2017 (10) TMI 384 - HC - Income Tax

Change of principle for stock valuation - argument raised is that method adopted on opening stock should be followed in closing stock - Held that - There is some fallacy in this argument for the reason that normally method of opening stock is same as it was for closing stock of previous year. If accounting system is to be changed obviously it has to be changed from opening stock of the year onward and that is what has been done in the case in hand. Therefore, it cannot be said that whatever method followed in opening stock that has not been followed in closing stock. Method of previous year cannot be applied otherwise there would be no case or in no circumstances accounting method can be altered and indirectly a bar will be created for Assessee for changing his method of accounting, though with development of system, new and well recognized methods in commercial circle are being introduced and adopted regularly. Revenue then contended that there is some error in mentioning of stock valuation with respect to Assessment Year in question and Previous Year and he shows that figures have been mentioned in reverse, but that being a factual mistake and can always be got rectified by moving application before appropriate authority. This does not give rise to a substantial question of law.

Summary

Issues:
- Appeal under Section 260A of Income Tax Act, 1961
- Change of principle for stock valuation
- Method of accounting for opening and closing stock
- Error in mentioning stock valuation figures
- Substantial question of law

Analysis:
The judgment pertains to an appeal under Section 260A of the Income Tax Act, 1961, arising from a decision by the Income Tax Appellate Tribunal, Lucknow Bench 'B'. The Tribunal had confirmed the judgment of the Commissioner Income Tax (Appeals) regarding the change of principle for stock valuation. The Tribunal relied on a judgment of the Calcutta High Court, emphasizing that the new system adopted by the Assessee was not unjust or illegal, and there was no bar for changing the accounting system. The argument raised about following the method of opening stock in closing stock was deemed fallacious since accounting system changes should occur from the opening stock of the year onwards.

The judgment highlighted that the method of the previous year cannot be automatically applied to the closing stock, as it would hinder the Assessee's ability to adapt to new and recognized accounting methods. The court emphasized that with the evolution of systems, new methods in the commercial sphere are regularly introduced and adopted. Furthermore, the court addressed an error in mentioning stock valuation figures for the Assessment Year and the Previous Year. The counsel for Revenue pointed out a factual mistake in the figures being mentioned in reverse, suggesting that this error could be rectified by submitting an application to the appropriate authority.

Ultimately, the court concluded that no substantial question of law had arisen in the matter and dismissed the appeal accordingly. The judgment underscored the importance of allowing flexibility in accounting methods to accommodate evolving commercial practices and emphasized the need for accuracy in reporting financial figures to avoid potential discrepancies.