2020 (2) TMI 260 - AT - Income Tax

Valuation of inventory - change in method of valuing inventory - HELD THAT - For a limited verification we are restoring the matter back to the file of the AO for verification of the assessee s contention that the assessee has consistently followed the above new method of valuing inventory in succeeding years also and no attempt is made to suppress income chargeable to tax of the relevant ay . Further On perusal of the order of the Ld.CIT(A) it is also observed by us that different methods are applied by assessee for valuing different components of inventory. If the assessee has to change method of valuing inventory in compliance with AS-2 issued by ICAI then changed method of valuation has to be applied to all the components of inventory as prescribed under AS-2 and the assessee cannot be allowed to pick and chose method of valuing inventory to apply method to some components of inventory and leaving out other components of inventory. In that scenario it will lose the character of being a change of method lacking bonafide and genuineness warranting change of method of valuation of inventory. So also for limited verification by the AO we are remitting matter back to the file of the AO wherein the assessee is directed to justify as to why it is adopting different method for valuing different components of inventories and whether the said differential methods for valuing different components of inventory are consistent with AS prescribed by ICAI. The assessee is directed to give justification before AO for adopting different method of valuing different components of inventory and to prove that these differential methods are consistent with AS-2 prescribed by ICAI and hence accordingly there was no intent to reduce tax by applying new method of valuing finished goods.

Issues Involved:
1. Exclusion of receipts arising in the core business under Explanation (baa) to Section 80 HHC.
2. Valuation of opening stock in case of change in valuation of closing stock.
3. Application of Section 14A subsections (2) and (3) and Rule 8D for determining expenditure related to exempt income.

Issue-wise Detailed Analysis:

1. Exclusion of Receipts under Explanation (baa) to Section 80 HHC:
The Tribunal noted that the issue concerning the exclusion of receipts under Explanation (baa) to Section 80 HHC was pending before the Special Bench of the Tribunal. Consequently, the Hon'ble Madras High Court did not find any substantial questions of law to be decided at present and deferred the matter.

2. Valuation of Opening Stock in Case of Change in Valuation of Closing Stock:
The core issue was whether the change in the method of valuing finished stock from 'market value' to 'cost or market value whichever is lower' should be applied to both opening and closing stock. The assessee had consistently valued finished stock at market value in preceding years, but changed the method to 'cost or market value whichever is lower' in the year under consideration. This change led to a reduction in the closing stock value. The Assessing Officer (AO) accepted the change for closing stock but insisted it should also apply to the opening stock, resulting in an addition of Rs. 47,45,000.

The Hon'ble Madras High Court remitted the matter back to the Tribunal, referencing the judgment in M/s Kadari Ambal Mills Limited v. JCIT, which held that there must be uniformity in the method of valuation of opening and closing stock. The Tribunal, upon remand, reiterated that the change in the method of valuing stock was bona fide and in conformity with Accounting Standards issued by ICAI. It was emphasized that applying the new method to the opening stock would lead to a chain reaction affecting previous years' assessments, which is undesirable.

However, the Tribunal also noted that the assessee applied different methods for valuing different components of inventory. The matter was remitted back to the AO for limited verification to ensure that the differential methods adopted for valuing different components of inventory are consistent with AS-2 prescribed by ICAI and that there was no intent to reduce tax liability.

3. Application of Section 14A Subsections (2) and (3) and Rule 8D:
The Tribunal observed that subsections (2) and (3) of Section 14A, inserted by the Finance Act, 2006, are procedural and retrospective. If the AO is not satisfied with the assessee's claim regarding expenditure related to exempt income, the AO must determine the expenditure as per Rule 8D of the Income Tax Rules. The Tribunal set aside the lower authorities' orders and remitted the issue to the AO to ascertain the expenditure incurred in respect of dividend income according to the Rules, after hearing the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO to verify the consistency of the new method of valuing inventory with AS-2 and to ascertain the expenditure related to exempt income as per Rule 8D. The Tribunal emphasized the importance of uniformity in the method of stock valuation and adherence to Accounting Standards to reflect a true and fair view of the financial statements.

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