9911796707
TMI Blog2004 (12) TMI 733X X X X Extracts X X X X X X X X Extracts X X X X ..... to filing of revised return for assessment years 1998-99 to 2000-01. 2. Both the parties represented by their respective counsel and representatives were heard. 3. Briefly stated, the facts of the case are that the closing stock was valued by the assessee as on 31-3-1997 (assessment year 1997-98) at lower of the cost or market price. According to the note of the tax auditors as reproduced in the assessment order, there was a change in the method of valuation of closing stock during the previous year relevant to the assessment year under appeal, i.e., assessment year 1997-98 which had the effect of reducing the profit by Rs. 2,65,54,316. The assessing officer examined the matter in detail and found that the assessee was valuing the stock at realizable value till assessment year 1996-97. It changed its method of valuation of 'closing' stock from the aforesaid method (ie., realizable value) to lower of the cost or market price during the previous year relevant to the assessment year under appeal. The assessing officer further found that the assessee once again changed the method of valuation of closing stock in assessment year 1998-99 inasmuch as it changed the method o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see valued the stock at realizable value. (ii) In assessment year 1997-98, the assessee changed the method of stock valuation from realizable value to the lower of the cost or market price. (iii) In assessment year 1998-99, the assessee changed the method of stock valuation from the lower of the cost or market price as adopted in assessment year 1997-98 to market value and valued the stock accordingly in the account filed along with the original return of income. (iv) In assessment year 1998-99 itself, the assessee filed a so-called 'revised' return to change once again the method of stock valuation from market value as adopted for valuation of closing stock in the original return to the lower of the cost or market price in the 'revised' return for assessment year 1998-99 in order to show the consistency and regularity in the employment of same method of stock valuation as was changed and adopted in assessment year 1997-98. 6. On appeal, the learned ClT(A) took note of the 'revised' return filed by the assessee for assessment year 1998-99 during the pendency of the present appeal before him and held that the assessee, by filing the 'revised&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upplied) 7. In support of appeal, the learned departmental Representative took us through the assessment order and the order of the learned CIT(A) and submitted that the reason for frequent changes in the method of valuation of stock were not guided by any bona fide consideration but by the sole consideration of avoiding proper tax liability. He invited our attention to the observations recorded in the assessment order in this behalf. According to him, a change in the method of valuation of stock was not permissible if such a change was effected to avoid proper tax liability by depressing the value of closing stock and thereby presenting a distorted picture of the profits. 8. In support of his submissions, the learned departmental Representative relied upon the following decisions: (i) Indo-Commercial Bank Ltd. v. CIT(1962) 44 ITR 22 (Mad.), (ii) CIT v. Hazaribagh Coal Syndicate (P) Ltd. (1989) 177 ITR 135 (Cal.), (iii) CIT v. West Coast Paper Mills Ltd. (1992) 193 ITR 3492 (Bom.) and (iv) CIT v. British Paints India Ltd. (1991) 188 ITR 441 (SC). 9. Per contra, the learned authorized representative for the assessee relied on the order of the learned CIT(A) dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue when it became evident to the assessee that it would be liable to pay greater amount of advance tax than what it would be liable to pay if it changed the method of valuation of stock in the manner it did. Thus, motivating factors for change in the method of valuation of stock are evident on a bare perusal of the assessment order. The relevant observations made in the assessment order in this behalf are as follows: The following facts show that the frequent change in the method of valuation of closing stock was not for business requirements but it was to avoid the tax. It was a tax evasion by an act done knowingly with the intention to deceive the tax authorities. It was a deliberate omission of revenue. The taxpayer has apparently circumvented the law to avoid the tax. On the perusal of trend in the advance tax payment for assessment year 1996-97, it is found that assessee paid advance tax of Rs. 6 crores and there was a TDS of more than Rs. 39 lakhs. With effective tax rate of 43 % the tax was paid for the-income estimates of about Rs. 15 crores. The advance tax instalment for the month of March 1997 was Rs. 4,15,00,000. Thus, by the end of the year, the assessee was ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of stock valuation at the lower of the cost or market price reportedly followed in assessment year 1997-98 was again changed over and replaced by another method of stock valuation, i.e., market value in assessment year 1998-99 and the closing stock was, accordingly, valued and reflected in the accounts filed along with the return of income for assessment year 1998-99 on 31-12-1998 declaring total loss at Rs. 1,58,56,553. It may be mentioned here that filing of the return for assessment year 1998-99 on 31-121998 would mean that the books of account had been maintained to reflect the value of stock at market price as it is this value at which the closing stock was valued and shown in the original return for assessment year 1998-99. While the return for assessment year 1998-99 was still pending assessment, the return for assessment year 1997-98 had been taken up for scrutiny on 5-8-1998 on the basis of which assessment for the assessment year under appeal, i.e., assessment year 1998-99 came to be finalized on 16-3-2000 making the impugned addition. It is at this stage that the assessee thought of revising the return for assessment year 1998-99 originally filed on 31-12-1998 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o what useful purpose was to be served by resorting to frequent changes in the method of valuation of stock. In the absence of any cogent reason coming forward from the assessee for such frequent changes in the method of valuation of stock even before us, we are inclined to agree with the findings recorded by the assessing officer that the changes in the method of valuation of stock were guided more by considerations of avoiding taxes legitimately due to the Public Exchequer in the assessment year 1997-98 than by any bona fide consideration. The assessee has placed no material before us to justify that the change in the method of valuation of stock was guided by any bona fide considerations or was necessary in the interest of the business being carried on by the assessee during the assessment year under appeal. On the facts of the case before us, we hold as under: (i) The assessee has placed no material before us to explain the reasons for such frequent changes in the method of stock valuation. (ii) The assessee has placed no material before us to establish that the change in the method of stock valuation in assessment year 1997-98 was bona fide or was guided by business expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and observed as under: As we said, we accept as sound the principle laid down in Sarupchand v. Commissioner of Income-tax. Extending that principle to changes in the method of valuation of closing stock, the position we reach is that an assessee is entitled to change his method of valuation, provided it is bona fide and provided further it is a method of valuation for regular employment by the assessee and not merely for the year in question. In other words, a change in the method of valuing the closing stock under such circumstances does not entail a rejection of the method of the assessee's choice on the application of the proviso to section 13. (Emphasis supplied) 17. In Sriram Bearing Ltd. v. CIT (1993) 199 ITR 579,584 (Cal.), the Hon'ble Calcutta High Court has held that the assessing officer can reject the change in the method of stock valuation adopted by the assessee if it is not followed by him consistently year after year. The Hon'ble court has held: It is by now well-settled that the method of stock valuation is a part of the method of accounting. Where an assessee regularly employs a method of accounting, its income has to be computed in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breath requires that permissibility should go only to the extent the change is bona fide. Therefore, attempt to have any change pushed through on the plea that bona fide or mala fide, every change is lawful, must fail. The absence of express requirement in the law cannot be capitalized on. The attempt to do so would, in fact, recoil on the case of the assessee. The revenue could retort likewise saying that the law permits no change and the method once employed has to be followed all the time without variation. 19. In West Coast Paper Mills Ltd.'s case (supra), the Hon'ble jurisdictional High Court has once again reiterated the proposition that a change in the method of accounting is possible only when the change in the method of accounting is followed regularly and is guided by bona fide considerations. 20. The aforesaid authorities as also several other authorities lay down the proposition that it is permissible for the assessee to change the method of accounting including the method of stock valuation provided the assessee satisfies the assessing authority that the change in the method is guided by bona fide considerations and is meant to be regularly followed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at Rs. 1,58,56,553. It may be mentioned here that filing of return for assessment year 199899 on 31-12-1998 would mean that the books of account had been maintained to reflect the value of stock at market price as it is this value at which the closing stock had been valued and shown in the original return for assessment year 1998-99. While the return for assessment year 1998-99 was still pending assessment, the return for assessment year 1997-98 had been taken up for scrutiny on 5-8-1998 on the basis of which assessment for the assessment year under appeal, i.e., assessment year 1997-98 came to be finalized on 16-3-2000 making the impugned addition. It is at this stage that the assessee thought of revising the return for assessment year 1998-99 originally filed on 31-12-1998 and hence filed the so-called 'revised' return enhancing the originally returned loss to Rs. 10,38,49,996. The assessee filed yet another revised return for assessment year 1998-99 on 16-8-2000 enhancing the said loss to Rs. 10,38,51,996. The reasons stated by the assessee for filing the 'revised' returns for assessment year 1998-99, as mentioned in the assessment order for assessment year 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the revised return after the books of account had been closed; four, the books of account and the entries made therein are considered to be relevant in law only when they are regularly kept or made in the day-to-day course of the business (section 34 of the Evidence Act) and that they cease to be relevant once it is shown that they were not kept or maintained regularly in the day-to-day course of the business; five, changing the method of stock valuation by filing the revised return shows that the change was effected after the expiry of the previous year and after the closure of the books; six, the 'revised' return for assessment year 1998-99 was filed only after the assessment for assessment year 1997-98 had been completed and that too with a view to defeat the case of the revenue; and, seven, the assessee did not still establish its bona fide in changing the method in the first year of change, i.e., in assessment year 1997-98 as also in frequently changing the method of stock valuation in assessment year 1998-99. The cumulative effect produced by the aforesaid events does not help the assessee in establishing its bona fide or in supporting its contention that the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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