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TMI Blog1984 (7) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... note 18 is relevant in which it was mentioned that last in first out method (LIFO) was adopted for computing direct cost and that on the basis of method which was used in the earlier years the cost as on 31-12-1975 was ₹ 48,659,804. It was the assessee's contention that because of the rising prices the assessee found it proper to adopt a correction method. The directors in their report in paragraph No. 10 explained to the shareholders that LIFO method was more realistic. 3. The assessee's business was that of manufacture of cutting tools, tungsten ore and tools for steel which was sort of a continuous process for 8 to 10 months and as such it was difficult to have specific identification of different consignments of new materials. (It must be clarified that the assessee was getting ore and steel from abroad and had to pay customs duty to the concerned authorities). The Commissioner (Appeals)'s observation was that identity was possible as the assessee received consignments from abroad. The assessee's stand was that the method adopted by it was more realistic and that notional profits could not be taxed. Before the Commissioner (Appeals), the assessee relied on Vallambrosa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative and officials, visited the factory premises of the assessee- company and saw the working procedure. The first point of the manufacturing process was that the bulk of manganese ore was poured in a very huge tank and there was some chemical process as a result of which in another tank there was acid. It must be stressed, however, that it is not the final product which has come out from the manganese ore as it contains manganese ore of nearly 80 per cent. The chemical procedure goes on and thereafter at certain stages different chemicals are poured, out of which, by further process, some different products are produced. However, the finished product comes out of the factory after a period of nearly 8 to 10 months. This is a clear indication that the chemical process of manufacture goes on for about 8 to 10 months and, therefore, it is humanely impossible to say as to what product has come out of the first manganese ore that was put in the first tank. It may be further stated that there are as many as more than 500 items and even to keep quantity-wise tanks of everything is not possible. It is no doubt true that the assessee gets manganese ore and other steel in its raw for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpetual LIFO, the rate per unit is calculated at the time of every accept. In case of periodic LIFO, the rate is calculated taking into account the average of the costs prevailing during a particular period. The company has adopted the periodic LIFO formula covering the financial year as the period, for the following reasons: (a)It is closer to the weighted annual average method previously followed by the company. (b)The average cycle time from the consumption of ore to the completion of the final product is about 10 months which is closer to the period adopted. The company has adopted the periodic LIFO method as it is more stable and the income figure is not affected by short-term fluctuations in prices of raw material." What is the precise effect of the correction in method of valuation applied by the company in 1975? The company had adopted a certain basis over the period 1970-74 for ascribing cost to stocks consumed and on hand. Let us describe it by an illustration as it will also help one to ascertain the precise correction it made at the end of 1975. Basis adopted 1970-74 Description Units Cost Opening stocks 20 100 (unabsorbed cost) Purchases made 30 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larger than purchases and, hence, the cost incurred in the year itself had been set off instead of the average cost (based on opening stock plus purchases) of 8.4 per unit, i.e., 336, and carrying forward 50 attributable to opening stock instead of 84 on average cost basis. The change made in 1975 from 1974 is, therefore, this: instead of taking the cost of stock consumed on the average of opening stock plus purchases, the cost of it is taken as its actual cost and the balance remaining (420-370) in that account is automatically carried forward against stock on hand at the end of 1975. This has been briefly described as 'periodic LIFO formula' in the company's annual report for 1975. If the company had continued the basis of 1974, then the cost of stocks consumed on average basis would be 40 multiplied by 8.4, i.e., 336 and the cost to be ascribed to stock-on hand being the difference (420-336) would be 84 instead of 50. Thus, the difference of 34 (84-50), due to rise in price of raw material, would be brought to tax in the year 1975 itself when it remained unrealised by consumption. Even Lord Clyde's rule in the Whimster & Co. v. IRC [1925] 12 TC 813 does not contemplate it. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the assessee. 10. We produce the following cases for basic differences-: Anaconda American Brass Ltd.'s case (supra) Assessee's case 1. Under the LIFO system, adopted by the company in 1947 for tax purposes, the company brought in inventories to account the values of 1936 to 1946, i.e., over 10 years (p. 95) In our case, while applying the correction to the valuation of inventories at the end of 1975, the unabsorbed cost of inventories relating to the year 1974 (opening inventories of 1975) was taken at the figure which was accepted by the Income-tax Department for making the assessment for the assessment, year 1975-76. 2. The company's processing of goods was about eight weeks. (pp. 93-94) The company's processing takes about 11 months. 3. The Privy Council explained the fact that the prices which the company charged for its products were closely related to prices paid by it to replace the metals used in manufacturing its products and when the market prices of purchased metal were increased, the company at once correspondingly increased the prices of its products. (p. 93) The prices of the company's products are not increased automatically every time the prices of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used. As for FIFO When prices are rising profit is not overstated. If turnover is rapid the charges to production should be near enough to current replacement prices. Acceptance by Inland Revenue Remarks Apparently not acceptable (Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC). It is not clear what would be decided by the Courts if the stock held had been recently acquired. The Courts take the view that the method employed should 'as nearly as possible accord with the facts'. The need to maintain capital intact in real terms in a period of inflation has tended to make accountants stress the value of LIFO." (p. 679) Vallambrosa Rubber Co. Ltd.'s case (supra) states that the expense lies where it falls. The assessee's case is not comparable to WIDIA (India) Ltd., as the turnover of the business of WIDIA Co. is on a small scale. Therefore, considering the ratio in the case of Vallambrosa Rubber Co. Ltd. ( supra), we cannot say that this method is not approved in accountancy. It was argued by the departmental representative that if the LIFO method is accepted, then the assessee because of this Particular mode of accounting may build sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority or the ITO who had jurisdiction to assess the assessee. 14. Shri Pophale then stressed that all the provisions in the Act will be overridden by section 144B because of the words 'notwithstanding anything contained in this Act'. According to Shri Pophale, it is obligatory on the part of the ITO to send draft to the assessee (when the income exceeds ₹ 1 lakh) and the ITO has to complete the assessment order on the basis of the draft order. In the present case, the ITO forwarded draft to the IAC and the IAC's jurisdiction is to confine to the objection raised by the assessee. Directions, if any, given by the IAC art binding on the ITO and not on the assessee. Shri Pophale made a point that section 144B(7) is also relevant because the IAC has to exercise power to pass an order under section 144B. Shri Pophale drew our attention to section 11 of the Act and stated that when the income from property is held for charitable or religious purposes, there are certain conditions or a frame- work within which the ITO has to pass an order whereas as far as section 144B is concerned, there is an obligation on the IAC to pass an order making suggestion to the ITO. It was stressed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be. allowed as a deduction. In view of the Special Bench order in Amar Dye-Chem. Ltd.'s case (supra), we turn down the assessee's claim. 17. The assessee-company claimed deduction on account of superannuation fund contribution. The AAC (acting as assessing officer) added back contribution of ₹ 80,995 as the superannuation fund was not recognised and he allowed deduction of ₹ 52,303 as was originally claimed by the assessee. The assessee-company filed before the Commissioner (Appeals) details of the contributions for the years 1971 to 1975 which amounted to ₹ 89,507 and stated that the said fund was approved by the Commissioner, Pune, by his order dated 4-3-1972. The IAC acting as the ITO allowed only 80 per cent of the contribution. Before the Commissioner (Appeals) it was claimed that the assessee was entitled to a further deduction of ₹ 19,304 besides ₹ 52,303. The Commissioner (Appeals) accepted the contention of the assessee-company. The assessee further challenged the deduction at the rate of 20 per cent following the CBDTs Circular No. SO 3433 dated 21-10-1965. The Tribunal, Bombay Bench 'D', in the case of Mahendra & Mahendra Ltd. held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -1981. I have given it very careful consideration. I, however, find myself unable to agree with my learned brother. I, accordingly, proceed to write a dissenting order. 2. The assessee-company manufactures various tungsten carbide products such as tips, dyes, nibs, drill steels, cutters, scrappers, etc: It follows previous year ending 31st December. 3. The company's first grievance is against the addition of ₹ 58,46,535 on account of valuation of closing stock. 4. The IAC (later referred to as assessing officer) noted that the company's auditors in note 18 to profit and loss account had observed that the company had so far followed the practice of valuation of inventories at the lower of direct cost or net realisable value and that the direct cost was worked out on the basis of actual cost or weighted annual average cost, but in calendar year 1975, the company had valued the closing stock by periodic (yearly)/LIFO formula according to which the closing stock was valued at an amount lesser than ₹ 58,46,535 as compared to the valuation if the earlier method had been followed. The assessing officer further noted that in the manufacture of tungsten carbide products, tung ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74 values would be substituted for the values of stock prevailing many years later. He, therefore, made an addition of ₹ 58,46,535. 5. The Commissioner (Appeals) upheld the addition after noting that the board of directors of the assessee-company in paragraph No. 10 of their report dated 25-6-1976 had opted for change in method of valuation from LIFO to FIFO and that even on 15-12-1975 company appeared to have estimated its income at ₹ 4.75 crores on the old method of valuation and the same was changed to the new method only in the return filed on 30-6-1976 declaring income of ₹ 3.72 crores. He further noted the increase in prices of hollow steel and tungsten (two raw materials of the assessee-company) from July 1972 to October 1976 and that the assessee- company had also been increasing its sale price from 1-1-1973 to 1-10-1974 which it had almost doubled for Tips C. 16 and increased one and half times in drill steel 714 and there was no increase in prices from 1-11-1974 to 1-12-1976 and that LIFO method was adopted in the meeting of board of directors held on 1-5-1976. The Commissioner (Appeals) observed that if the period of production of the assessee was one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce had been furnished by the assessee, average basis was the only proper basis which the assessee had been following in earlier years and in the absence of supporting material, any other method would not give correct picture of profits. He stated that the average basis was the proper method and in LIFO assumptions have to be made, which if not made on facts would not give correct picture. 8. The learned departmental representative relied on the observations in Sampath Iyengar on Law of Income-tax, Seventh edn., Vol. 4 at p. 3439 under the heading 'Systems of Valuation' that LIFO and 'Base stock method' have been rejected by the Courts as not reflective of the true profits. Similarly, on page 3446 it was observed relying on Anaconda American Brass Ltd.'s case (supra) that LIFO method even as an estimate was irrational and afforded no basis for arriving at true income and does not reflect the true profit for the purposes of income-tax. Our attention was also drawn to Whiteman & Wheatcroft on Income-tax and Surtax 1971 edn. at p. 366 in paragraph No. 9.31 where the learned author noticed the Privy Council decision in Anaconda American Brass Ltd.'s case (supra) that LIFO method is ina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's paper book I. It was shown that while there was a jump in 1974 in the price of tungsten ore (per kg.), e.g., when in December 1974 it jumped to ₹ 83.76 from ₹ 36.74 as in June 1974, there was a downward trend in 1975 (year under consideration) where from ₹ 98.22 in February 1975, the prices had shown a down- ward trend and stood at ₹ 93.65 in December 1975. Similarly, the prices of drill steel bars did not show much fluctuation, as the prices increased marginally to ₹ 9.08 per kg. in June 1975, as against ₹ 8.93 in February 1975. Thereafter, the prices jumped to ₹ 11.55 in July 1975 and were steady in the next five months and had stood at ₹ 11.21 in December 1975. It was also submitted that the assessee's reliance on the observation of an author, Joel Dean of Graduate School of Business, Columbia University (USA) in Managerial Economics was misplaced because the said author only talked of accountancy principles and that too in USA. However, the said method (LIFO) had been rejected by the Privy Council in Anaconda American Brass Ltd.'s case (supra) where the Privy Council noted that LIFO method had been accepted in America, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of advance tax instalments accordingly and that it was only in the next year (May 1976) that the directors decided to change the method of valuation. Therefore, the said decision of 1976 should not govern and upset the method of valuation followed by the assessee in 1975. Our attention was also drawn to the fact that the assessee's principal competitor WIDIA (India) Ltd. did not change the method of valuation nor did the assessee's holding company Sandvik AB, Sweden. There was no evidence that the commercial practice in India had changed in favour of LIFO method. 13. Our attention was also drawn to the report of Royal Commission on Taxation of Profit and Income (June 1955) which in Chapter 18 'Stock and the computation of profits' referred to FIFO in paragraph No. 461 which was the method adopted in UK. The inland revenue suggested that FIFO should be made compulsory, but the Royal Commission reject- ed the said recommendation and observe that the assessee could adopt any other method subject to the conditions that the method, should be acceptable and should disclose to the real cost and not the artificial cost and the method should be calculated to disclose the real profits of ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assumption that metal used in the year were those which had been longest in the inventory. The company had urged that as per modern accounting practice, the replacement cost and not the actual cost of metal used should be regarded as expenditure incurred in manufacturing the products sold in the year. LIFO was, thus, an estimate of replacement of cost of the metals and the closing stock under this method represented the unabsor- bed residue of cost. The result of adopting LIFO was that higher cost was attributed to the metal processed and the lower cost to that retained in stock and the company was able to show lower profits than if it had followed the accustomed or traditional method of valuation. The Privy Council posed the question whether the new method was permissible for income-tax purposes. The Privy Council accepted the revenue's submis-sion that LIFO method, however, appropriate for corporate purposes of the company, did. not truly reflect company's profits for income-tax purposes and referred to observations of Lord Clyde in Whimster & Co.'s case (supra) that the profits of any particular year or accounting period must be taken to consist of the difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were created. 16. In view of the very lucid and convincing reasons given by the Privy Council for rejecting the LIFO method while computing the taxable income of the assessee, I hold that the assessee is not entitled to change-over to LIFO method and the lower authorities were right in rejecting the assessee's claim. I am not impressed by the distinctions sought to be made by the assessee before us with Anaconda American Brass Ltd.'s case (supra). The said distinctions, I may say, are without any difference and do not displace the applicability of the basic proposition laid down by the Privy Council. 17. J. Batty in Management Accountancy, Fourth edn., at p. 679 (as reproduced in paragraph No. 11 of Judicial Member's order) has only pointed out that LIFO was not accepted by inland revenue (UK) and that in a period of inflation the accountants stressed the value of LIFO for purpose of maintaining capital intact in real term. Thus, the views of the said author on accountancy have no bearing on the question of determination of profits for income-tax purposes. Views of Sampath Iyengar in Law of Income-tax, Seventh edn., Vol. 2, at pp. 3439 and 3446 (referred in paragraph No. 8) as al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, to the IAC the draft assessment order and the assessee's objections for action under section 144B(4), under which provision the IAC is to issue directions for the guidance of the ITO to enable him to complete the assessment. Thereafter, the IAC on 7-7-1977 wrote to the ITO that he proposed to issue notice under section 144A to the assessee and, therefore, the ITO should not pass the assessment order and await further instructions. The IAC on 13-7-1977 wrote to the assessee regarding the change of method or valuation of stock from FIFO to LIFO on which point he proposed to issue directions to the ITO under section 144A and asked the assessee to state its objections on or before 22-7-1977. The assessee appeared before the IAC on 22-7-1977 and filed a detailed reply. On 27-7-1977 the Commissioner passed order under section 125A(1) of the Act vesting concurrent jurisdiction in the IAC, along with the ITO with effect from 1-8-1977. On 23-9-1977, the said IAC wrote to the assessee referring to hearing already given by the ITO culminating in the draft order and further hearing under section 144B and the fact that the assessment jurisdiction had been assigned to the said IAC under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to go in appeal and this was confirmed by the assessee's action in agitating in appeal the additions sought to be made by the ITO in the draft order in respect of surtax liability as well as superannuation fund. It was, therefore, claimed that the assessment was open, as the assessee had not accepted the draft assessment order and at this stage the IAC was legally competent to take action under section 144A by calling for and examining the records of any proceeding of which the assessment was pending and he could issue directions to the ITO as the matter was open and. when the IAC acted under section 144A on 13-7-1977, the assessee did not raise any objections. He urged that the Commissioner's order under section 125A validly vested concurrent jurisdiction in the IAC and the IAC was, therefore, within his rights in going over the whole assessment and in making the addition in question of ₹ 58,46,535. It was urged that section 144B(7) clearly laid down that where the jurisdiction had been vested in the IAC by an order under section 125A, section 144B had no application. Even otherwise to insist that the IAC should pass order as drafted by the ITO made nonsense of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually exclusive and it was a common practice that both the said sections were resorted to simultaneously and as both these sections had been introduced by the same Amendment Act, the Legislature, if it intended that section 144A should not be operative where section 144B was in operation, could have said so. It was urged that both the sections should be harmoniously construed and interpretation which conferred jurisdiction should be preferred. (Legislation and Interpretation by Jagdish Swarup, 1974 edn., p. 418). It was also urged that the assessee's ground of appeal challenging the IAC's jurisdiction was incompetent as the question of jurisdiction was not appealable, relying on Law and Practice of Income-tax by Kanga & Palkhivala, Seventh end., p. 789 'Appeal and Reference'. Regarding the allocation of jurisdiction between the IAC and the ITO, the departmental representative claimed that the allocation had been made vide the IAC's order dated 16-11-1977. The original order was shown to us as also to the assessee's counsel. 21. I have carefully considered the submission of both the parties and I am unable to accept the assessee's contentions. Regarding the lack of jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - The assessee-company manufactures various tungsten carbide products like tips, dyes, nibs, drill steels, cutters, etc. The company followed the previous year ended on 31st December. It also followed the practice of valuing inventories at the lower of direct cost or net realisable value from year to year. The direct cost was worked out on the basis of actual cost or weighted annual average cost. During the year relevant to the assessment year under appeal, the company changed its method of valuing closing stock. This was indicated by note 18 appended to the profit and loss account by the company's auditors running as under: "The company has been following the practice of valuation of inventories at the 'lower of the direct cost or net realisable value' thereof. The formula used for computing the 'direct cost' was 'actual cost' or 'weighted annual average cost'. In computing the direct cost of inventories as on December 31, 1975, the periodic last in first out (LIFO) formula of assigning the cost has been used. On the basis of the formula previously used the value of inventories as on December 31, 1975, would have been ₹ 4,86,58,904, viz., ₹ 58,46,535 higher. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other Indian competitors had made any change in the method of valuation if that was absolutely necessary for the particular manufacture. The assessee did not show even the inflation in drill steel prices was worldwide. The assessee appealed to the Tribunal against the order of the Commissioner (Appeals). 4. Hearing the appeal the learned judicial Member and the Accountant Member passed differing orders the learned' Judicial Member' holding that the addition of ₹ 58,46,535 was not justified. He held that the changed method could not be said to have been not 'approved in account- ancy'. Dealing with the argument on behalf of the department that if the LIFO method is accepted, then the assessee because of its particular mode of accounting may build up secret reserves, the learned Judicial Member referred to the Supreme Court decision in the case of Calcutta Discount Co. Ltd. (supra) to emphasise that the assessee could so arrange its affairs to minimise the tax effect. The learned Accountant Member on the contrary held that the assessee was not entitled to change over to LIFO method and the authorities below were right in rejecting the assessee's claim. In his view, the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of arriving at its profit from year to year. The important raw material involved in the manufacture being imported and subject to the world fluctuation in prices the uncontrolled inflation substantially affected the assessee's business and profit structure. The increase in the price of the raw material was as much as 3 times in 1973, double in 1974 and substantially higher during the year under appeal. In order to take into account the correct profit of the business, the assessee had, therefore, no alternative but to follow a more logical and realistic method of valuing closing stock which could upset the uncontrolled inflation and other effects which were beyond the assessee's control. The LIFO method was evolved in United States and other advanced countries in the 1930s and has been followed in a large number of countries in the world to give an accurate method for obtaining the profit of manufacturing enterprises. It is both a scientific method as well as a well recognised method. To support his stand the learned counsel has referred to several authorities. The Indian edition 1976 of Managerial Economics by Joel Dean of Graduate School of Business, Columbia Univer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of inventories issued by the Institute of Chartered Accountants of India in June, 1881 also refers to LIFO method as a normal and standard method of valuation of stock at paragraph No. 26.1: "The historical cost of inventories should normally be determined by using 'FIFO', 'average cost, or 'LIFO' formulae." 8. On the strength of these and other authorities the learned counsel has emphasised that the LIFO method is not only a well recognised scientific method for valuing closing stock but, in his view, would be the most fitted to adopt in circumstances like that of the assessee where without the possibility of immediately increasing the sale price the assessee has to face abrupt and phenominal increases in the prices of raw materials in an uncontrolled atmosphere of inflation. The assessing officer could not therefore, deny the assessee right of adopting this method. 9. The learned counsel has also pointed out that under section 145 of the Act a taxpayer is entitled to adopt the best method which he considers suitable for his business. There is no restriction at all under the Act in such selection of the method. Apart from the fact that the assessee's choic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue. It is an important principle both of accountancy as well as income-tax that unrealised appreciation in the value of inventories should not be brought to charge. This principle applies both to the manufacturing as well as trading concerns. 12. Referring to the decision in Anaconda American Brass Ltd.'s case (supra), on which reliance has been placed by the department and which has been referred to in the two orders of the Tribunal, the learned counsel has pointed out that an application of this decision to the Indian circumstances was prima facie not justified. There was nothing in the Canadian law corresponding to section 145. Apparently, the Canadian taxpayer has no option to choose the method of accounting. The law has progressed very much and, according to the learned counsel, if the same case was now to go before the Courts in Canada today, the decision might not he the same. In the present case, the assessee has exercised its option to follow this method of accounting and stock valuation. This method comes to a closer determination of the true profit of the business. 13. It is also pointed out that the change does not make any difference. There is no double tax or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel has pointed out that essentially the assessee who has been following one method of accounting has suddenly changed its method which distorts the entire profit picture. Even if over a long period the overall profit given up for taxation could be the same, the profit for the current year cannot be said to have been correctly computed when the methods of valuation of the opening and the closing stock are different. Valuation of stock as such, according to the learned counsel, does not by itself specify a method of accounting. Mere adoption of a form of valuation of closing stock or a change in the method does not, therefore, cover the concept of method of accounting. The assessee cannot, therefore, be said to have even any option in this regard under section 145. Even though the assessee follows the same method of valuation for the subsequent years as far as the present year is concerned, according to the learned counsel for the department, the profit is not correctly computed and the assessee's action leads to unjustified reduction of tax. The assessee has not justified this. 17. Though on the above-mentioned point, the point of difference was originally referred to me as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to support its case for adopting the LIFO method and the department challenging the efficiency and validity of this method. It is neither, necessary nor possible to say with any amount of finality whether a method like the LIFO for stock valuation is the best one or a perfect one. As regards the methods, these varies and each school subscribes to one method or other, but ultimately all are intellectual approaches against the background of the best available facts to ascertain the profit. Often the theory embedded in any method is absolutely unsupported by the factual details. Thus, the very valuation of closing stock implies something like realisation of value for the stock. A trader very well knows if he could have sold all the stock on that day, the very question of stock valuation would not arise. Theories of this type are only attempts to study the reality against well known principles and practices. It would be futile, thus, to brand one or other systems as wrong based on its mere distance from reality. 19. While the final word as to whether the LIFO method would be better than the system followed by the assessee, thus, cannot be said, there is nothing in accountancy or in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock from year to year is that for every year both the opening and the closing stock are valued on the same method. If there is a change in the method of valuing the stock, for instance, cost being adopted for the opening stock and market for the closing stock, the correct profit of the year cannot be ascertained. 21. Another equally valid principle in arriving at the profit is that no tradesman should take into account the unrealised profit embedded in his stock. Under the mercantile and other allied systems of accountancy the profit of the year is accounted for not by the actual cash received on sale but also by taking into account the value of the stock. Unless the stock is sold, the full sale price and the profit are not realised. Between the holding of the stock and realisation of money by selling it, there is much of a slip so that if the stock cannot be sold at all, the value of the goods embedded in the stock becomes an outright loss. If the stock is sold for an amount lesser than what it is accounted for in the closing stock, then also there is a loss. A prudent businessman cannot, therefore take the risk of valuing stock at a level which anticipates the realisation of a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts the computation of profit. For instance, even in the case where a person regularly maintaining accounts on the same basis from year to year, disturbs any one of the components like closing stock valuation he could upset the computation of profit and it would be open to the ITO to reject the book results even without rejecting the method of accounting. 24. I have detailed above some of the well known principles of accountancy and income-tax, because both in the orders of the authorities below and the learned Members, whose difference of opinion is referred to me, and also in the arguments of the learned counsels on both sides, one or other of these principles have been referred to. In my opinion, while each one of these principles independently and studied as such may be accurate, while combining one or more of these principles caution has to be taken to adopt the manner of such combination. If this is not done, it might entirely distort the picture of the assessee's business both from the point of view of income-tax as well as accountancy. Thus, while an assessee is entitled to follow any method of accounting under the option given to him by section 145 since there is the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om year to year, therefore, in these subsequent years would be indicated by the book valuation. That would not, however, show the correct profit for the year under appeal as made out by the assessee's books. It is in this context that the principle regarding the consistency in the method followed has to be seen. When the assessee followed the same method of valuation of closing stock till the year of appeal, its profit was computed in a particular manner. The change in the method of valuation has altered the closing stock for the current year while retaining the opening stock as the same. One of the principles, admitted as relevant by both the parties, is that the closing stock of one year and the opening stock of the next year should be the same. This condition will not be satisfied if the accounts for the year are not adjusted. While, therefore, no exception can be taken to the assessee's right to change his method of stock valuation in this or any other year, the difference has to be adjusted by adding it or subtracting it from the total income in the year of the change. The addition of ₹ 58,46,535 has, therefore, to be sustained. 26. The cases cited do not help the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary, the, change can be made but should not by itself result in some taxable income not getting taxed altogether. 27. One question which would arise is whether this addition should be treated as a closing stock valuation and on that score the opening stock of the next year increased to this extent with the result that the profit of the next year goes down. If in a continuing account the stock valuation were to be disturbed for one year and the necessary adjustment is not made in every subsequent year, the profit in every succeeding year cannot be properly computed. In the present case, for all the years prior to the year under appeal and all the years subsequent to the year of appeal it is the assessee's case that the same method has been followed for stock valuation. There is a change only for the year under appeal. The adjustment is only for the year under appeal, the addition being confined to the computation of profit for this year only. For the subsequent years, the opening and closing stocks will continue to be valued on the same basis. Even though, therefore, the reason for the addition has its basis on, stock valuation, it does not result from the stock valuation but f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO was vested in the IAC. On 24-10-1977 the assessee claimed that the assessment proceedings having been terminated with the issue o f the draft assessment order by the ITO, the IAC was to issue the necessary instructions only in conformity to which the assessment had to be completed. On the basis of the above facts the jurisdiction of the IAC to make the addition of ₹ 58,46,535 in pursuance of the alleged action he took under section 144A(1) was challenged. This point having been decided in favour of the revenue, the matter came before the Tribunal on further Appeal. The learned Judicial Member held in favour of the assessee holding that the IAC should have passed an order in conformity with section 144B. The learned Accountant Member, however, held that the assessment was properly made by the IAC. The second point of difference arises out of the above facts. 29. After hearing the parties at length, I agree with the reasoning and conclusion of the learned Accountant Member. Apart from the fact that the objection itself was raised very late in the proceedings, the IAC having a concurrent jurisdiction legally vested in him, he had the power to pass the order he made. 30. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing years is correct, the learned Third Member has accepted the addition made by the IAC. 5. In this view of the matter, the Tribunal has to pass the final order on the basis of the decision of the learned Third Member. When this appeal was fixed for passing final order, both the learned counsel for the assessee and the learned departmental representative have argued to a great length and contended that certain paragraphs from the order of the learned Third Member should be reproduced while Passing the final order. It is ununderstandable that as to why certain paragraphs or observations are to be reproduced at the time of passing the final order. The observations are already on record in the orders of the learned Members of the Pune Bench of the Tribunal and the learned Third Member who has heard the appeal on the differed points. 6. As it is held that the IAC has a jurisdiction to make an assessment on the assessee as an assessing officer and as the additions made by him are further upheld by the learned Third Member and, therefore, the appeal requires to be dismissed according to law. Hence, we have considered it just and proper not to reproduce any observations made by the le ..... 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