Commissioner of Income Tax vs Dalmia Cement (Bharat) Ltd.

Dr. M.K. Sharma, J.—This petition u/s 256(2) of the Income Tax Act, 1961, has been preferred by the Revenue for the assessment year 1984-85 seeking a direction to the Tribunal to state a case and refer to this court for its opinion the following question of law :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in accepting the assessor''s method of valuation of DBM dust which was changed for valuing the closing stock ?"

The assessed is being assessed in the status of a company and has been carrying on in its Dalmia Magnesite Corporation Unit in Salem, the business of raising magnesite ore and converting it into dead burnt magnesite (DBM). In the year under consideration, the assessed showed an opening stock value of DBM dust at Rs. 77,50,677, but it showed the same in the closing stock at nil value on the ground that it was having silica content above a specified percentage, i.e., at 15 per cent., and, hence, it had no market value. In the course of assessment proceedings, it was found that in the earlier years, the assessed was valuing DBM dust stock at "raw material cost plus packing charges" but for the assessment year in question, it valued the closing stock of "raw material cost plus packing charges or realisable value, whichever was lower". The realisable value of DBM dust was considered as nil on the ground that it was not saleable. According to the assessee, the aforesaid change was made bona fide in the light of the prevailing fact situation and in conformity with the principle and practice of valuation of inventories having no realisable value. The change in the method of valuing the closing stock decreased the value of DBM dust by Rs. 70,50,677 thereby reducing the assessable income by the same amount.

The Assessing Officer rejecting the assessor''s contention valued the closing stock at Rs. 77,50,677 and added it to the assessor''s income on the ground that up to the assessment year 1983-84, the assessed was showing the value of DBM dust at cost only and in order to determine the true profit in any particular year it is necessary that the system of valuation adopted for opening stock as well as the closing stock should be on identical lines. On appeal, the Commissioner of Income Tax, after going through the scheme of the assessed and various case laws in the matter, came to the conclusion that the change in the method of valuation of DBM dust stock is bona fide, but it cannot be believed that it had no value at all and accordingly, the Commissioner of Income Tax (Appeals) reduced 1/3rd of the amount of Rs. 77,50,677, being the addition made by the learned Assessing Officer for the raw material and packing charges cost of the closing stock of DBM dust and upheld the addition of the balance 2/3rd amount thereof. The matter was thereafter taken to the Tribunal. After consideration of the materials available from the records, the Tribunal held that there is no dispute that the change in the method is bona fide and that there is also no dispute that this product had no market value at all. According to the Tribunal, the realistic method of valuation would be to value it at nil, and accordingly, upheld the contention of the assessee. Hence, the present reference application u/s 256(2) of the Income Tax Act is at the instance of the Revenue, after the application filed by it u/s 256(1) was rejected by the Tribunal on the ground that the finding given by the Tribunal in the assessor''s appeal is a finding of fact and that it did not give rise to any referable question of law.

Our attention has been drawn to a decision of the Bombay High Court in the case of Melmould Corporation Vs. Commissioner of Income Tax, .

Learned counsel for the Revenue submitted before us that the Tribunal while coming to the findings recorded by it in the present case relied on a decision in Commissioner of Income Tax, Tamil Nadu Vs. Carborundum Universal Ltd., . According to learned counsel, the law laid down in the aforesaid case has subsequently been reversed by the Supreme Court in the case of CIT v. British Paints India Ltd. : [1991]188ITR44(SC) . It is, Therefore, submitted by learned counsel for the Revenue that in view of the change of law coming in, the question as proposed is required to be called for u/s 256(2) of the Act.

We have perused the ratio of the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. : [1991]188ITR44(SC) . It is not in dispute that u/s 145 of the Income Tax Act, 1961, the assessed can adopt a method of valuation which has to be followed by it regularly. For the earlier previous years, the assessed was valuing the closing stock at raw material cost plus packaging charges while in the relevant assessment year, it has valued the closing stock at raw material cost plus packaging charges or realisable value, whichever was lower, and the realisable value of DBM dust was considered as nil on the ground that it was not saleable. It has been held in the case of Commissioner of Income Tax Vs. Corporation Bank Ltd., thus (headnote) :

"The two principles applicable with regard to the valuation of stock are that the assessed is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus, clear that irrespective of the basis adopted for valuation in the earlier years, the assessed has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter."

It has been held by the Madras High Court in the case of Commissioner of Income Tax, Tamil Nadu Vs. Carborundum Universal Ltd., , that the value of the closing stock of the preceding year must be the value of the opening stock of the next year and that the change has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. It has been further held in that case that if instead a procedure is adopted for changing the value of the opening stock, it would lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding would also have to change and correspondingly the value of the opening stock of that year and so on. In the case before the Madras High Court also, the change in the method was found to be made bona fide and that the said method according to the assessed would be continued consistently in future also. The Andhra Pradesh High Court also in the case of Commissioner of Income Tax Vs. Mopeds India Limited, , held that a change in the method has to be effected with a change in the valuation of the closing stock for the first year and that the Tribunal was right in holding that the opening stock should be revalued was incorrect. In view of the ratio of the aforesaid decisions, it is well-settled, that the assessed can adopt a method of valuation which has to be followed by it regularly. It is also well-settled that irrespective of the basis adopted for valuation for earlier years, the assessed has an option to change the method of valuation of closing stock provided the change is bona fide and followed regularly thereafter.

In the present case, the Commissioner of Income Tax (Appeals) found the change adopted by the assessed bona fide. The Tribunal also held that the change in the method of valuation adopted by the assessed was bona fide and the same method was followed by the assessed even subsequently. On the basis of the aforesaid findings, the Tribunal came to the conclusion that a realistic method of valuation in the present case would be to value it at nil. The aforesaid finding arrived at by the Tribunal appears to us to be just and proper and, in our opinion, the same does not suffer from any error in view of the decisions discussed hereinabove. Besides, the finding arrived at by the Tribunal being a finding of fact, in our opinion, no referable question arises there from and accordingly we reject this petition. However, there will be no order as to costs.