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TMI Blog2018 (12) TMI 696X X X X Extracts X X X X X X X X Extracts X X X X ..... uently realised or realisable before the balance sheet for the year in question was adopted. The Tribunal found this method to be scientific and accordingly, allowed the assessee's appeal. In our considered view, the decision in Mahalaxmi Sugar Mills Co. Ltd. (supra) would squarely apply to the case on hand. The Assessing Officer or the CIT(A) does not dispute the fact with regard to the loss suffered by the assessee. We say so after going through the factual matrix of the case, nor such a contention was advanced before us by the Revenue. From the assessment order, it is seen that for the subsequent year also, the assessee had generated huge loss from the share business and has settled all such loans from other incomes in various years. Thus, we are of the clear view that the 'since realised price', as adopted by the assessee, is the price realised by the assessee upon its sale and taking note of the law laid down in the aforementioned decisions, we hold that the method of valuation of the closing stock adopted by the assessee cannot be stated to be lacking in bona fides and the value adopted by the assessee is the value realised by the assessee upon sale of the share and suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is adopted, it would reflect a distorted or unreal value. 6. The assessee would further state that the 'since realised price' method of valuation is an accepted method, in accordance with the Accounting Standard (AS) prescribed by the Institute of Chartered Accountants of India (ICAI), and accordingly, valued his shares at ₹ 6,46,36,684/-. 7. The Assessing Officer, by order dated 31.03.2006, completed the assessment under Section 153A read with Section 143(3) of the Act and while doing so, raised a query as to why the valuation of the closing stock adopted by the assessee, was lower than the cost of the stock. The assessee explained stating that on account of a scandal that had occurred during the relevant time, the prices of the shares had been fluctuating inordinately and on account of difficulty in ascertaining the true value of the share with the stock market crashing day by day, the assessee resorted to adopt the price at which the stock was sold in the first month of the subsequent financial year. The Assessing Officer rejected the contention raised by the assessee as regards the method of valuation and ascertained the market value of the stock as on 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee deliberately valued the closing stock of his stock of shares for the year ending 31.03.2000 by adopting an unconventional method of accounting of valuation only to reduce the value of closing stock and the profit for the year ending 31.03.2000. According to the Assessing Officer, the method of valuation, adopted by the assessee, is wholly impermissible in the light of the following decisions:- (i) CIT vs. Kamani Metals and Alloys Ltd., (1994) 208 ITR 1017 (Bom.); (ii) CIT vs. Tamilnadu Sugar Corpn. Ltd., (2004) 265 ITR 0466 (Madras); and (iii) K.Mohammed Adam Sahib vs. CIT, (1965) 56 ITR 0360 (Mad.). 14. After referring to the above decisions, the Assessing Officer observed that the assessee is even entitled to valuation of stock at NIL following the principle of cost price or market price , whichever is less, provided that there is no market for the goods/stock as on the date of balance sheet. It further held that it is not the case of the assessee that there was no market for the shares held by him as on 31.03.2000 and the shares were freely traded in the market. Thus, he concluded that for income tax purposes, the Assessing Officer is required to asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gularly employed by the assessee. 18. In the case on hand, the Assessing Officer as well as the CIT(A) have faulted the assessee in not adopting a uniform method of accounting. However, one important factor, what has been lost sight of by the Assessing Officer is that the assessment year in question is the first year of the assessee s business in stock. 19. In our considered view, this fact assumes importance and therefore, the authorities were not justified in making an observation that the assessee was adopting different methods of accounting for different assessment years. In this regard, we may note Clause No.31 of Valuation of Inventories (AS-2) issued by the council of Institute of Chartered Accountants of India. The said Clause states that consistency is generally accepted as a fundamental accounting assumption and any change in the accounting policy relating to inventories, which has a material effect in the current period or which is reasonably expected to have a material effect in later periods should be disclosed. It further states that in the case of change in accounting policy, which has material effect in the current period, the amount by which any item in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contingency and if it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements. 23.4. Clause 8 deals with events occurring after the balance sheet date and it contains six sub-clauses viz., sub-clauses 8.1 to 8.6 and all of other provide for contingencies which may indicate need for adjustments to the assets and liabilities as at the balance sheet date. 23.5. Sub-Clause 8.2 gives an illustration regarding adjustment to be made for a loss on a trade receivable account, which is confirmed by the insolvency of a customer, which occurs after the balance sheet date. 23.6. Sub-Clause 8.3 gives an illustration of decline in market value of investments between the balance sheet date and date on which the financial statements are approved. 24. Reverting back to valuation of inventories (AS-2), in sub-clause 6.9, net realisable value has been defined to mean the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale. 25. The assessee's case is that what has been shown in their books of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passed by the authorities as confirmed by the Tribunal by reiterating the observations contained therein and placing strong reliance on the decisions in the case of Kamani Metals and Alloys Ltd., (supra); Tamilnadu Sugar Corpn. Ltd., (supra); and CIT vs. Britsh Paints India Ltd., (1991) 54 Taxman 0499. 30. In Kamani Metals and Alloys Ltd., (supra), one of the questions which came up for consideration, was whether the replacement cost for the purpose of valuing a closing stock for the year ended 31.03.1974 has to be determined with reference to the price announced for the quarter ended 31.03.1974 and not with reference to the price announced for the quarter commencement on 01.01.1973. The Hon'ble High Court of Bombay upheld the order of the Tribunal holding that the closing stock has be valued on the last date of the accounting year which in the said case was 31.12.1974 and the price of the raw material on that date was the same as the price prevailing on the date of purchase and the change took place only after the end of the accounting year i.e., on 01.01.1975 and such change cannot affect the valuation of the closing stock on 31.12.1974. 31. In our considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of the business, such as the creation of reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt any such computation as he deems appropriate for the proper determination of the true income of the assessee. This is not only a right but a duty that is placed on the officer, in terms of the first proviso to s. 145, which concerns a correct and complete account, but which in the opinion of the officer, does not disclose the true and proper income. 34. On a plain reading of the above decision, we are of the view that it supports the case of the assessee. What is required by the assessee to do is to disclose a true picture of his profits and gains and it is the duty of the Assessing Officer to adopt the computation as he deems appropriate for the proper determination of the true income of the assessee. Equally, the observations in paragraph 16 would also enure in favour of the assessee, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10(2)(xv) of the Act, the Court examined the manner of accounting system adopted by the said assessee. The assessee therein adopted mercantile system of accounting and it gave up the agency commission after the end of the financial year. The Revenue contended that the commission had accrued before it was given up and therefore, the assessee cannot state that they had not earned commission in question. The Revenue's contention was rejected by the Hon'ble Supreme Court holding that the commission receivable could have been ascertained only after the managed company made up its accounts, the assessee had given up the commission even before the managed company made up its accounts and merely because the assessee-company was maintaining its accounts on the basis of mercantile system cannot lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. In support of such finding, reference was made to the decision of the Bombay High Court in H.M.Kashiparekh Co. Ltd. vs. CIT reported in (1960) 39 ITR 706 (Bom.). In the said decision, it was pointed out that it was the real income of the assessee-company for the accounting year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in Shoorji Vallabhdas Co. (supra). 40. In the case of CIT vs. Mahalaxmi Sugar Mills Co. Ltd. reported in (1993) 200 ITR 0275, the assessee reduced the closing stock in respect of the stock earmarked for export on the ground that it was constrained to earmark for export the sugar at prices lower than the market rate, the value of such closing stock was lesser than the aforesaid amount. The Assessing Officer did not accept the contention of the assessee and added back the said sum to the adjusted value of the closing stock shown by the assessee. The assessee was unsuccessful before the first appellate authority and carried the matter to the Tribunal. The Tribunal allowed the assessee's claim by examining the documents and found that the loss, in fact, was incurred and this is allowable as a deduction. The Tribunal pointed out that the method of valuation of the closing stock, which was adopted by the assessee, was that it would not take the value of the closing stock on the last date of the accounting year but, it took the estimated realisable market value by adopting the price of sugar subsequently realised or realisable before the balance sheet for the year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) does not dispute the fact with regard to the loss suffered by the assessee. We say so after going through the factual matrix of the case, nor such a contention was advanced before us by the Revenue. 44. The Revenue hinges upon the only issue that the correct method of valuation of closing stock should be the cost or market value, whichever is lower on the closing stock. However, one cannot ignore the fact that the assessee is duty bound to disclose the true state of affairs for determination of the tax and if correct profits and gains could be deduced from the amounts maintained by the assessee, the Assessing Officer cannot accept the same. In doing so, in the instant case, we are required to examine the relevant evidence and not confine ourselves to doctrines or theories. 45. The other contention of the Revenue is that the assessee was not consistent with his accounting standards. We do not agree with the said submission because, the assessee has been maintaining mercantile system of accounting for all the assessment years subsequent to the year under consideration. Noteworthily, the year under consideration is the first year of business of the assessee in trading of stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted is one of the recognised methods and further, whether the changed method of stock valuation is followed consistently year after year. Further, it was pointed out that the change of method must be bona fide and must not be restricted to a particular year. 49. In the instant case, the bona fide of the assessee has not been questioned by the Assessing Officer. No doubt true that such procedure was not followed earlier or later than the assessment year under consideration and this is so because, the assessment year under consideration is the first year of business. The other aspect which the assessee had stated is regarding the fluctuation in the market on account of a scam which had occurred during the relevant time. The figures speak for themselves and they indicate the loss sustained by the assessee. 50. Further, from the assessment order, it is seen that for the subsequent year also, the assessee had generated huge loss from the share business and has settled all such loans from other incomes in various years. Thus, we are of the clear view that the 'since realised price', as adopted by the assessee, is the price realised by the assessee upon its sale and ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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