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TMI Blog2024 (5) TMI 1366X X X X Extracts X X X X X X X X Extracts X X X X ..... s in making it mandatory to value the stock by applying the FIFO or weighted average cost method - writ petition in challenging the amendment in Section 145A, making it mandatory for adoption of Clause 16 of ICDS (II) for applying FIFO or weighted average cost method across the Board for all assessee for valuing the closing and opening stock. HELD THAT:- It is no matter of doubt that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory. The petitioner was applying the LIFO method of accounting as the standard for valuing the closing and opening stock up to 01.04.2017. Before 01.04.2017, there was no mandatory provision for adopting one or another method of Accounting Standards. The Statute also did not mandate only one method of valuing the closing and opening stock. The petitioners were free to adopt any one of the Accounting Standards as notified by the ICAI. The Parliament, after a wide range of consultation from all stakeholders and based on the recommendations of the Committee to maintain uniformity in accounting the income and valuing the stock, has made Clause 16 of ICDS (II) mandatory for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not apply to those assessees who had not applied FIFO for valuing their stock in the Assessment Year 2017-18, as these assesses have been following LIFO consistently and had filed their returns before the Finance Act 2018 was enacted. Therefore, in the case of the petitioners, the stipulation under Clause 16 of the ICDS (II) for the adoption of FIFO or weighted average cost for valuation of the stock/inventory cannot be applied in the Assessment Year 2017-2018 for the valuation of the opening stock, as the opening and closing stock of the year is to be valued by applying the same methodology. Thus all the writ petitions are partly allowed, and the impugned notices in all the writ petitions are quashed. The respondents are directed to either accept the valuation of both opening and closing stock, for the Assessment Year 2017-2018, based on the LIFO method or permit the petitioners to value their stocks by applying the FIFO or weighted average cost method. - THE HONOURABLE MR. JUSTICE DINESH KUMAR SINGH FOR THE PETITIONER : BY ADVS. SRI AJAY VOHRA (SR) A.KUMAR (SR) SRI.P.J.ANILKUMAR, SMTG.MINI(1748) SRI.P.S.SREE PRASAD, SRI.AJAY V.ANAND FOR THE RESPONDENT : BY ADVS. MR.P.R.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Business or Profession (PGBP) or Income from Other Sources . 3.2 Vide Clause 16 of the ICDS(II), a change has been brought with respect to the methodology of valuation of the stock/inventory. It has been mandated that Cost of Inventories . shall be assigned by using First-In-First-Out (FIFO), or weighted average cost formula . Clause 22 provides that the value of the opening stock shall be the closing stock of the immediately preceding year. Clauses 16 and 22 of the ICDS (II) are extracted hereunder: First-in First-out and Weighted Average Cost Formula 16. Cost of inventories, other than the inventory dealt with in paragraph 13, shall be assigned by using the First-in First-out (FIFO) or weighted average cost formula. The formula used shall reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. (emphasis supplied) 17. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently, the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system of accounting, other than mercantile or cash. The Legislature felt the need to provide Accounting Standards for income computation. The Central Government could, thus, by notification in the Official Gazette notify from time to time Accounting Standards (AS) to be followed by any class of assessees or in respect of any class of income . The Central Government notified the Accounting Standards on 25.01.1996. 4.3 On December 7, 2006, the Ministry of Corporate Affairs (MCA) notified as many as 28 Accounting Standards of the ICAI under Section 211 of the Companies Act 1956 and mandated that the same be followed by the Companies. The Central Board of Direct Taxes in December 2010 constituted the Accounting Standards Committee (AS Committee) comprising Indian Revenue Services (IRS) officers from the Income Tax Department and professionals like Chartered Accountants, with the following objects: (i) to study the harmonisation of ASs issued by the ICAI with the direct tax laws in India, and suggest ASs which need to be adopted under section 145(2) of the Act along with the relevant modifications; (ii) to suggest a method for determination of the tax base (book profit) for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as issued making the ICDS applicable effective from April 1, 2017. 5. Circular No.10 of 2017, issued by the Central Board of Direct Taxes on 23.03.2017, is titled Clarifications on Income Computation and Disclosure Standards (ICDS) notified under Section 145(2) of the Income Tax Act 1961 . The Circular acknowledges that it had been brought to the notice of the Central Board of Direct Taxes that some of the ICDS may require amendment/clarification for proper implementation . The matter was then referred to the Committee which, after duly consulting the stakeholders recommended a two-fold approach for the implementation of ICDS: One was to amend the ICDS itself and the other was to issue clarifications by way of FAQs. Thus, the Delhi High Court in the judgment of Chamber of Tax Consultants (supra) held that Circular No.10 of 2017 was in the form of FAQs. The Delhi High Court has also been of the view that Circular No.10 of 2017 made it clear that ICDS is intended to prevail over judicial precedents which could be to the contrary. 5.1 The Delhi High Court further held that the amendments to Section 145 permitted the Central Government, as a delegate of the Legislature, to notify stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not so read down it would be ultra vires the Act and article 141 read with articles 144 and 265 of the Constitution. (ii) The ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents applicable thereto as they stand. (iii) The decision in J. K. Industries Ltd. v. Union of India (supra) is distinguishable in its application to the case on hand. (iv) ICDS I which does away with the concept of prudence is contrary to the Act and binding judicial precedents and is therefore unsustainable in law. (v) ICDS II pertaining to valuation of inventories and eliminates the distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution is contrary to the decision of the Supreme Court in Shakti Trading Co. (supra). It fails to acknowledge that the valuation of inventory at market value upon settlement of accounts of the outgoing partner is distinct from the valuation of the inventory in the books of the business which is continuing. ICDS II is held to be ultra vires the Act and struck down as such. (vi) The treatment to retention money under paragraph 10(a) in ICDS III will have to be det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down as such. (xii) ICDS VII which provides that recognition of Government grants cannot be postponed beyond the date of accrual receipt, is in conflict with the accrual system of accounting. To that extent, it is held to be ultra vires the Act and struck down as such. (xiii) ICDS VIII pertains to valuation of securities. For those entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed which is different from the ICDS. In effect, such entities will be required to maintain separate records for income-tax purposes for every year since the closing value of the securities would be valued separately for income-tax purposes and for accounting purposes. To this extent, Part A of ICDS VIII is held to be ultra vires the Act and is struck down as such. Based on the aforesaid conclusion, the Delhi High Court struck down Notification Nos.87 and 88 of 2016 dated 29.09.2016 and Circular No.10 of 2017 issued by the Central Board of Direct Taxes as ultra vires the Act. 6. After the judgment of the Delhi High Court, the present provisions of Section 145A have been substituted vide Finance Act 2018 with retrospective effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income for the said year. 6.4 According to the petitioner, by the substitution of the provisions of Section 145A with retrospective effect from 01.04.2017, the closing stock of the petitioner for the Financial Year 2016-17, relevant to the Assessment Year 2017-18, which was valued as per the LIFO at Rs.1,92,44,87,015/- has been revalued, applying FIFO at Rs.2,43,52,03,645/- resulting in enhancement in value of stock at Rs.51.07 crores which is sought to be taxed in the hands of the petitioner for the Assessment Year 2017-18. Prayers : 7. The present writ petition has been filed with the following prayers: It is therefore humbly prayed that this Hon'ble Court may call for the records relating to Exhibit-P1 notification dated 29.09.2016 and Exhibit-P4 notice and Exhibit-P6 intimation rejecting reply and; A. Declare that Para 16 of ICDS-II and Exhibit-P1 in notification 87/2016 dated 29.09.2016 prescribing that the cost of inventories shall be assigned by using the First In First Out or Weighted Average Cost method to the exclusion of other methods relating to valuation of inventory, namely, Last in First Out is arbitrary, illegal, violative of Article 14, 19(1) (g) and 265 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that while discarding the consistently followed and regularly accepted method of valuation of the stock/inventory applying LIFO, and mandating the use of FIFO or Weighted average Cost for valuation of closing stock for the relevant year of adoption of ICDS(II), no basis or rationale whatsoever has been brought about or outlined demonstrating how and why the method of valuation of the stock/inventory, consistently and regularly followed by the petitioner since the inception of its business and accepted as such by the Revenue, was not reflective of the correct income of the business of the petitioner. Exclusion of the consistently followed method of valuation of the stock /inventory applying LIFO, which has been one of the wellaccepted methods of stock inventory valuation, and the mandatory application of FIFO or Weighted average cost as the only method for valuation of the stock/inventory, is wholly unreasonable being devoid of any rationale and bears no nexus with the objects sought to be achieved, i.e., determination of the most accurate picture of the accounts of an assessee. Ergo, the exclusion of LIFO as an appropriate method for valuing the stock/inventory leads to an unre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome due to enhancement in the value of closing the stock, as a result of the stock valuation by applying FIFO or weighted average cost method. In other words, while the opening stock for the relevant year would be determined by importing the closing stock of the preceding year, i.e., applying LIFO, the closing stock of the same year, as a result of the adoption of ICDS (II), would necessarily have to be determined applying an altogether different methodology viz, FIFO or weighted average cost method. 8.5 It is further submitted that the opening and closing stock of a year have to be necessarily valued on the same basis. The opening stock cannot be valued in a manner different from the valuation of the closing stock. However, making mandatory FIFO for the valuation of the stock retrospectively with effect from 01.04.2017 would result in the opening and closing stock being valued based on two different and distinct methodologies. The learned counsel for the petitioner has placed reliance on judgments in Ramswarup Bengalimal vs. CIT (1954) 25 ITR 17 (All) ; K.G Khosla Co.P.Ltd vs.CIT (1975) 99 ITR 574 (Del) ; CIT vs. Doom Dooma India Ltd. (1993) 200 ITR 496 (Gau) ; CIT vs. Mahavir Alu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head Profits and gains of business or profession , (i) the valuation of inventory shall be made at lower of actual cost or net realisable value computed in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145; (ii) the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation; (iii) the inventory being securities not listed on a recognised stock exchange, or listed but not quoted on a recognised stock exchange with regularity from time to time, shall be valued at actual cost initially recognised in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145; (iv) the inventory being securities other than those referred to in clause (iii), shall be valued at lower of actual cost or net realisable value in accordance with the income computation and disclosure standards notified under sub-section (2) of Section 145. Provided that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no substance in the writ petition in challenging the amendment in Section 145A, making it mandatory for adoption of Clause 16 of ICDS (II) for applying FIFO or weighted average cost method across the Board for all assessee for valuing the closing and opening stock. He further submits that as there is no substance in the submission of the learned Counsel for the petitioners, the unequals are being treated equally. There is no question of any class of persons, inasmuch as with effect from 01.04.2017, for maintaining uniformity in valuing the closing and opening stock has to be by applying the FIFO method, which has been made mandatory for all assessees. 10.2 It is further submitted that an assessee cannot contend that he will not follow the law and will adopt a particular method of valuation of the stock, despite the change in law by the competent legislature, i.e., Parliament. If under the IT Act, only one method has been adopted, that too after a wide range of consultation from all the stakeholders to value the closing and opening stock by applying the FIFO method under Clause 16 of ICDS (II), there is no discrimination or arbitrariness. He therefore submits that the present w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of Article 14 in relation to invalidation of legislation The two dimensions of Article 14 in its application to legislation and rendering legislation invalid is now well recognized and these are (i) discrimination, based on an impermissible or invalid classification and (ii) excessive delegation of powers; conferment of uncanalised and unguided powers on the executive, whether in the form of delegated legislation or by way of conferment of authority to pass administrative orders if such conferment is without any guidance, control or checks, it is violative of Article 14 of the Constitution. The Court also needs to be mindful that a legislation does not become unconstitutional merely because there is another view or because another method may be considered to be as good or even more effective, like any issue of social, or even economic policy. It is well settled that the courts do not substitute their views on what the policy is. 13.2 In State of Maharashtra (supra), the Supreme Court has laid down the well-established principles for testing any legislation before it can be declared as ultra vires. Paragraph 106 of the said judgment is extracted hereunder: 106. Before we embark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon or grant special benefits to persons or things grouped together under the classification, so long as the classification is of persons or things similarly situated with respect to the purpose of the legislation, so that all persons or things similarly situated are treated alike by law .. ( emphasis supplied ) 13.4 In Shayara Bano vs. Union of India (supra), the Supreme Court has held that if Legislature suffers from manifest arbitrariness, the same can be held to be invalid legislation under Article 14 of the Constitution of India. Paragraph 101 of the said judgment is extracted hereunder:- 101. The test of manifest arbitrariness, therefore, as laid down in the aforesaid judgments would apply to invalidate legislation as well as subordinate legislation under Article 14. Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary. We are, therefore, of the view that arbitrariness in the sense of manifest arbitrariness as pointed out by us above would apply to negate legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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