Commissioner of Income Tax vs George Oakes Ltd.

P.P.S. Janarthana Raja, J.—This appeal is filed u/s 260A of the Income Tax Act, 1961, by the Revenue, against the order of the Income Tax Appellate Tribunal, Bench "A", Chennai, in I.T.A. No. 2966/Mds/04 dated September 1, 2006, raising the following substantial question of law:

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was entitled to value its opening stock in one way and the closing stock in another, during the relevant year when Accounting Standard 2 had come into effect in the earlier year itself?

The facts leading to the above substantial question of law are as under:

The assessee is a company. The relevant assessment year is 2001-02 and the corresponding accounting year ended on March 31, 2001. The original return of income was filed on October 30, 2001, declaring total income at Rs. 1,27,00,922. Later, the assessee filed a revised return declaring total income at Rs. 1,19,74,004 on November 27, 2001. The Assessing Officer noted that the assessee made changes in the method of valuation of stock. The Assessing Officer completed the assessment u/s 143(3) of the Income Tax Act ("the Act" in short). While completing the assessment, the Assessing Officer made an addition of Rs. 19,64,000 representing the reduction of profit due to the change in valuation of stock. Aggrieved by the order, the assessee filed an appeal to the Commissioner of Income Tax (Appeals). The CIT (Appeals) dismissed the appeal and confirmed the order of the Assessing Officer. Aggrieved, the assessee filed an appeal to the Income Tax Appellate Tribunal ("the Tribunal" in short). The Tribunal allowed the appeal filed by the assessee on the ground that the change of accounting method is bona fide one and relied on this Court judgment reported in Commissioner of Income Tax, Tamil Nadu Vs. Carborundum Universal Ltd., . Hence the present appeal is filed by the Revenue.

Learned standing counsel appearing for the Revenue submitted that the assessee has taken into account only the change in valuation of closing stock for the year by following the Accounting Standard (AS-2). The opening stock however, remains undisturbed. It is also further submitted that because of the valuation of opening and closing stock by different methods, there was a consequential reduction of total income declared for the year and hence the Assessing Officer is right in his opinion that the amount of Rs. 19.64 lakhs representing reduction of profit was includible in the total income of the assessee.

Heard counsel. The Institute of Chartered Accountants of India by its Accounting Standard (AS-2) (Valuation of inventory), has prescribed the standard for valuation of inventory. According to this standard, the inventory has to be valued at purchase cost price less commission and discount on purchase (if any) and the commission and discount on purchase in respect of the goods sold should be adjusted against cost of goods sold. Being compulsory the company has adopted the Accounting Standard (AS-2) as per the guidelines prescribed by the Institute of Chartered Accountants of India. In this case there is a specific finding that the change in the accounting method has not been found to have been made with a mala fide intention. Such a change in method of accounting is bona fide and the same is made mandatory by the Institute of Chartered Accountants of India to be followed in the preparation of financial accounts. Under such circumstances, in the year of change, some discrepancy is bound to happen in the profitability of the company as compared to previous year. However, in succeeding years, there will not be any discrepancy on this account. When the change of accounting method is bona fide and also the same is recognised in accounting principle, the resultant variation in income cannot be forced to be taxed upon the assessee. This court in the case of Commissioner of Income Tax, Tamil Nadu Vs. Carborundum Universal Ltd., considered the scope of change of method of accounting and held as follows:

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 change has to be accepted by the Revenue, notwithstanding the fact that during the assessment year which is the first year when the change of method is brought about it has resulted in a prejudice or detriment to the Revenue. So long as the method of valuation adopted by the assessee gets recognition from the practising accountants and the commercial world for valuation of stock-in-trade, the adoption of that method cannot be questioned by the Revenue unless the adoption of that method is found to be not bona fide or restricted for a particular year.

The Tribunal correctly followed the principles enunciated in the above judgment and came to the correct conclusion. The reasons given by the Tribunal are based on valid materials and evidence. Under these circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference.

In view of the foregoing reasons, no substantial question of law arises for consideration of this Court and accordingly the tax case is dismissed. Consequently, M.P. No. 1 of 2007 is closed. No costs.