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TMI Blog1997 (6) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... larly assessed to tax for last several years. For the purpose of accounts, it follows calendar year as the previous year and for our purpose the previous year starts from 1-1-1987 and ends on 31-12-1987. Until 31-12-1986 the assessee's closing stock of tea was valued on cost basis. In doing so, it was not including the element of depreciation, interest on Nabard Loan and also some other element of cost. However, while valuing the closing stock as on 31-12-87, the above three elements of expenditure were included in the closing stock. In audited accounts, statutory Auditors have stated that the method of valuation of stock in the year under review underwent a change because of which there was increase in the profit of Rs. 7,11,680 and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to agree with the stand taken by the asseessee. Firstly let us consider the controversy on the basis of pragmetic approach. Normally the opening stock of quantity gets disposed of during the previous year and, therefore, sales are reflected in the books of account and, therefore, appropriate profit or loss on the stock carried forward gets accounted for in the books of account. When the previous year ends, the trader takes account of the stock lying on hand and which is unsold during the year, but for which the expenditure is debited in the Trading and Profit Loss Account. Therefore, appropriate adjustment is necessitated by reducing the expenditure which is embedded in the stock lying at the close of the accounting year and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee-company filed a revised return showing a lower total income and claiming that the difference between the income returned in the two returns did not represent the profits of the company for the year ended August 31, 1970, as that sum represented part of the value of the closing stock of finished goods as on August 31, 1970. The assessee claimed that though in valuing the closing stock of all the items in the earlier years, it had adopted total cost, from the assessment year in question it had changed the valuation of the closing stock in respect of work-in-progress and finished goods from total cost to direct cost, the difference between the total cost and the direct cost being that in the direct cost the overheads such as adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst year when the change of method was brought about, a prejudice or detriment might be caused to the revenue. As the method of valuation adopted by the assessee had obtained recognition from practicing accountants and the commercial world for valuation of stock-in-trade, the adoption of that method could not be questioned by the Revenue unless the adoption of that method was found to be not bona fide or restricted to a particular year. If the assessee is called upon to apply the new method of valuation to the opening stock of the accounting year as well, the value of the closing stock of the year previous to the accounting year will also have to get altered which will result in a modification of the assessment of that previous year. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent detriment (to the Revenue) will get adjusted and disappeared. Keeping this principle in mind and applying the same test, even if it is found by the assessee that in this year the changed method worked to the detriment of the assessee, yet since it is admittedly followed year after year, the detriment would vanish. In fact, from commercial point of view it should get vanished in the next year itself. 8. Lastly, an aspect of pure Accountancy requires to be considered. At the end of the year when the unsold stock is inventorised and valued, in the books of account an entry is passed debiting the (closing) stock and crediting the trading account. Next year this (closing) stock is carried forward in the new ledger as (opening) stock. Now s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter excluding all overheads. On reference, the High Court held that the assessee could not be required to revalue the opening stock as directed by the Tribunal when the assessee had been permitted to revise the method of valuing the closing stock and the same was adopted year after year. While giving this judgment, Their Lordships of the Bombay High Court took into consideration the Accountant's approach as given in book written by Shri G.P. Kapadia and brought out by Indian Merchants' Chamber Economic Research Training Foundation, the booklet called "Valuation of Stock and Work-in-progress -Normally Accepted Accounting Principles". The High Court also observed that same principle had been adopted by Karnataka High Court in the case of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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