2008 (12) TMI 34 - HC - Income Tax

Valuation of Opening & Closing Stock for Income Computation: Case Analysis

Commissioner of Income Tax, Patiala Versus The Improvement Trust, Patiala

The case involved an appeal under Section 260A of the Income Tax Act, 1961 regarding the valuation of opening and closing stock for income computation. ... Revised return was rejected by AO on ground that assessee has changed the method of accounting - revised return was within the prescribed time - assessee has only made correction by bringing closing stock in consonance with the principle, on which opening stock was valued, so that the income can be correctly arrived at - CIT (A) &ITAT were right in directing AO to re-compute the income by adopting value of closing stock at cost or market price whichever is lower – revenue’s appeal dismissed Issues:1. Valuation of opening and closing stock for income computation.2. Legality of revising return for changing stock valuation method.Issue 1: Valuation of opening and closing stock for income computationThe case involved an appeal under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal regarding the valuation of opening and closing stock for income computation. The appeal raised questions on whether the ITAT was correct in directing the Assessing Officer to re-compute the income by adopting the value of opening and closing stock at cost or market price, whichever is lower. The dispute arose as the assessee changed the method of accounting by adopting market price for the closing stock in the revised return, which was different from the method followed in earlier assessment years. The CIT (A) allowed the appeal, emphasizing that opening and closing stock should be valued on the same basis, and the Assessing Officer cannot adopt the closing stock valuation from the original return without varying the opening stock. The Tribunal upheld this view, leading to the dismissal of the appeal as no substantial question of law was found to arise.Issue 2: Legality of revising return for changing stock valuation methodThe second issue revolved around the legality of revising a return to change the method of stock valuation. The appeal questioned whether the ITAT was legally justified in accepting the closing stock as declared in the revised return, given that the provisions of section 139(5) of the Act permit revising a return only for correcting omissions or wrong statements in the original return, not for changing the method of stock valuation entirely. The Tribunal's decision to accept the revised return was supported by the argument that the correction made by the assessee was to align the closing stock valuation with the principle used for the opening stock, ensuring the correct computation of income. The High Court concurred with this reasoning, stating that the revised return was filed within the prescribed time and the correction aimed at arriving at the correct income figure. Consequently, the appeal was dismissed on this issue as well.---