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TMI Blog2024 (11) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... ognised by the Accounting Standards for the purposes of Inventory/Stock valuation. As per those standards inventories are valued at the lower of cost or net realisable value, the latter term being a reference to the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The principle behind valuing stock at the lower of cost or realisable value is that no prudent trader would care to show increased profit before its actual realisation and hence, while anticipated loss is taken into account, anticipated profit in the shape of appreciated value of closing stock is not brought into the account [Chainrup Sampatram v. Commissioner of Income-Tax, West Bengal [ 1953 (10) TMI 2 - SUPREME COURT] . The adoption of any particular method of stock valuation is towards ensuring that it reflects the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. Whatever be the method of valuation adopted, it is a misconception to think that any profit arises out of the valuation of closing stock. As noticed in Chainrup Sampatram (supra), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It is only if the classification is unreasonable and bears no rational relation to the object sought to be achieved by the legislative measure that it will be struck down as discriminatory and unconstitutional [Kerala Hotel Restaurant Association Others v. State of Kerala Others [ 1990 (2) TMI 259 - SUPREME COURT] On the facts of the instant appeals, since the prescription in ICDS II, with regard to the method of valuation of inventory/stock, is applicable to all assessees whose income is chargeable to tax under the head Profits and gains of business or profession , we do not find any unreasonable classification as having been effected among persons who are similarly situated. Further, the prescription under the ICDS II being one that is directed towards achieving the object of uniformity and consistency in the computation of income of assessees falling under the specified categories, we fail to see how the same would offend the equality clause under the Constitution. As a matter of fact, we also fail to see what pre-existing right of the appellants has been taken away by the prescription imposed through the amended Section 145A of the IT Act read with ICDS notified under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of other methods relating to valuation of inventory, such as the Last In First Out (LIFO) method, while computing income under the head of Profits and Gains of Business or Profession under the Income Tax Act, 1961 [hereinafter referred to as the I.T. Act ]. It was contended that the said paragraph of ICDS II and the Notification dated 29.09.2016, to the extent impugned, were violative of Articles 14, 19 (1)(g) and 265 of the Constitution of India and hence unconstitutional and legally unenforceable. There was also a prayer to declare as unconstitutional Section 145A of the IT Act, as introduced by the Finance Act, 2018 w.r.e.f. 01.04.2017. 3. The facts necessary for a disposal of these appeals have already been narrated in the impugned judgment of the learned Single Judge and hence do not require to be repeated in this judgment. Essentially the grievance of the petitioners was with regard to the effect of the amendment in the IT Act, that introduced a new Section 145A therein that was markedly different from the earlier provision that existed upto 31.03.2018. Read along with the ICDS II that was notified in 2016, and the terms of the Notification dated 29.09.2016, the appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contentions of the learned Senior Counsel Sri.Ajay Vohra and Sri.A.Kumar, assisted by Smt. G.Mini, for the appellants, briefly stated are as follows: ● The valuation of closing stock is an integral aspect of a method of accounting, and so long as the LIFO method of valuation of closing stock is recognised by the prevailing accounting standards, an assessee has to be permitted to follow it. The provisions of Section 145A, read with Notification dated 29.09.2016 notifying the ICDS, if given effect to, would nullify the judgments of the Supreme Court and the High Courts and hence ought to be struck down as unconstitutional. Reliance is placed on the decisions in Investment Ltd. v. Commissioner of Income-Tax, Calcutta [(1970) 77 ITR 533 (SC)]; Vazir Sultan Tobacco Co. Ltd., Hyderabad v. Commissioner of Income Tax, Andhra Pradesh, Hyderabad [(1981) 4 SCC 435]. ● Stock valuation is not a source of profit and the method of valuation of stock by taking the lower of cost or realisable value is followed as a conservative practice taking note of anticipated losses and ignoring anticipated gains. There was therefore no rationale for deviating from the existing practice of stock val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62) 46 ITR 144 (SC)]; Commissioner of Income Tax, West Bengal II v. Birla Gwalior (P) Ltd. - [(1974) 3 SCC 196]; Poona Electric Supply Co. Ltd. v. Commissioner of Income-Tax, Bombay City I [(1965) 57 ITR 521]; R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, Punjab, Jammu Kashmir, Himachal Pradesh Patiala [(1971) 3 SCC 369]; State Bank of Travancore v. Commissioner of Income Tax, Kerala [(1986) 2 SCC 11]. 6. Per Contra, the submission of Sri. Jose Joseph, the learned Standing Counsel for the Income Tax Department, briefly stated is as follows: ● While it may be a fact that prior to the introduction of the new Section 145A of the IT Act with effect from 01.04.2017, the appellants had the freedom to value their stock in accordance with any of the recognised methods of valuation prescribed by the Accounting Standards in vogue, this freedom was curtailed in relation to a specific category of assessees viz. those whose income fell for assessment under the heads of Profits and Gains of Business or Profession or Interest Income, who were then statutorily obliged to value their stock only in accordance with the methods newly prescribed by the amended provisions. Even a consiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act had to be read down to restrict the power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act. We have gone through the said decision and find that it was rendered in the context of the unamended Section 145A of the IT Act that enabled an assessee to value his inventory of goods in accordance with the method of accounting regularly employed by him. However, Section 145A of the Act was since amended by Finance Act 2018, w.r.e.f 01.04.2017 to bring in new provisions that effectively cured the defect pointed out by the Delhi High Court in The Chamber of Tax Consultants (supra). The new provisions of Section 145A having specifically provided for the computation of income chargeable under the head Profits and gains of Business or Profession as per the ICDS, there is now a specific statutory provision that mandates the manner in which the income has to be computed for the purposes of the IT Act, and the accounting methodology that must inform such computation. The findings of the Delhi High Court in The Chamber of Tax Consultants (supra) cannot, therefore, be of any assistance to the case of the appellants in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exhausted in the order of purchase. On a rising market this would write off the lower priced lots first, and on a falling market the higher priced lots would go first. The LIFO method, on the other hand, assumes that the items of stock purchased last are the first to be issued or sold and thus the stock remaining is valued at the cost of the earlier purchases. Under the Weighted Average Cost method, the cost of each item is determined from the weighted average cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average is calculated on a periodic basis or as each additional shipment is received, depending upon the circumstances. At any rate, whatever be the method of valuation adopted, it is a misconception to think that any profit arises out of the valuation of closing stock. As noticed in Chainrup Sampatram (supra), the valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and cannot be regarded as the source of such profits. Thus, the issue canvassed in these appeals in the context of Article 14 of the Constituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hotel Restaurant Association Others v. State of Kerala Others [(1990) 2 SCC 502]; Tata Motors Ltd. v. State of Maharashtra Others [(2004) 5 SCC 783]; Pattali Makkal Katchi v. A. Mayilerumperumal Ors. [(2023) 7 SCC 481]]. On the facts of the instant appeals, since the prescription in ICDS II, with regard to the method of valuation of inventory/stock, is applicable to all assessees whose income is chargeable to tax under the head Profits and gains of business or profession , we do not find any unreasonable classification as having been effected among persons who are similarly situated. Further, the prescription under the ICDS II being one that is directed towards achieving the object of uniformity and consistency in the computation of income of assessees falling under the specified categories, we fail to see how the same would offend the equality clause under the Constitution. As a matter of fact, we also fail to see what pre-existing right of the appellants has been taken away by the prescription imposed through the amended Section 145A of the IT Act read with ICDS notified under Section 145 (2) of the Act ? Surely, the appellants cannot be heard to contend that they have a right, ..... 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