2015 (11) TMI 1360 - AT - Income Tax

Disallowance of loss in respect of valuation of closing stock - change in the method of valuation of stock of shares - CIT(A) deleted the addition - Held that - It is a basic principle for accounting that the valuation of stock in trade has to be done at cost or market price, whichever is lower and the same is in consonance with other important accounting principle that anticipated loss is required to be considered, while drawing the final accounts. In the present case, the assessee however was earlier following the method of valuing the stock of shares at cost which, in my opinion, was not correct method followed by the assessee, as the shares represented its stock in trade. As per the advice of the statutory auditors, which was duly supported by the relevant guidelines issued by the RBI as well as Accounting Standard-2 issued by the ICAI, the assessee, therefore, changed the method of valuation of stock of shares from at cost to either cost or market price whichever lower and since the new method adopted by the assessee was more proper and correct and the same was consistently followed by the assessee in the subsequent years, I am of the opinion that there was no justification on the part of the AO to reject the same merely because it had resulted in loss. CIT(A) appreciated all the relevant facts of the case in proper perspective and allowed the claim of the assessee for loss as a result of change in the method of valuation of closing stock, which was fully justified. No justifiable reason to interfere with the order of the ld. CIT(A) giving relief to the assessee on this issue. - Decided against revenue.

Summary

Issues:
Disallowance of loss in valuation of closing stock of shares.

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income-Tax (Appeals) for the assessment year 2006-07, where the disallowance of Rs. 17,34,218/- on account of the assessee's claim for loss in valuation of closing stock was deleted. The assessee, an investment and finance company, changed its method of stock valuation from "at cost" to "cost or market price whichever is lower" based on auditors' advice and RBI guidelines. The AO rejected this change, leading to the disallowance. The CIT(A) allowed the claim, citing adherence to RBI guidelines and modern accounting practices. The Revenue contended that the change was unjustified and not in line with applicable standards. The assessee argued that the change was supported by auditors and relevant guidelines. The Tribunal held that the new valuation method was correct, considering stock in trade principles and accounting standards. The CIT(A) decision was upheld, dismissing the Revenue's appeal.

This case revolved around the disallowance of loss in valuation of closing stock of shares by the Revenue. The assessee changed its method of stock valuation based on auditors' advice and RBI guidelines, resulting in a loss. The AO disallowed this change, but the CIT(A) allowed the claim, emphasizing adherence to modern accounting practices and RBI guidelines. The Tribunal supported the CIT(A)'s decision, stating that the new valuation method was appropriate, considering stock in trade principles and accounting standards. The Revenue's appeal was dismissed, affirming the relief granted to the assessee regarding the valuation issue.