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1998 (7) TMI 148 - AT - Income TaxMethod Of Accounting Valuation Of Closing Stock Recognition Fifo And Lifo Methods Consistency In Valuation Method Change In Method Of Valuation
Issues Involved:
1. Whether the revenue was justified in rejecting the LIFO method of valuation of closing stock adopted by the assessee. 2. Whether the principle of finality and consistency in tax litigation applies to the method of stock valuation. Detailed Analysis: Issue 1: Justification for Rejecting the LIFO Method The central issue in this appeal is whether the revenue was justified in rejecting the LIFO (Last In First Out) method of valuation of closing stock, which the assessee had consistently adopted for 18 years starting from the assessment year 1976-77. Initially, the assessee used the weighted average cost method until 31-12-1974. The LIFO method, which assumes that the last material purchased is consumed first, was adopted thereafter. The Assessing Officer rejected this method for the assessment year 1976-77, leading to an addition of Rs. 58,46,535, which was confirmed by the CIT(A). The Tribunal's Division Bench members differed in their opinions, leading to a Third Member's decision. The Third Member upheld LIFO as a recognized method of accountancy, stating that there was no prohibition under income-tax law against its adoption, provided the change was bona fide. However, the Third Member justified a one-time addition for the year of change due to the lowering of profits. The assessee challenged the one-time addition, while the revenue did not challenge the recognition of LIFO. The Tribunal, in subsequent years (1977-78 to 1982-83), consistently upheld the LIFO method, and the revenue did not seek references against these orders. The Assessing Officer accepted the LIFO method for the assessment year 1989-90 and rectified previous assessments accordingly. However, the Assessing Officer reopened the matter in the assessment year 1994-95, citing Tribunal decisions in the cases of P.N. Gadgil and Kirloskar Cummins Ltd., which favored the department. The CIT(A) confirmed the rejection of LIFO, asserting that it was defective and did not ascertain true profits, favoring the FIFO (First In First Out) method instead. Issue 2: Principle of Finality and Consistency in Tax Litigation The learned counsel for the assessee argued that the issue had reached finality through previous Tribunal decisions and should not be disturbed, citing the Apex Court's decision in Radhasoami Satsang v. CIT. The learned Sr. D.R. supported the CIT(A)'s order, referencing the Supreme Court's decision in CIT v. British Paints India Ltd., which allows rejection of a method if true profits cannot be deduced. The Tribunal considered the principle of finality and consistency, referencing the Hon'ble Bombay High Court's decision in H.A. Shah & Co. v. CIT, which emphasized that settled positions should not be reopened without fresh facts. The Tribunal also cited the Apex Court's decision in Radhasoami Satsang, which stated that a fundamental aspect found as a fact should not be changed in subsequent years if it has been allowed to sustain. The Tribunal noted that the LIFO method had been consistently accepted for over 20 years, with no pending litigation before higher courts. The Tribunal found no fresh material to justify reopening the settled issue, distinguishing the cases of P.N. Gadgil and Kirloskar Cummins Ltd. as not providing new grounds for reopening. The Tribunal also rejected the contention that LIFO did not deduce true profits, noting that it is a recognized method under Accounting Standard 2 and International Accounting Standard. The Tribunal emphasized that assumptions about price rises or consumption patterns should not determine the correctness of a method. Conclusion: The Tribunal concluded that both FIFO and LIFO are recognized methods, and the assessee has the option to adopt either, provided it is done consistently. The revenue cannot disturb a settled position without compelling reasons. The Tribunal set aside the CIT(A)'s order and deleted the addition, upholding the consistent adoption of the LIFO method by the assessee.
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