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TMI Blog1984 (11) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year, the IAC, respectively, added to the returned income for the two years the amount of Rs. 34,64,179 and Rs. 34,02,272. Dealing with this issue in his consolidated order for two years, the Commissioner (Appeals) considered the assessee's method of valuation of closing stock. It was brought to the notice of the Commissioner (Appeals) that the Research Committee of Chartered Accountants of India prepared the guidelines published in October 1979, for valuation of closing stock wherein it was observed, noted the Commissioner (Appeals) : " In their recommendation, it is submitted, the committee has expressed its preference for treating excise duty as part of the manufacturing cost to be included in valuing inventories ; but they have also opined that system of valuation of inventory on direct cost not including excise duty as permissible one. " The Commissioner (Appeals) considered the assessee's method of valuation of stock for and from the previous year relevant for the assessment year 1976-77 and he concluded by observing that : " Even if the method followed by the assessee in the two years under appeal is an accepted method of valuation, the IAC having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me would not be complete without inclusion of the excise duty which for all purposes has to be considered as an element of cost. " As such, the Commissioner (Appeals) upheld the IAC's action for both the years. 20. Shri Mehta for the assessee pointed out that up to the assessment year 1980-81, the IAC had accepted the valuation of stock as made by the assessee. In this regard, Shri Mehta brought to our notice the assessee's balance sheet for the accounting year ended on 31-12-1973. This balance sheet discloses that stocks are valued in the following manner : " At cost (in the case of stock in process and manufactured goods at raw material cost) or market whichever is lower, as certified by a director. " Shri Mehta pointed out that for the first time in the accounts for the year ended 31-12-1976, there was a slight change in the method of ascertaining the cost for the purposes of the valuation of the closing stock. In the accounts for the year ended 31-12-1976 on this issue in their report, the auditors have commented as under : " The company has changed the basis of valuing its stock in process and manufactured goods. As a result, the value of these stocks has increased by Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n their report for the year ended 31-12-1979, the auditors commented as under : " The company has changed the basis of valuing its stocks of manufactured goods by exclusion of excise duty and certain additional elements of cost. As a result of the exclusion of excise duty from cost, the value of finished goods stock has decreased by Rs. 43,10,907 and profit for the year by a like amount before tax and Rs. 10,56,721 after tax. The other stocks have been valued on the same basis as in the previous year. In our opinion, the valuation of stocks is fair and proper and in accordance with normally accepted accounting principles. " 22. For the two years ended under consideration, viz., 31-12-1980 and 31-12-1981, the assessee proceeded to ascertain the cost in the same manner as it had done for the accounting year ended 31-12-1979. The auditors, comments for these two years were as under : 31-12-1980 : " The company has changed the basis of valuing its stocks of manufactured goods and stock in process by exclusion of certain elements of costs and inclusion of certain other elements of cost. As a result of this change, the value of the stocks has increased by Rs. 6.83 lakhs and profit fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner (Appeals). 24. Shri Mehta for the assessee pointed out that as observed by the Commissioner (Appeals). Section 43B of the Income-tax Act, 1961 ('the Act') was inserted by the Finance Act, 1983, with effect from 1-4-1984. According to Shri Mehta, the issue of the principles of ascertainment of cost had been receiving attention at different levels and that when the department had reopened certain assessments and one such concerned assessee filed writ proceedings before the Bombay High Court wherein reliance was placed on behalf of the department on certain circulars issued by the CBDT and the Commissioner. According to Shri Mehta, the genesis of the action of the IAC in adding for the two years under consideration the amount exceeding Rs. 34 lakhs each has to be seen in the circular of the Commissioner, dated 9-4-1981. Shri Mehta submitted that he is in a position to file the copies of these papers as these papers were relied upon by the department in the writ proceedings to which a reference has been made. 25. Now, Shri Mehta points out that by his letter, dated 9-4-1981, the Commissioner, brought to the notice of the officers working under his charge, the CBDT circular dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded when the absorption costing system is used. Such a situation will normally arise when excise duty is levied on a compounded basis. " 26. Shri Mehta then brings to our notice, the publication by the Institute of Cost and Works Accountants of India, published in October 1979. Shri Mehta specifically brings to our notice that the said publication refers to a notification of Ministry of Law, Justice and Company Affairs, Shri Mehta pointed out that the assessee manufactures the dyes according to the proforma prescribed. In this regard, Shri Mehta brings to our notice the proforma 'C' printed at pages 19 and 20 of the publication, according to which the manufacturer has to give information to the concerned authority regarding the different elements of cost, selling and distribution expenses, etc. Shri Mehta then adds that in respect of the quantity sold within the country, one is required to give total expenses excluding excise duty for quantity sold and similarly total sales realisation excluding excise duty for quantity sold, the difference being the margin. Shri Mehta added that it would thus be manifest that with regard to the statement to be filed by a paint and dyes manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (Investigation) (Special Cell), New Delhi, being one of the papers relied upon by the department in the writ proceedings, which states as under : " On my recent tour to Bombay. I found that certain other big companies have also started resorting to the same method of undervaluation of stocks as described above. In the case of Goodlass Nerolac Paints (P.A. No. 34-009-CM-5335)/BMY-COM-IV-3 the undervaluation of closing stock in this manner was Rs. 43,10,907 in 1979. The relevant extract from the annual report of the company for the year 1979 reads as under : 'The company has changed the basis of valuing its stocks of manufactured goods by exclusion of excise duty and certain additional elements of cost. As a result of the exclusion of excise duty from cost, the value of finished goods stock has decreased by Rs. 43,10,907 and profit for the year by a like amount before tax and Rs. 10,56,721 after tax. The other stocks have been valued on the same basis as in the previous year. In our opinion, the valuation of stocks is fair and proper and in accordance with normally accepted accounting principles'. " Shri Mehta submitted that in the manner in which both the authorities below ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ascertainment of cost ignoring the element of excise duty and that on the basis followed by the assessee for the year ended 31-12-1979, there was an under statement of Rs. 43,10,907. Shri Tuli submitted that in accepting the assessee's method, the ITO did not discuss the issue in the assessment order and in the assessment order there was no whisper about the change in the method of ascertainment of cost effected by the assessee in the accounts for the year under consideration by reverting to the original method. Shri Tuli submitted that it was this aspect of the assessment, which was commented by the Director of Inspection (Investigation) (Special Cell), New Delhi, to which a reference has been made in the letter filed by the department in certain writ proceedings to our attention was drawn by Shri Mehta and to which we have made a reference earlier in paras 24 to 26. According to Shri Tuli, since the assessee had made certain changes in the method of valuation of cost unilaterally, the ITO was justified in ignoring the change which the assessee made. Shri Tuli stressed the fact that the method of ascertainment of cost is to be consistent and for a long period. According to Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the closing stock, automatically that figure has to be taken as an opening stock so that there is merely a shifting of profits from one year to another year. Inasmuch as for every one of the years now under consideration, the assessee has returned income of well over crores of rupees, the increase in the value of the closing stock owing to the change in the method of ascertainment of that value cannot be considered as a motivated one. In the accounts for the year 31-12-1979 on the assessee's reverting to its original principle of ascertainment of cost from the method that is adopted in the accounting year 31-12-1978, there was an understatement of an amount of Rs. 43,10,907. On the same basis for the two years under consideration, the assessing officer has worked out that had the assessee followed the method of valuation that it had followed in the accounting year ending 31-12-1976, the profits would have been, respectively, larger by an amount of Rs. 34,64,179 and Rs. 34,02,272. Inasmuch as without considering this adjustment, the assessee's returned profits were over Rs. 1,50,00,000, we are unable to attribute any motive to the assessee when the assessee reverted to its origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently false. This conclusion has to be followed as in the very first year when the assessee effected the change, it so effected on the basis of the guidance note prepared by the Institute of Chartered Accountants to which our attention was drawn by Shri Mehta. As brought to our notice earlier and found to be correct, in the account for the year ending 31-12-1976, on the basis of the advice, which the assessee was able to obtain, the assessee made refinement for the purposes of ascertainment of cost and that on that basis, it ascertained the cost for the years ended 31-12-1976, 31-12-1977 and 31-12-1978. We find nothing on record to suggest that when the assessee valued its stock for the year ended 31-12-1979 on the same principles as it had followed up to the year 31-12-1975, there was any mala fide intention. We equally do not find anything on record which would suggest that when for the two years under consideration, the assessee followed the same method for ascertainment of cost as it followed up to 31-12-1975, there was any mala fide intention on the part of the assessee. Shri Mehta pointed on that in reverting to the original method, the assessee strictly followed the guidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout the ascertainment of cost of item 'B'. According to the department, the assessee ought to have valued at Rs. 120 for item 'B', so that in respect of sale of item 'A' during the year of account the assessee's profit is shown correctly at Rs. 30 and not at Rs. 10. This amount of Rs. 20 is the addition as made by the ITO for the two years under consideration, viz., Rs. 34,64,179 for the first year and Rs. 34,02,272 for the second year. 32. We are satisfied that at no stage, when the assessee changed the method of ascertainment of cost, the assessee's bona fide can justifiably be doubted or challenged. We further have to take a note of the fact that the income returned for each of the years is of the same order and that no one could justifiably say that the assessee was contemplating adjustment of profits from year to year so as to reduce the tax liability. 33. We would now consider Shri Tuli's objection that the assessee had changed its method of accounting. As we have made it clear earlier, the assessee did not make any change in its method of accounting but had made certain changes in the principles followed for ascertainment of value of stock. Even if one were to assume that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncil's decision in Ahmedabad New Cotton Mills Co. Ltd.'s case, it was incumbent on the assessing officer to evaluate both the opening and closing stock on the same principles. Apparently, this has not been done. Based on the Privy Council's decision in the case of Ahmedabad New Cotton Mills Co. Ltd., it is manifest that in the assessment for the year 1982-83, the ITO necessarily had to make an adjustment by reducing the opening stock value by an amount of Rs. 36,64,179. To revert to the illustration which we had given earlier, if on valuing item 'B' at Rs. 100 in the subsequent year, the assessee sells the item at Rs. 155, the profit would be Rs. 35. The assessee has accounted for this profit at Rs. 35 in the second year's account. However, in the manner in which the ITO has made the assessment, when he has enhanced the profit of the first year by Rs. 20, he has not reduced the profit of Rs. 35 for the purposes of second year's assessment. Assuming, we are wrong in our decision that the ITO was not justified in making the adjustment of the type which he did for any of the two years in the second year, it has to follow that the ITO must reduce the assessee's assessable income by Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he burden of showing good reason that the method should be changed to the 'on cost' method and, therefore, the assessee is entitled to continue to adopt the 'direct cost' method as before. Thus, the adoption of 'direct cost' method by the assessee cannot be questioned by the revenue as it has been found by the Tribunal that the adoption of this method is bona fide and is a permanent arrangement. The revenue's only contention is that it has shown to be prejudicial to the revenue. As pointed out in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.), merely because the new method adopted by the assessee was detrimental to the revenue, that alone can never be the basis for denying the right to change the method. Further, even though the change of the method has resulted in a detriment to the revenue in the year in question, since the method is to be followed consistently year after year in future, this apparent detriment to the revenue will get adjusted and disappear. Therefore, in view of the findings of the Tribunal that the change of the method is bona fide and is intended to be followed in future, year after year, the chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of ascertainment of cost and on that basis, we delete the addition made for each of the two years, respectively, at Rs. 34,64,179 and Rs. 34,02,272. 37. Assuming that our decision be not correct and there is any justification to make an addition for the assessment year 1981-82 of Rs. 34,64,179, on the basis of Privy Council's decision in Ahmedabad New Cotton Mills Co. Ltd.'s case the opening stock for the assessment year 1981-82 must be valued on the same principles even though the closing stock for the year 1980-81 may not be or cannot be valued on that basis. Therefore, if there be any justification in adding to the closing stock, the value for the assessment year 1981-82, the amount of Rs. 34,64,179, the assessee must be allowed the deduction of Rs. 43,10,907, the undervaluation of closing stock in 1979 as observed by the Director of Inspection (Investigation) (Special Cell), and referred to by us at page 19 of our order and the Auditor's note as referred to by us in para 14 of this order. For the assessment year 1982-83, if on that basis, the addition of Rs. 34,02,272 is to be confirmed, the ITO is bound to reduce the value of the opening stock by an amount of Rs. 34,64,179 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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