2009 (1) TMI 522 - HC - Income Tax

Method of accounting - Valuation of stock - In course of assessment, Assessing Officer passed an order that assessee had changed method of valuation of inventory, which had resulted in inventory being shown at a lower value - Method of valuation of inventory was a result of recommendation in consonance with AS-2 on valuation of inventories

Summary

Issues:
Valuation of inventory method change and its impact on revenue.

Analysis:
The judgment deals with the issue of changing the method of valuing inventory and its impact on revenue. The first question raised was regarding the change in the method of valuation of inventory by the assessee. The Assessing Officer noted that the assessee had shifted to a different method resulting in a lower inventory value, following a recommendation by the Institute of Chartered Accountants of India and in accordance with Accounting Standard-2 (AS-2) on 'Valuation of inventories'. The court referred to the decision in CIT v. Carborundum Universal Ltd. where it was emphasized that a change in valuation method, even if detrimental to revenue in the short term, should be accepted if it is bona fide and intended to be followed consistently in the future. The court agreed with the Madras High Court's decision, emphasizing that the choice of valuation method lies with the assessee and as long as it is recognized by practicing accountants and the commercial world, the revenue cannot question it unless it is found to be not bona fide or restricted to a particular year.

The second question raised was already covered against the revenue by a previous decision of the Delhi High Court in CIT v. Woodward Governor India (P.) Ltd. The Tribunal affirmed the order of the CIT(A) in this case, stating that the choice of valuation method rests with the assessee and has been consistently followed in subsequent years. As a result, the court concluded that no substantial question of law arises for consideration, and therefore, the appeal was dismissed.