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2024 (5) TMI 1366 - HC - Income TaxMethod of valuation of closing stock - adoption of a uniform method of valuation of closing and opening stock - FIFO Method - valuation of inventories at lower of actual cost or net realisable value computed in accordance with the Income Computation and Disclosure Standards (ICDS) notified under sub-section (2) of Section 145 - arbitrariness in making it mandatory to value the stock by applying the FIFO or weighted average cost method - writ petition in challenging the amendment in Section 145A, making it mandatory for adoption of Clause 16 of ICDS (II) for applying FIFO or weighted average cost method across the Board for all assessee for valuing the closing and opening stock. HELD THAT - It is no matter of doubt that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory. The petitioner was applying the LIFO method of accounting as the standard for valuing the closing and opening stock up to 01.04.2017. Before 01.04.2017, there was no mandatory provision for adopting one or another method of Accounting Standards. The Statute also did not mandate only one method of valuing the closing and opening stock. The petitioners were free to adopt any one of the Accounting Standards as notified by the ICAI. The Parliament, after a wide range of consultation from all stakeholders and based on the recommendations of the Committee to maintain uniformity in accounting the income and valuing the stock, has made Clause 16 of ICDS (II) mandatory for the adoption of FIFO or weighted average cost method. This mandatory provision applies to all assessees, and, therefore, find no substance in the submission of the learned Senior Counsel for the petitioners that making Clause 16 of ICDS (II) mandatory for adopting FIFO or weighted average cost method as the only method valuing the stock/inventory suffers from any vires of unreasonable classification or manifest arbitrariness as violative of Article 14 of the Constitution of India. In the present case, the petitioners had been following the LIFO method to value its closing and opening stock and the same had been accepted by the Revenue up to 01.04.2017. It is also a well-settled law that the closing and opening stock are to be valued by applying the same method of valuation. In the case of Ramswarup Bengalimal ( 1953 (9) TMI 22 - ALLAHABAD HIGH COURT , K.G Khosla 1973 (11) TMI 37 - DELHI HIGH COURT , Doom Dooma India Ltd 1992 (12) TMI 41 - GAUHATI HIGH COURT , Mahavir Aluminum Ltd . 2007 (11) TMI 41 - HIGH COURT OF DELHI held that opening and closing of stock of a year have to be necessarily valued on the same basis. The opening stock cannot be valued in a manner different from the valuation of closing stock. In Chainrup Sampathram 1953 (10) TMI 2 - SUPREME COURT , P.M Mohd. Meerakhan 1969 (2) TMI 4 - SUPREME COURT , Sanjeev Woolen Mills 2005 (11) TMI 26 - SUPREME COURT , ALA firm 1991 (2) TMI 1 - SUPREME COURT it has been held that the valuation of closing and unsold stock is not the source of income in the hands of the assessee. However, by applying the method of FIFO with effect from 01.04.2017, the income of the petitioner has increased to the tune of Rs.51.07 Crores without any real income. As substitution of Section 145A with retrospective effect from 01.04.2017 by the Finance Act, 2018 is to give relief to those assessees who had adopted the FIFO to value their stock in the Assessment Year 2017-18 and to save their returns from being declared as incorrect/invalid. This retrospective operation is with said purpose and objective. However, if an assessee did not apply the FIFO to value its opening and closing stock as it was not mandatory, requiring such an assesses to apply FIFO to value their stocks for the Assessment Year 2017-18 would result in an uncalled-for outcome. Therefore, retrospective amendment in substituting Section 145A would not apply to those assessees who had not applied FIFO for valuing their stock in the Assessment Year 2017-18, as these assesses have been following LIFO consistently and had filed their returns before the Finance Act 2018 was enacted. Therefore, in the case of the petitioners, the stipulation under Clause 16 of the ICDS (II) for the adoption of FIFO or weighted average cost for valuation of the stock/inventory cannot be applied in the Assessment Year 2017-2018 for the valuation of the opening stock, as the opening and closing stock of the year is to be valued by applying the same methodology. Thus all the writ petitions are partly allowed, and the impugned notices in all the writ petitions are quashed. The respondents are directed to either accept the valuation of both opening and closing stock, for the Assessment Year 2017-2018, based on the LIFO method or permit the petitioners to value their stocks by applying the FIFO or weighted average cost method.
Issues Involved:
1. Validity of Clause 16 of ICDS (II) and its retrospective application. 2. Constitutionality of Section 145A as amended by the Finance Act, 2018. 3. Impact of mandatory FIFO or Weighted Average Cost method on valuation of inventory. Summary of Judgment: Issue 1: Validity of Clause 16 of ICDS (II) and its retrospective application. The petitioner, engaged in the business of trading jewellery, consistently used the LIFO method for inventory valuation since 1978. The introduction of ICDS by Notification No. S.O. 3079(E) dated 29.09.2016 mandated the use of FIFO or Weighted Average Cost for inventory valuation from Assessment Year 2017-18. The Delhi High Court in *Chamber of Tax Consultants v. Union of India* (2018) held that the ICDS cannot override judicial precedents or provisions of the Act. The retrospective application of Section 145A, substituted by the Finance Act, 2018, mandated FIFO or Weighted Average Cost, invalidating the LIFO method previously used by the petitioner. The court held that the retrospective amendment would not apply to assessees who had not adopted FIFO for the Assessment Year 2017-18. Issue 2: Constitutionality of Section 145A as amended by the Finance Act, 2018. The petitioner argued that Clause 16 of ICDS (II) and the retrospective amendment of Section 145A were arbitrary and violative of Articles 14, 19(1)(g), and 265 of the Constitution. The court found that the legislative intent behind the amendment was to maintain uniformity in accounting standards. However, it held that the retrospective amendment should not apply to assessees who had consistently followed the LIFO method and filed their returns before the Finance Act, 2018. Issue 3: Impact of mandatory FIFO or Weighted Average Cost method on valuation of inventory. The court acknowledged that the valuation of opening and closing stock must be consistent and that the retrospective application of FIFO or Weighted Average Cost would create discrepancies. The court highlighted that the valuation of inventory is not a source of income but a method to balance the cost of goods. The mandatory adoption of FIFO or Weighted Average Cost resulted in an artificial increase in the petitioner's income by Rs. 51.07 crores for the Assessment Year 2017-18. Conclusion: The writ petitions were partly allowed. The court quashed the impugned notices and directed the respondents to either accept the valuation of both opening and closing stock based on the LIFO method for the Assessment Year 2017-18 or permit the petitioners to value their stocks by applying the FIFO or Weighted Average Cost method.
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