2017 (3) TMI 92 - HC - Income Tax

Valuation of opening and closing stock of the raw material (Tendu leaves) - method of valuation - whether the average price principle could not have been applied? - Held that - We do not find any force in the submissions made on behalf of the Revenue for referring the questions of law as stated in the application, under Section 256 (2) of the Act for a decision. The assessee is engaged in the manufacturing and sale of Bidis. It is not disputed that the assessee has branches and sub-branches at several places and the raw material, that is Tendu leaves is stored by the assessee in godowns in the places where the branches and the sub-branches of assessee are located. Tribunal found that during the last years where the said method of accounting had affected the assessee, the assessee did not change the method of valuation and even the Revenue did not point out the said fact to the assessee. The Tribunal rightly held that merely because the change of the method would help the Revenue in a particular year, the Assessing Officer is not at liberty to change the method of valuation that was followed by the assessee for a considerably long period. In the instant case, the assessee has not claimed that he was adopting the method of last in and first out and the assessee had stated that it was possible for some time, in view of the practical difficulty that the Tendu leaves purchased subsequently could be utilized first and vice versa. The finding of facts recorded by the Tribunal do not give rise to any substantial question of law. - Decided against revenue

Summary

Issues:
1. Valuation of opening and closing stock based on average cost vs. First in First out method.
2. Application of 'average price principle' in the case of the assessee.
3. Dispute regarding the method of valuation followed by the assessee.
4. Challenge to the order of the Commissioner of Income Tax (Appeals) by the Revenue Department.
5. Rejection of application by the Tribunal to refer questions of law to the High Court.
6. Arguments presented by both the Revenue and the assessee regarding the valuation method.
7. Consideration of practical difficulties faced by the assessee in following a specific valuation method.
8. Comparison with a similar case before the Madhya Pradesh High Court.
9. Justification for dismissing the Income Tax Application filed by the Revenue.

The High Court of Bombay heard a case involving the valuation of opening and closing stock by an assessee engaged in manufacturing and selling Bidis. The dispute arose as the Assessing Officer questioned the method of valuation based on average cost, insisting on the First in First out method. The Commissioner of Income Tax (Appeals) ruled in favor of the assessee, leading to an appeal by the Revenue Department before the Income Tax Appellate Tribunal, which upheld the previous decision. The Revenue then sought to refer questions of law to the High Court, but the Tribunal rejected the application, prompting the Revenue to file a fresh application under Section 256 (2) of the Income Tax Act.

The Revenue argued that the 'average price principle' should not apply if it affects tax revenue adversely, citing a Supreme Court judgment. On the other hand, the assessee maintained that the valuation method had been consistently followed and accepted by the Revenue in previous years. The High Court noted the practical difficulties faced by the assessee in strictly adhering to a specific valuation method due to the nature of the business and storage locations. The Tribunal found no fault with the average price principle, emphasizing that long-standing methods should not be changed solely for short-term revenue benefits.

The Court referenced a similar case before the Madhya Pradesh High Court, where a comparable method was deemed acceptable. It was concluded that the Tribunal's findings did not raise any substantial question of law warranting a referral to the High Court. The judgment cited by the Revenue's counsel was deemed irrelevant to the current case, leading to the dismissal of the Income Tax Application by the Revenue under Section 256 (2) of the Income Tax Act. The Court's decision was made without costs, settling the matter in favor of the assessee.