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2024 (11) TMI 171 - HC - Income Tax


Issues Involved:

1. Constitutionality of Section 145A of the Income Tax Act, ICDS II, and Notification 87/2016.
2. Retrospective application of Section 145A.
3. Exclusion of LIFO method for inventory valuation.
4. Alleged discrimination and arbitrariness in the prescribed methods of inventory valuation.
5. Impact of legislative changes on established accounting practices.

Comprehensive Issue-wise Analysis:

1. Constitutionality of Section 145A of the Income Tax Act, ICDS II, and Notification 87/2016:

The appellants challenged the validity of Section 145A of the IT Act, para 16 of ICDS II, and Notification 87/2016, arguing they violated Articles 14, 19(1)(g), and 265 of the Constitution. They contended these provisions unconstitutionally restricted inventory valuation methods to FIFO or Weighted Average Cost, excluding LIFO, which disregarded established accounting principles. The court upheld the constitutionality of these provisions, indicating that legislative intervention can validly prescribe specific methods for income computation under the IT Act, especially when aimed at uniformity and consistency in tax assessments. The court emphasized that the legislative changes were made with a determining principle and did not constitute manifest arbitrariness.

2. Retrospective Application of Section 145A:

The appellants argued that the retrospective effect of Section 145A, introduced by the Finance Act, 2018, effective from 01.04.2017, was unjust, as it would apply different valuation methods to opening and closing stock within the same financial year, creating notional income. The Single Judge found merit in this contention, ruling that the retrospective application was invalid for the assessment year 2017-18, as it would disrupt the consistency required in stock valuation. The appellate court agreed with this finding, noting that the revenue did not challenge the Single Judge's decision on this point.

3. Exclusion of LIFO Method for Inventory Valuation:

The appellants contended that excluding LIFO from recognized valuation methods was arbitrary, as LIFO was an accepted accounting practice. They argued that the exclusion violated the principle of consistency in accounting and was not justified by any intelligible differentia. The court, however, noted that legislative bodies have the authority to prescribe specific methods for tax purposes, and the exclusion of LIFO was part of a broader policy decision aimed at standardizing tax assessments. The court found no arbitrariness in the exclusion, as it was based on a legitimate policy objective.

4. Alleged Discrimination and Arbitrariness in the Prescribed Methods of Inventory Valuation:

The appellants claimed that the mandatory use of FIFO or Weighted Average Cost methods resulted in discrimination, as it imposed an unequal tax burden on those previously using LIFO. They argued this classification lacked a rational basis and violated Article 14. The court rejected this argument, stating that the classification was reasonable and applied uniformly to all assessees under the specified tax category. The court emphasized that the legislative changes were intended to achieve uniformity in tax computation and did not infringe upon the appellants' rights.

5. Impact of Legislative Changes on Established Accounting Practices:

The appellants relied on past judicial precedents to argue that established accounting practices should be respected in tax assessments. They cited the Delhi High Court's decision in The Chamber of Tax Consultants case, which emphasized the importance of consistent accounting standards. However, the court noted that the legislative amendment to Section 145A addressed the issues raised in that case and provided a clear statutory mandate for inventory valuation methods. The court reiterated that legislative changes can override established practices if they are made with a legitimate policy objective.

In conclusion, the court dismissed the appeals, affirming the constitutionality of the legislative changes and the prescribed methods for inventory valuation. The court highlighted the importance of legislative freedom in economic policy and upheld the amendments as a valid exercise of legislative authority aimed at achieving uniformity and consistency in tax assessments.

 

 

 

 

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