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TMI Blog2012 (6) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... on of inventory which is not allowed under the provisions of section 145A and he made an upward adjustment in the income of the assessee of Rs.11,60,494/-. 2-3. The assessee filed the appeal on this issue before the CIT(A) and the CIT(A) has confirmed the addition by holding as under :- "4.2 In view of these circumstances, I am of the considered view that the addition of Rs. 11,60,494/- on account of valuation of closing stock in terms of section 145A of the Act was rightly made by the Assessing Officer. As a result, Ground of appeal No.2 is dismissed." 4. The grounds of appeal read as under :- "1. That the order of Commissioner of (Appeals) is contrary to law and the facts of the appellant's case insofar as it relates to method of accounting. 2. That CIT (Appeals) erred in ignoring the facts that the assessee Company continues to value the Stock at cost or net realizable value whichever is less, as was being done earlier. Shifting to a new ERP package i.e. SAP for improvement in working in a more scientific method which values the stock at cost but takes moving average method to arrive at cost does not amount to change in method of valuation of stock of chan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "16. The cost of inventories, other than those dealt with in paragraph 14, should be assigned by using the first-in, first-out (FIFO), or weighted average cost formula. The formula used should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition." He pleaded that as per this, the assessee has a choice to value the stock at cost either by following FIFO or weighted average cost formula. To arrive at the valuation with both these methods is known as cost. Therefore, the basic fundamental of accounting, i.e. the valuation of inventory should be at cost or net realizable value whichever is lower is met and if one follows either of these there is no change in method of valuation. Therefore, the basic fundamental of accounting for valuing inventory at cost or net realizable value whichever is less is met if anyone of either is followed. There will be no change in the method of valuation. He pleaded that various courts had held that bonafide change of method is permissible. He pleaded that the assessee must alter his regular method, he must abandon what up to that time was his regular method and start a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting. This is so because in such a case it cannot be said that the assessee had followed the earlier method regularly in view of the intermediary changed method of accounting. Such a case will be a case falling under section 145 (2) where no method of accounting has been regularly employed by the assessee, entitling the assessing authority to make an assessment in the manner provided in section 144. For this proposition, he relied on the decision of Reform Flour Mills (P) Ltd. v. CIT [1978] 114 ITR 227 (Cal.). Learned AR further pleaded that in view of this, where it is found that an assessee has changed his regular method of accounting by another recognized method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bonafides of the introduction and continuance of the change. For this, he relied on the decision of Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 861/[1982] 10 Taxman 37 (Cal.). Learned AR also pleaded that in other words, it cannot be contended that a change has to be supported by cogent reasons showing the bonafides of the assessee in so changing the method. For this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f closing stock which was earlier valued at cost and subsequently valued at net realizable value. Hence, in that case, the method was changed from 'At cost' to 'Net realizable value'. He pleaded that no such circumstances exist in the present case. The assessee continues to value the inventory at cost only. He pleaded to set aside the orders of the authorities below. 7. On the other hand, the learned DR relied on the order of the authorities below and also pleaded that the assessee's claim that the assessee has not changed the method of valuation is completely misplaced. The assessee's auditor has reported in the auditor's report on the accounts of the assessee for the year ending 31.03.2008 which has been made in compliance with section 227(2) of the Companies Act, 1956 that they have audited the balance sheet of the assessee as on 31.03.2008 and profit & loss account for the year ended on 31.03.2008 and they have also reported that in their opinion and to the best of their information and according to the explanations given by them, those accounts were subject to the Note which read as under:- "During the year the Company has changed its method of valuation of raw material, com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1.4.2010. Learned AR pleaded that the assessee can change the method of valuation but if it reduces the income then the assessee has to compensate for the same in the year in which the method has changed. He also relied on the decision of ITAT Delhi Bench in the case of Ajanta Raj Proteins Ltd. (supra) and pleaded that the facts of case under consideration are similar to the facts of the case of Ajanta Raj Proteins Ltd. (supra). 8. We have heard both the sides in details. We have also perused the material available on record. The provisions of section 145A were inserted by the Finance (No.2) Act, 1998, w.e.f. 1.4.1999. Prior to the assessment year 1998-99, the entire provisions regarding the method of accounting were contained in section 145 of the Income-tax Act only. As per that section, the income under the head "Profit and gains of business or profession" or "Income from other sources" shall be computed according with either cash or mercantile system of accounting regularly employed by the assessee. In other words, the Act recognizes two system of accounting, cash system of accounting and mercantile system of accounting. The section also provides that the Central Government ..... X X X X Extracts X X X X X X X X Extracts X X X X
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