2012 (6) TMI 477 - AT - Income Tax

Tribunal: Consistency in accounting method crucial under Income-tax Act 1961

The Tribunal held that the provisions of Section 145A of the Income-tax Act, 1961, prevail over Section 145, requiring the method of accounting regularly ... Valuation of stock – change of method of accounting - Held that:- according to the provisions of section 145A of the Income-tax Act, 1961, for valuation of inventory, the method to be adopted is the method of accounting regularly employed by the assessee – For the determination of income chargeable under the head 'Profits and gains of business or profession', the Act requires assessee to value the stock in accordance with the method of accounting regularly employed by the assessee. Once the method has been chosen it should be employed regularly by the assessee and assessee may not be permitted to change it in the subsequent years. The assessee was regularly employing the method of valuation for valuing the stock at cost or net realizable value whichever is less. By shifting to a new ERP package, for example, SAP 2 worked out the value of the stock at cost, any reduction in the valuation of the stock is not permitted in law. Decided in favor of Revenue. Issues Involved:1. Change in the method of valuation of stock.2. Applicability of Section 145A of the Income-tax Act, 1961.3. Consistency in the method of accounting.Issue-wise Detailed Analysis:1. Change in the method of valuation of stock:The assessee company, engaged in the manufacture and sale of writing instruments, changed its method of valuation of stock during the assessment year 2008-09. The change resulted in a reduction of income by Rs. 11,60,494/-. The Assessing Officer (AO) found this change unacceptable, citing that under Section 145A of the Income-tax Act, 1961, the method of accounting regularly employed by the assessee must be used for inventory valuation. The AO made an upward adjustment of Rs. 11,60,494/- in the income of the assessee.The CIT(A) upheld the AO's decision, stating, 'the addition of Rs. 11,60,494/- on account of valuation of closing stock in terms of section 145A of the Act was rightly made by the Assessing Officer.'2. Applicability of Section 145A of the Income-tax Act, 1961:The assessee argued that Section 145A does not bar changing the method of valuation, provided it is followed regularly. The assessee shifted to a new ERP package (SAP) that values stock at cost using the moving average method. They claimed this change was scientific and did not constitute a change in the method of valuation as both FIFO and weighted moving average methods are recognized by Accounting Standard 2 (AS-2).The learned DR countered that the change in the method of valuation was reported by the assessee's auditor, which resulted in a reduction of profit by Rs. 11,60,494/-. The DR emphasized that Section 145A requires the method of accounting regularly employed in the preceding year to be adopted, and any change that reduces income must be compensated for in the year of change.3. Consistency in the method of accounting:The assessee contended that the method of valuation was consistently followed in subsequent years and that bona fide changes in the method are permissible. They cited various case laws to support that a change in the method of accounting, if followed regularly thereafter, satisfies the requirements of Section 145.The Tribunal noted that Section 145A, introduced by the Finance (No.2) Act, 1998, w.e.f. 1.4.1999, starts with a non-obstante clause, indicating its provisions prevail over Section 145. The Tribunal emphasized that once a method is chosen, it should be employed regularly and not changed in subsequent years. The assessee's shift to a new ERP package that resulted in a reduced valuation of stock was not permitted by law.Conclusion:The Tribunal concluded that the provisions of Section 145A override those of Section 145, and the method of accounting regularly employed by the assessee must be followed consistently. The assessee's change in the method of valuation, resulting in a reduction of income, was not permissible. The Tribunal upheld the orders of the authorities below, dismissing the appeal of the assessee.