year 1996-97, the stock was valued at realizable value.
- In assessment year 1997-98, the method changed to the lower of cost or market price.
- In assessment year 1998-99, the method changed again to market value, and then reverted to the lower of cost or market price through a revised return.

The AO observed that these frequent changes were not consistent and seemed to be aimed at avoiding tax liabilities.

3. Bona fide considerations for changing the method of stock valuation:
The AO and the Tribunal scrutinized whether the changes in the method of stock valuation were guided by bona fide considerations. The AO found no cogent reasons provided by the assessee for the changes. The Tribunal agreed, noting that the assessee did not establish any bona fide reasons for the frequent changes and concluded that the changes were motivated by a desire to avoid taxes.

4. Consistency in the method of stock valuation:
The CIT(A) initially deleted the addition made by the AO, considering the revised return filed by the assessee for assessment year 1998-99 as evidence of consistency. However, the Tribunal found this reasoning flawed, emphasizing that the method of stock valuation must be regularly followed. The Tribunal noted that the changes were made after the books of account had been closed and were not consistently followed in the day-to-day business operations.

5. Tax avoidance and intent to defraud the revenue:
The AO and the Tribunal both found that the changes in the method of stock valuation were driven by an intent to avoid tax liabilities. The AO provided a detailed analysis of the trend in advance tax payments and concluded that the changes were deliberate acts to deceive tax authorities. The Tribunal upheld this view, rejecting the assessee's arguments and emphasizing the moral obligation to pay taxes honestly.

Conclusion:
The Tribunal reversed the order of the CIT(A) and restored the addition made by the AO, concluding that the frequent changes in the method of stock valuation were not bona fide and were intended to avoid tax liabilities. The appeal filed by the revenue was allowed, reinforcing the principle that changes in accounting methods must be consistent and guided by bona fide considerations.