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TMI Blog2006 (12) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... following FIFO method in working out the cost of the securities, for the purpose of closing stock valuation, as and when cost price is to be adopted. Even though the assessee-company still followed the policy of stock valuation on the principle of cost or market price whichever is less, the assessee-company changed the method of computing the cost of the securities. The assessee-company switched over from FIFO method to Moving Weighted Average Method. It is the case of the assessee that other primary dealers in Government securities are generally following the Moving Weighted Average method to work out the cost of securities. As the assessee-company has changed its method of valuation of closing stock from FIFO to Moving Weighted Average method, the profit of the previous year relevant to the assessment year under appeal got reduced by Rs. 4,98,90,219. 3. This was deeply inquired by the Assessing Authority in the course of assessment proceedings. The assessee-company explained before the Assessing Authority that the change in the method was due to bona fide reasons and therefore the consequent reduction in the profit for the impugned assessment year needs to be accepted. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) that the change is bona fide one and the changed method of valuation is being consistently followed by the assessee-company for the subsequent years. 6. The CIT(A) did not agree with the finding of the Assessing Authority. He found that if any other method of valuation is giving a more realistic picture of the closing stock such a change in the method of valuation has to be considered as bona fide . The CIT(A) made a reference to the agenda note for the Board meeting in which the change in the method of valuation was adopted wherein, the logic and reasoning for the change in the method have been succinctly discussed. The CIT(A) opined that the FIFO method was reflecting the value of the latest purchases only and not the actual value of stock and almost all primary dealers in securities are following the Moving Weighted Average method. In the light of this finding and relying on the decision of the Bombay High Court in the case of Melmould Corpn. ( supra ) the CIT(A) held that the change in the method of stock valuation was bona fide for reason and the Assessing Authority was not justified in rejecting the claim of the assessee on the change of method of stock valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dards issued under that provisions is to prevent deployment of accounting policies which do not reflect the correct income. This has been highlighted by Circular No. 717 issued by CBDT on 14-8-1995. The Accounting Standard needs to be interpreted in a manner so as to further the purpose and context of bringing the Accounting Standards. ( v )Reliance has been placed on the following decisions : ( a ) Kehar Singh v. State (Delhi Administration) AIR 1988 SC 1983 ( b ) RBI v. Peerless General Finance and Investment Co. Ltd. AIR 1987 SC 1023 ( c ) State of Bihar v. CIT [1993] 202 ITR 535 (Pat.) ( d ) Bhoruka Finance Corpn. v. UOI [1993] 202 ITR 723 (Kar.) ( e ) Municipal Corpn. v. State of Rajasthan AIR 1994 (Raj.) 142 ( f ) J.K. Synthetics Ltd. 94 STC 422 (SC) ( g ) Gujarat Industrial Development Corpn. v. CIT [1997] 227 ITR 414 (SC) ( vi )The Accounting Standard-2 issued by the Institute of Chartered Accountants of India deals with valuation of inventories. It is specifically stated in the Accounting Standard that inventory should be valued at the lower of cost or net realisable value. ( vii )Accounting method cannot be decided or changed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute the cost. The assessee has switched over to Moving Weighted Average cost for the reason that it reflected more realistic position. Further it is also in the line with the valuation policy followed by most of the players in the primary dealer market. 15. The Ld. C.A. submitted that change in cost formula was adopted after detailed discussion in Board meetings. Reserve Bank of India is the Regulatory Authority for the primary dealers operating in India. The RBI is one of the major shareholders of the assessee-company and two executives of RBI are on the Board of the assessee-company. At the time of taking decision, the assessee-company had no reason to believe that the change would necessarily dent the profits of the company, as the impact would depend on the market conditions and the volume of transactions during the year. 16. The Ld. C.A. further submitted that the most important point to be considered is that the new cost formula is consistently followed by the assessee in all the subsequent years. 17. The Ld. C.A. relied on the following decisions : 1. Corporation Bank Ltd. s case ( supra ) 2. Melmould Corpn. s case ( supra ) 3. Atul Products case ( supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they are susceptible to daily changes depending upon the interest rate prevailing in the market. The business is highly dynamic by way of frequency as well as by way of volume. When the assessee-company was following FIFO method of cost computation, what was reflected in the valuation was the acquisition cost of the latest instruments even though the instruments held by the assessee-company need not be the instruments of latest purchase. This is because FIFO is not a physical concept but it is an Accounting concept. Even though valuation is done on FIFO method, it does not means that the instruments are also traded by the assessee on first in first out method (FIFO). In some cases, the assessee may not be holding any securities of latest purchases but may be holding the stock of older purchases. This difference between physical concept and accounting concept may provide misleading results in case of volatile transaction entered into by the assessee-company in primary market. That is why the industry as a whole by and large values the stock on Moving Weighted Average method. Therefore, there is no ground to doubt the bona fides of the assessee-company in adopting the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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