1995 (6) TMI 41 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 70,00,000 due to change in accounting method for consumable stores and machinery spares.
2. Valuation of finished goods on "prime cost" instead of "on cost" basis.
3. Bona fides of the changes in accounting methods.
4. Application of section 145 of the IT Act by the Income-tax Officer (ITO).

Issue-Wise Detailed Analysis:

1. Addition of Rs. 70,00,000 Due to Change in Accounting Method for Consumable Stores and Machinery Spares:
The assessee changed its accounting method in 1977, charging the entire purchase of consumable stores and machinery spares to the profit and loss account instead of actual consumption. The ITO did not accept this change, arguing it caused a "distortion of profits" and resulted in a revenue loss of Rs. 70,00,000. The CIT (Appeals) deleted this addition, accepting the new method as a recognized accounting practice and bona fide. The Tribunal upheld the CIT (Appeals)'s decision, citing various authoritative accounting texts and case laws supporting the new method as well-recognized and acceptable in accountancy.

2. Valuation of Finished Goods on "Prime Cost" Instead of "On Cost" Basis:
The assessee also changed its method of valuing finished goods from "on cost" (including various overheads) to "prime cost" (only material cost and direct labor). The ITO rejected this change, stating it concealed profits amounting to Rs. 85.48 lakhs. The CIT (Appeals) deleted this addition, recognizing the new method as an accepted accounting practice. The Tribunal agreed, noting that the new method was more refined and recognized by authoritative sources, including the Supreme Court in the case of British Paints India Ltd. The Tribunal emphasized that the change was bona fide and consistently followed in subsequent years.

3. Bona Fides of the Changes in Accounting Methods:
The Tribunal examined the bona fides of the changes, noting the assessee's argument of operational inconvenience in valuing numerous small items. The Tribunal found this explanation reasonable, given the company's growth and increased number of items over the years. The Tribunal also noted that the change was a one-time affair and consistently followed in subsequent years, with the revenue accepting the new method in later assessments. The Tribunal concluded that the changes were bona fide and made for genuine reasons, not merely to gain a tax benefit.

4. Application of Section 145 of the IT Act by the Income-tax Officer (ITO):
The Tribunal considered whether the ITO had impliedly applied the proviso to section 145(1) of the IT Act. The ITO had not expressly resorted to this proviso, but the Tribunal noted that the ITO's actions implied its application. However, the Tribunal distinguished this case from others cited by the revenue, such as British Paints India Ltd., where the method adopted by the assessee had no support in accounting principles. In contrast, the methods adopted by the assessee in this case were well-recognized and supported by authoritative texts and case laws. The Tribunal concluded that the ITO's additions were not justified, as the new methods were bona fide and accepted in accountancy.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decision to delete the additions made by the ITO, recognizing the new accounting methods as bona fide and well-recognized in accountancy. The appeal by the revenue was dismissed.