2007 (1) TMI 88 - HC - Income Tax

Valuation of stock Section 145 - AO has power to reject the change in the method of valuation of closing stock when the change itself is not genuine and bona fide without producing sufficient evidence to show that change was not genuine or bona fide - change is method of valuation allowed.

Summary

Issues:
1. Whether the Assessing Officer has the power to reject the change in the method of valuation of closing stock adopted by the assessee.

Analysis:

1. The judgment discusses the issue of whether the Assessing Officer has the authority to reject the change in the method of valuation of closing stock adopted by the assessee for the assessment year 1991-92. It is established that the Assessing Authority can reject the change if it is not genuine and bona fide, even if the accounts are correct and complete. The Assessing Officer is empowered under Section 145 to compute income in a manner he deems fit to deduce the correct profits and gains, as per the decision in CIT v. McMillan and Co. [1958] 33 ITR 182.

2. The judgment further clarifies that an assessee can value the closing stock at either stock price or market price, whichever is lower, as per the decision in INDO COMMERCIAL BANK v CIT. The Apex Court emphasized that the correct principle of accounting is to enter stock at cost unless a reduction is warranted due to a fall in market value, as stated in CIT v. BRITISH PAINTS INDIA LTD.

3. The judgment highlights that the Assessing Officer has the authority and duty under Section 145 to make computations for deducing correct profits and gains, as per the decision in CIT v PUNJABSTATE INDUSTRIAL DEV. CORPN. The Revenue is bound by the method regularly employed by the assessee, and the method should enable the proper deduction of real income, profits, and gains, as emphasized in SAKTHI TRADING CO. v. CIT.

4. The judgment addresses the argument that the Assessing Authority can reject the method of valuation adopted by the assessee to arrive at the proper income. The court disagrees with this contention, stating that the well-recognized principle of commercial accounting for valuing closing stock is either cost price or market price, whichever is lower. The court emphasizes that the term "regular" does not mean a permanent pattern of accounting, as per the decision in SANJEEV WOOLEN MILLS v. CIT.

5. The judgment concludes that the method of valuation adopted by the assessee must reflect true income, and the Revenue cannot reject it unless it lacks bona fides. The court dismisses the appeal, stating that in the absence of any finding that the change in valuation is not genuine, and considering the accepted accounting principles followed by the assessee, there is no reason to disturb the Tribunal's order.