2002 (9) TMI 25 - HC - Income Tax

Change iin valuation method - (i) Whether, the assessee was barred by any provision of the law from changing its stock-in-trade valuation method from the cost basis, which was followed for the assessment year 1994-95, being the year of commencement of business, to the method of cost or market value, whichever is lower? - (ii) Whether, an assessee is permitted in law to change its method of stock valuation to benefit itself in the matter of incidence of tax, provided such change is made honestly, and a sufficient degree of consistency is disclosed in the matter of change, so as to satisfy the requirements of section 145 of the Income-tax Act, 1961? - (iii) Whether the Tribunal erred in law in finding that the assessee had not satisfied the conditions stipulated in law which permit an assessee to change the stock valuation method in one particular assessment year, the relevant assessment year in this case being 1995-96? All questions are answered in favour of assessee

Summary

Issues Involved:
1. Whether the assessee was barred by law from changing its stock-in-trade valuation method.
2. Permissibility of an assessee changing its method of stock valuation to benefit itself in tax incidence.
3. Whether the Tribunal erred in law in finding that the assessee had not satisfied the conditions for changing the stock valuation method.

Detailed Analysis:

Issue 1: Whether the assessee was barred by law from changing its stock-in-trade valuation method.
The court examined the facts and circumstances under which the assessee changed its stock valuation method from cost basis to cost or market value, whichever is lower, for the assessment year 1995-96. The change was suggested by the auditors and adopted by the board of directors in October 1994. The Institute of Chartered Accountants of India had also made this method compulsory from April 1, 1995. The court noted that the change in valuation method resulted in a significant reduction in the closing stock value, thereby reducing the taxable profit. However, the court found no suppression or misrepresentation by the assessee. The court concluded that the assessee was not barred by any provision of law from changing its stock valuation method, provided it was done honestly and consistently.

Issue 2: Permissibility of an assessee changing its method of stock valuation to benefit itself in tax incidence.
The court discussed whether an assessee is permitted to change its stock valuation method to benefit itself in tax incidence. The court referred to section 145 of the Income-tax Act, 1961, which allows income to be computed according to the method of accounting regularly employed by the assessee. The court cited various precedents, including the Supreme Court case of Chainrup Sampatram v. CIT, which accepted the method of valuing stock at cost or market value, whichever is lower. The court emphasized that the change in accounting method must be honest and consistent. The court concluded that the assessee is permitted to change its stock valuation method to benefit itself in tax incidence, provided the change is made honestly and consistently.

Issue 3: Whether the Tribunal erred in law in finding that the assessee had not satisfied the conditions for changing the stock valuation method.
The court found the Tribunal's reasoning vague and unsatisfactory. The Tribunal had disallowed the assessee's claim by stating that the conditions for changing the valuation method were not satisfied, without specifying what those conditions were. The court noted that the assessee had continued with the new valuation method in subsequent years, demonstrating consistency. The court concluded that the Tribunal erred in law in finding that the assessee had not satisfied the conditions for changing the stock valuation method. The court emphasized that the method adopted by the assessee was acceptable and reflected true profits.

Conclusion:
The court answered all three questions in favor of the assessee. It held that the assessee was not barred by law from changing its stock valuation method, that the change was permissible to benefit in tax incidence provided it was honest and consistent, and that the Tribunal erred in its finding. The court restored the order of the Commissioner of Income-tax (Appeals) and set aside the Tribunal's order. The court also awarded costs to the assessee due to the unsatisfactory manner of disposal of the case by the Tribunal.