2012 (4) TMI 281 - HC - Income Tax

No change in the method of valuation of closing stock by the respondent-assessee during the assessment year 1993-94 as considered by ITAT Held that - Revenue has not been able to demonstrate and show that in the earlier Assessment Years, the respondent had valued the closing stock at cost and not on Net Realizable Value basis and has not shown what is stated and averred in the impugned order passed by the tribunal is factually incorrect. In view of above factual position, it is not possible to hold that the order of the Tribunal is perverse. Deleting the addition made by the Assessing Officer to the income of assessee on account of under valuation of closing stock Held that - Held in Supreme court case in Sanjeev Woolen Mills v. CIT Mumbai (2005 - TMI - 6166 - SUPREME Court) closing stock can be valued on cost price or at market price, if the market price is less than the cost. However, the said principle does not apply if the market value of the closing stock is more than the cost, as profits cannot be brought to tax on notional basis - in favour of the respondent-assessee and against the Revenue. Reimbursement payable by the manufactures AO stated that the respondent assessee was receiving reimbursement of the loss on export from the sugar manufacturers and losses were reimbursed, therefore, the assessee should compute the closing stock on cost basis i.e. Net realizable Value plus reimbursement Held that - there was no statutory or contractual obligation under which the respondent-assesses could have claimed reimbursement of export losses from the mills/manufacturers from whom it had procured/purchased sugar for export - The obligation, if any, was moral but non statutory or non contractual - against the Revenue and in favour of the respondent-assessee Depreciation on lease hold rights - The contention of the appellant-Revenue is that the assessee is not entitled to depreciation in respect of lease hold rights in office/ flat, and car parking space etc. as the respondent/assessee was not the registered owner. - held that - this issue has to be decided against the Revenue and in favour of the respondent-assessee in view of the decision of the Supreme Court in Mysore Minerals v. CIT (1999 -TMI - 5760 - SUPREME Court).

Issues Involved:

1. Change in the method of valuation of closing stock.
2. Bonafide nature of the change in the method of valuation.
3. Deletion of addition made by the Assessing Officer due to under-valuation of closing stock.
4. Acceptance of net realizable value (NRV) for closing stock valuation instead of cost price.
5. Reimbursement payable by manufacturers included in NRV.
6. Entitlement to depreciation for leasehold rights.

Issue-wise Detailed Analysis:

1. Change in the Method of Valuation of Closing Stock:

The main question was whether there was a change in the method of valuation of closing stock by the respondent-assessee during the assessment year 1993-94. The Assessing Officer contended that the assessee had consistently used the cost method in prior years and changed to NRV in 1993-94 to reduce profits artificially. However, the Tribunal found that the method of valuation had not changed and was consistently "cost or NRV whichever is lower." This was supported by the auditor's certificate and past records.

2. Bonafide Nature of the Change in the Method of Valuation:

The Tribunal and CIT (Appeals) examined whether the change in valuation method, if any, was bonafide. The Tribunal concluded that the change was not aimed at reducing profits but was a consistent practice. The CIT (Appeals) noted that the valuation of damaged stock at NRV was consistent with accounting principles and not an attempt to distort profits.

3. Deletion of Addition Made by the Assessing Officer:

The Tribunal deleted the addition of Rs. 16,00,30,000 made by the Assessing Officer, who had rejected the change in valuation method. The CIT (Appeals) and Tribunal found the addition unjustified as the method of valuation was consistent with past practices and accounting standards. The Tribunal noted that the Assessing Officer's reliance on the auditor's initial comments was based on a misconception.

4. Acceptance of Net Realizable Value (NRV) for Closing Stock Valuation:

The Tribunal upheld the use of NRV for valuing closing stock, in line with the Supreme Court's decision in Chainrup Sampatram v. Commissioner of Income-Tax, which allows valuation at cost or market price, whichever is lower. The Tribunal found no evidence from the Revenue to contradict the assessee's consistent use of this method.

5. Reimbursement Payable by Manufacturers Included in NRV:

The Tribunal addressed whether the reimbursement from manufacturers should be included in NRV. The Tribunal found that such reimbursements were not fully recoverable and were based on moral obligations rather than statutory or contractual ones. The CIT (Appeals) had accepted that the reimbursements were uncertain and should be accounted for on a receipt basis, not accrual.

6. Entitlement to Depreciation for Leasehold Rights:

The additional question in ITA No.1166/2011 concerned the entitlement to depreciation on leasehold rights. The Tribunal ruled in favor of the respondent-assessee, citing the Supreme Court decision in Mysore Minerals v. CIT, which allows depreciation if the assessee has possession and interest in the property, even without a registered sale deed.

Conclusion:

The appeals were dismissed, affirming the Tribunal's decisions on all issues. The Revenue failed to demonstrate any factual inaccuracies or provide evidence to counter the Tribunal's findings. The respondent-assessee's method of stock valuation and accounting practices were upheld as consistent and compliant with established accounting standards and legal precedents.

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