1992 (2) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Rejection by the CIT (Appeals) of the change in the method of accounting adopted by the assessee for valuing the closing stock.
2. Whether the excise duty should be included in the valuation of closing stock.
3. Applicability of proviso to section 145(1) of the IT Act.
4. Bona fides of the change in the method of accounting by the assessee.

Detailed Analysis:

1. Rejection by the CIT (Appeals) of the change in the method of accounting adopted by the assessee for valuing the closing stock:

The assessee, a manufacturer of cigarettes, changed its method of accounting for excise duty and the valuation of stocks of duty-paid finished goods starting from the assessment year 1981-82. The CIT (Appeals) rejected this change, leading to additions of Rs. 92,03,357 for AY 1981-82, Rs. 60,62,910 for AY 1982-83, and Rs. 1,68,73,765 for AY 1983-84. The assessee argued that the change was in line with the guidelines issued by the Institute of Chartered Accountants of India (ICAI) in October 1979. However, the Assessing Officer (AO) did not accept this change, stating that the guidelines were not binding and did not have statutory force under the IT Act. The AO further argued that excluding excise duty from the valuation of finished goods would distort the true income of the assessee.

2. Whether the excise duty should be included in the valuation of closing stock:

The CIT (Appeals) examined the matter in detail and referred to various paragraphs of the Guidance Note on accounting treatment of excise duty published by the ICAI. The CIT (Appeals) noted that excise duty is a cost directly attributable to the manufacturing process and should be included in the valuation of inventories. The CIT (Appeals) also referred to judicial decisions, including the Supreme Court's observation in McDowell & Co. Ltd. v. CTO, which stated that excise duty is directly relatable to manufacture and should be included in the cost of production.

3. Applicability of proviso to section 145(1) of the IT Act:

The CIT (Appeals) upheld the AO's application of the proviso to section 145(1), which allows the AO to reject the assessee's accounts if they do not reflect the true income. The CIT (Appeals) referred to the Supreme Court's decision in Chainrup Sampatram v. CIT, which emphasized that the purpose of crediting the value of unsold stock is to balance the cost of goods entered on the other side of the account. The CIT (Appeals) concluded that the new method of valuation introduced by the assessee did not serve this purpose and justified the AO's invocation of the proviso to section 145(1).

4. Bona fides of the change in the method of accounting by the assessee:

The assessee argued that the change in the method of accounting was bona fide and consistent with the ICAI's Guidance Note. The assessee cited various judicial decisions supporting the right to change the method of valuation of stock if it is bona fide and consistent. However, the CIT (Appeals) and the Tribunal found that the change was not bona fide, as it resulted in a significant reduction in taxable income. The Tribunal noted that the exclusion of excise duty from the valuation of closing stock would result in a distorted picture of the true state of the business, as observed by the Supreme Court in British Paints (India) Ltd. v. CIT.

Conclusion:

The Tribunal upheld the CIT (Appeals) decision to reject the change in the method of accounting for valuing the closing stock and confirmed the additions made by the AO. The Tribunal emphasized that excise duty should be included in the valuation of closing stock, as it is directly attributable to the manufacturing process. The Tribunal also supported the application of the proviso to section 145(1) and found that the change in the method of accounting was not bona fide. The appeals filed by the assessee were dismissed.