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2014 (3) TMI 333 - AT - Income TaxNon-inclusion of demurrage charges Valuation of closing stock Charges to be included as an element of cost u/s 145A of the Act or not Held that - The AO having adopted the same method of valuation for the closing stock i.e. as for the opening stock being in fact consistently followed the question of validity of the revision by the assessee arose for consideration Relying upon Commissioner of Income-Tax Versus British Paints India Limited 1990 (12) TMI 2 - SUPREME Court - determination of correct profit would require proper valuation of inventories both as at the beginning as well as the end of the relevant accounting period - This is also in essence the rule of the non obstante provision of section 145A since statutorily mandated. The issue is legal and goes to the root of the matter - The same would accordingly get decided on the basis of legal precedents including an analysis - The issue arising directly out of our decision validating the change by the assessee having not been dealt with by the CIT(A) - who in fact approved the change in the first instance with no specific arguments in the matter having also been made thus the matter remitted back to the CIT(A) for adjudication Decided in favour of Revenue.
Issues Involved:
1. Non-inclusion of demurrage charges in the valuation of closing stock. 2. Validity of the change in the method of accounting by the assessee. 3. Applicability of Section 145A of the Income Tax Act. 4. Consistency in valuation of opening and closing stock. Issue-wise Detailed Analysis: 1. Non-inclusion of Demurrage Charges in Valuation of Closing Stock: The Revenue contested the non-inclusion of demurrage charges paid to the Port Authorities in the valuation of the closing stock, which was a departure from the assessee's past practice. The Tribunal found that demurrage charges, being costs for delayed removal of goods, are not part of the cost of purchase, conversion, or bringing the inventory to its present location and condition. Therefore, these charges should not be included in the valuation of closing stock. The Tribunal referenced Accounting Standard (AS)-2 issued by the Institute of Chartered Accountants of India (ICAI), which supports this view. 2. Validity of the Change in the Method of Accounting by the Assessee: The CIT(A) accepted the assessee's claim that the change in the method of accounting was bona fide. However, the Tribunal held that this change does not represent a method of accounting but rather a correction of the valuation process. The Tribunal cited the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC) to support this view. The Tribunal concluded that the change was valid as it led to a more accurate representation of the cost and profit. 3. Applicability of Section 145A of the Income Tax Act: The Revenue argued that Section 145A, which mandates the inclusion of certain costs in inventory valuation, should apply. The Tribunal rejected this argument, stating that demurrage charges do not qualify as costs to be included under Section 145A. The Tribunal emphasized that only qualifying costs should be included, and demurrage charges do not meet this criterion. 4. Consistency in Valuation of Opening and Closing Stock: The Tribunal acknowledged that the opening stock for the year included demurrage charges while the closing stock did not, which could cause distortion. However, it noted that the valuation of the opening stock must match the closing stock of the preceding year. The Tribunal referenced the case of CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC), which supports the principle that the correct method of valuation should be followed. The Tribunal also considered the decision in Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom), which held that there is no need to revise the opening stock value when the closing stock is valued using a different method. However, the Tribunal found that the valuation method previously used was invalid, thus justifying the change. Conclusion: The Tribunal approved the change in the method of valuation by the assessee based on accounting principles and legal precedents. However, it recognized the need for a corresponding change in the valuation of the opening stock to ensure accurate profit determination. The Tribunal restored the matter to the file of the CIT(A) to decide this issue in accordance with the law after allowing reasonable opportunity for hearing to both parties. The Revenue's appeal was allowed for statistical purposes. Order Pronounced: The order was pronounced in the open court on February 26, 2014.
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