Commissioner of Income Tax vs Delta Plantation Ltd.

Ajit K. Sengupta, J.—In this reference made at the instance of the revenue, the following question has been referred by the Tribunal for the opinion of this Court u/s 256(2) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the addition of Rs. 4,46,190 on account of under-valuation of closing stock was not warranted and in that view deleting the addition of the said amount?

This reference arises out of the income tax assessment of Delta Plantation Ltd., which was formerly known as Khari Katia Tea Estates (P.) Ltd. for the assessment year 1982-83 corresponding to the previous year being calendar year 1981. The main source of income of the assessee-company during the relevant previous year was cultivation, manufacture and sale of tea. The assessee-company used to value its closing stock of tea at the end of each year at selling price. From the calendar year 1981, the assessee-company decided to change its basis of valuation of stock of tea and start valuing it at ''since realised'' or the ''estimated realisable value''. It was explained to the ITO in the course of assessment proceedings that it was a normal practice in tea industry to value the closing stock of tea at the end of each year at ''since realised'' and/or ''estimated realisable value''. It was also explained that in the earlier method of valuing the tea at selling expenses, expenses like excise duty, packaging, freight and other selling expenses were not being considered. The Assessing Officer found that in view of the change in the method of stock valuation, the accounts of the assessee-company showed a loss of Rs. 4,46,180. The ITO, therefore, did not allow the change in the method of valuation of stock of tea at the end of the previous year and added back the resultant loss of Rs. 4,46,180 to the total income of the assessee-company for the assessment year 1982-83.

Before the Commissioner (Appeals), it was, inter alia, contended on behalf of the assessee-company that the new method of stock valuation adopted by the assessee-company was a normal practice followed in the entire tea industry for valuation of stock of tea at the end of the accounting year and there was no reason why the Assessing Officer should refuse to accept the change in the method of stock valuation followed by the assessee-company consistently year after year.

The Commissioner (Appeals), however, held that while the assessee was at liberty to change the method of valuation of closing stock, it cannot be allowed to do so if it results in loss of revenue. He, therefore, upheld the order of the ITO and confirmed the disallowance of Rs. 4,46,180 added by the ITO.

On further appeal before the Tribunal, it was, inter alia, contended that the change in the method of stock valuation cannot be disallowed merely because it results in loss to the revenue. The Tribunal found that there could be no effective loss of revenue on account of change in the system of stock valuation since the closing stock of one year is necessarily the opening stock of another year. The Tribunal also found that this system of valuing the closing stock of tea is a recognised practice followed in the tea industry and accepted by the Tribunal in a number of cases. The Tribunal, therefore, reversed the order of the ITO as well as of the Commissioner (Appeals) and deleted the disallowance of Rs. 4,46,180 made on this count.

At the hearing before us no one appeared for the assessee. Mr. J.P. Khaitan, Advocate, has assisted the Court. He has drawn our attention to the method of valuation of inventories as contained in the Accounting Standard and Book-keeping and Accounts by Spicer and Pegler. He submits that the assessee has adopted a correct method of valuation of closing stock.

The Institute of Chartered Accountants of India has issued an Accounting Standard ''AS-2'' on ''valuation of inventories''. This standard was issued in June 1981 and it deals with the principles of valuing inventories for financial statements. This statement lays down that ordinarily inventories should be valued at lower of historical cost and net realisable value. The expression ''net realisable value'' is defined in paragraph 6.9 of the said statement to mean the actual/estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in making the sale. Although paragraph 5 of the said statement makes it quite clear that the said statement will not apply to inventories of plantation industry, we have referred to the said statement only for the limited purpose of finding out the real meaning of the expression ''net realisable value''.

In Book-keeping and Accounts by Spicer & Pegler, Seventeenth edn., it has been stated in Chapter VIII at page 300 that in tea companies, it is a recognised practice to bring stock of tea into account at the prices realised subsequent to the balance sheet date, less only selling costs. By this means, the whole of the profit is shown in the period in which the crop is reaped. It is further stated that this method of stock valuation has come to be accepted as customary in the tea industry.

In this case the assessee-company has changed its method of stock valuation of tea from selling price to ''since realised'' and/or ''estimated realisable value'', which is nothing but net realisable value. This method of stock valuation is customarily followed in the entire tea industry as found by the Tribunal. This method is also recognised by the Practising Accountants as well as by Spicer & Pegler in their Book-keeping and Accounts. The income tax authorities, in our view, therefore, were not justified in rejecting the changed method of stock valuation as adopted by the assessee-company. We are not impressed with the argument that the new method of stock valuation cannot be accepted merely because there would be loss of revenue in the year of change. What is relevant is to consider whether the method adopted is one of the recognised methods and further whether the changed method of stock valuation is followed consistently year after year. Change in the method of stock valuation cannot be restricted to a particular year. If the new method of stock valuation is followed consistently year after year, the tax authorities have no option but to accept such method notwithstanding the fact that in the initial year when the changed method is brought about, it may result in a prejudice or detriment to the revenue. The change of method must be bona tide and must not be restricted to a particular year. The Tribunal has not recorded any finding to the effect that the new method of stock valuation is being followed by the assessee-company year after year. This aspect has to be examined by the Tribunal. We, therefore, decline to answer the question in this reference and remand the matter to the Tribunal for fresh disposal in the light of the foregoing observation.

There will be no order as to costs.

Chowdhury, J.

I agree.