1986 (12) TMI 56 - AT - Income Tax

Summary

Issues Involved:
1. Change in the method of valuation of closing stock.
2. Bona fide nature of the change in valuation method.
3. Allowability of the loss due to the change in valuation method.
4. Consistency in the application of the new valuation method.

Issue-wise Detailed Analysis:

1. Change in the Method of Valuation of Closing Stock:
The Income Tax Officer (ITO) computed the assessee's total income for the assessment year 1977-78 and rejected the assessee's contention regarding the change in the method of valuation of closing stock. The assessee changed the valuation method from 'cost' to 'cost or market rate whichever was lower,' resulting in a loss of Rs. 4,64,547. The ITO and the Commissioner (Appeals) held that this change was not bona fide and aimed at reducing taxable profit.

2. Bona Fide Nature of the Change in Valuation Method:
The Commissioner (Appeals) supported the ITO's finding that the change in the method of valuation was not bona fide. It was observed that the change was made to set off the speculation profit of Rs. 5,90,530 against the loss of Rs. 4,64,547. The Commissioner (Appeals) noted that the bulk of the shares held were equity shares of Lynx Machinery Ltd., and there was no rationale behind the change in valuation method during the year.

3. Allowability of the Loss Due to the Change in Valuation Method:
The Commissioner (Appeals) also held that the resultant loss due to the new valuation method was an accumulated past loss, which could not be allowed as a deduction against the trading profits for the year under appeal. The assessee argued that the change in the method of valuation was permissible and cited several case laws to support this contention, including Indo Commercial Bank Ltd. v. CIT, CIT v. Eastern Bengal Jute Trading Co. Ltd., and Snow White Food Products Co. Ltd. v. CIT.

4. Consistency in the Application of the New Valuation Method:
The assessee's learned counsel pointed out that the ITO accepted the changed method of valuation in the subsequent assessment years 1978-79 and 1979-80. The Tribunal noted that the assessee had been valuing shares at cost in the past and changed to a recognized method of 'cost or market price whichever was lower.' The Tribunal emphasized that if an assessee regularly employs a method of accounting, the income should be computed in accordance with it, as per Section 145 of the Act.

Conclusion:
The Tribunal concluded that the change in the method of valuation of shares from 'cost' to 'cost or market price whichever was lower' was bona fide. The Tribunal directed the ITO to allow the loss incurred in valuing the closing stock of shares after due verification, setting aside the Commissioner (Appeals)'s order. The appeal was allowed, affirming the assessee's right to change the method of valuation provided it is bona fide and consistently followed in subsequent years.