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TMI Blog2017 (6) TMI 479X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, decide the issue. We direct the AO accordingly. Addition of valuation of closing stock by treating the change in method of closing stock as ‘sham’ - Held that:- We find that the assessee has followed a bonafide system of accounting and once the system is bonafide no interference can be done by Revenue in the valuation of stock. None of the authorities below have doubted the bonafide of the assessee in regard to change in method of valuation of closing stock, we delete the addition and allow the appeal of the assessee on this issue. See Melmould Corporation Versus CIT [1993 (2) TMI 82 - BOMBAY High Court]- Decided in favour of assessee. - ITA No. 142/Mum/2012 - - - Dated:- 26-4-2017 - Sri Mahavir Singh, JM And Sri Rajesh Kumar, AM Assessee by : Shri Farrokh Irani, AR Revenue by : Shri Suman Kumar, DR ORDER Per Mahavir Singh, JM: This appeal by the assessee is arising out of the order of CIT(A)-14, Mumbai, in appeal No. CIT(A)-14/IT.87/RG.6(1)/10-11 dated 30-11-2011. The Assessment was framed by ACIT Circle-6(1), Mumbai for the A.Y. 2008-09 vide order dated 30-12-2010 u/s 143(3) of the Income Tax Act, 1961 (hereinafter the Act ). 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings u/s 271(1)(c) read with, Explanation I thereto are initiated separately for furnishing inaccurate particulars of income/concealment of income., Aggrieved assessee preferred the appeal before CIT(A). The CIT(A) also confirmed the action of the AO by observing in Para 5.3 as under: -. 5.3 I have considered the above submission, the facts of the case and the case law cited by the appellant. The appellant has not controverted the finding of the AO that the lender company namely Balkrishna Paper Mills Ltd is not a company in which public are substantially interested. The appellant has only claimed that Balkrishna Paper Mills Ltd is a public company. As per section 2(22)(e), the loan received by the appellant can be excluded from the definition of deemed dividend only if the said Balkrishna Paper Mills Ltd is a company in which public are substantially interested. From the analysis carried out by the AO it is evident that said Balkrishna Paper Mills Ltd is not a company in which public are substantially interested. If that is so, it is also seen that the statutory auditors of Balkrishna Paper Mills Ltd have, in their audit report stated that as per the information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any shares in, or debentures of, the company; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:] Provided that where two or more persons hold one or more shares in a company joint iv, they shall, for the purposes of this definition, be treated as a single member; 5. Similarly, the Public Ltd. Company s definition is substituted for the following clause 4 by the companies (amendment) Act, 2000 with effect from 13-12-2000 and the same reads as under: - (iv) public company means a company which- (a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company 6. In view of the above the learned Counsel for the assessee stated that as per clause B of Section 2(18) of Companies Act said to be a company in which public substantially interested if it is a company which is not a private company as define in the Companies Act 1956 and the conditions either in item A or item B is satisfied. Section 3(iv) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n confirming the action of Assessing Officer of making addition of ₹ 52,905/- being non reconciliation of AIR Data. The AO failed to appreciate that the company had never transacted with such company CIL Textiles Pvt. Ltd what is mentioned in AIR. Further this income is neither booked by the company nor the credit of TDS on same is claimed/availed. The assessee does not know this party and the assessee cannot be asked to prove the negative. The AO also failed to issue summons to the said party for confirmation. 9. At the outset, both, the learned Counsel for the assessee as well as the learned Sr. Dr. fairly conceded that this issue can be sent back to the file of the AO for fresh reconciliation statement of the assessee so that he can verify vis- vis AIR information relevant reconciliation and accordingly, decide the issue. We direct the AO accordingly. This issue of assessee s appeal is allowed for statistical purposes. 10. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making addition of valuation of closing stock by treating the change in method of closing stock as sham amounting to ₹ 6,17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of change in the method of valuation of stock. Secondly, the change in the method of valuation is also not on account of any statute, rule or regulation. Yet another fact which cannot be ignored is that in the current year, two of appellant's undertakings have been demerged from it and additional income on slump sale basis had to be disclosed by the appellant. It appears, that the lowering of the profits on account of change in the method of stock valuation has been adopted by the appellant as a tool to offset its increased tax liability on account of demerger of its undertaking. In this regard, I would like to discuss the principles which have been laid down in the context of stock valuation by various authorities. 8.12 Although the appellant claims that for implementation of ERP system only weighted average cost method has to be followed, the same is not true because the ERP system is a system which is more advanced than the Tally system of accounting which was hitherto being followed by the appellant and where FIFO method of valuation of stock was being followed. It cannot be the case of the appellant that a more advanced software system would not be capable of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hted average cost method adopted by the assessee as malafide and not bonafide We find that the assessee during the year has taken one time strategic decision for valuation of its inventories on adoption of new EPR system and valued the inventories on the basis of weighted average cost basis instead of FIFO basis which was followed up to earlier accounting years. The assessee has filed complete details of valuation on the basis of new EPR system which has resulted in lower value of closing stock at ₹ 6,17,59,737/- and this has not given any effect because as and when the finished goods were sold and raw material/ WIP (inputs) were consumed in subsequent year was neutralize by the same. We find that the assessee has followed a bonafide system of accounting and once the system is bonafide no interference can be done by Revenue in the valuation of stock. Hon ble Bombay High Court in the case of Melmould Corporation vs. CIT (1993) 202 ITR 789 (Bom) has considered the issue and held that the assessee could not be required to revalue the opening stock by excluding all overhead expenses when the assessee has been permitted to revise the method of valuing the closing stock for that ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a greater degree of accuracy, or a refinement, should not be treated as a change of basis, whether, the change results in a higher or a lower valuation. In such cases the new valuation is applied at the end of the year without amendment of the opening valuation. 6. The same principle has been adopted by the Karnataka High Court in CIT v. Corporation Bank Ltd. . It has said (headnote) : The two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is thus, clear, that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. 7. Thus, the value of the closing stock of the preceding year must be the value of the opening stock of the next years. The change, therefore, has to be effected by adopting the new method for valuing the closing stock wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, was incorrect. 10. Similar question was dealt with by the Allahabad High Court in the case of Triveni Engineering Works Ltd. v. CIT , in a similar manner. 11. Reliance was placed by the Revenue on a decision of the Privy Council in the case of CIT v. Ahmedabad New Cotton Mills Ltd. . In the case before the Privy Council both the opening and closing stock were undervalued. The Privy Council observed in this connection: Mistake cannot be rectified by raising valuation of closing stock only, the valuation of both the opening and closing stock had to be raised. 12. This decision has no application to the question before us which deals with the change method of valuation and the manner in which such change has to be brought about. Whenever, there is a change in the method of valuation. There is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is brought about bona fide and is no reason why such a change should not be permitted. Undoubtedly, the proviso to section 145 of the Income-tax Act, 1961, lays down that : Provided that in any case where the accounts are correct and complete ..... X X X X Extracts X X X X X X X X Extracts X X X X
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