2008 (8) TMI 192 - HC - Income Tax

High Court upholds change in stock valuation method from FIFO to average cost, supports assessee's accounting method change rights.

The High Court upheld the Income-tax Appellate Tribunal's decision in favor of the assessee, allowing the change in valuation method of closing stock from ... Whether Tribunal was right in holding that the change in the method of valuation of closing stock by the assessee from FIFO method to average cost method was justified – Whether Tribunal was justified in deleting the addition made on account of change in the method of valuation of closing stock – practical difficulties was given reason for change in method - assessee has given reasonable grounds for changing the method – therefore, questions are answered in affirmative and against the Revenue Issues:1. Change in method of valuation of closing stock from FIFO to average cost method.2. Deletion of addition made on account of change in method of valuation of closing stock.Issue 1 - Change in method of valuation of closing stock from FIFO to average cost method:The appeal by the Revenue questioned the Income-tax Appellate Tribunal's decision allowing the assessee to change the method of valuation of closing stock from FIFO to average cost method. The assessee, H. P. State Civil Supplies Corporation, had been following FIFO method for years but faced practical difficulties due to having over 250 separate depots across Himachal Pradesh. The Commissioner, Income-tax, rejected the change, citing lack of board resolution and permission from tax authorities. However, the ITAT accepted the assessee's explanation, considering practical difficulties and the validity of both valuation methods recognized by the Institute of Chartered Accountants of India. The High Court noted that no legal provision barred changing the accounting method without permission and cited precedents supporting an assessee's right to change valuation methods. The court emphasized that a change in accounting practice should be bona fide and in accordance with accepted practices, ultimately ruling in favor of the assessee.Issue 2 - Deletion of addition made on account of change in method of valuation of closing stock:The second issue involved the deletion of an addition of Rs. 17,33,319 to the assessee's income due to the change in the method of valuation of closing stock. The Revenue argued against the deletion, relying on judgments from the Calcutta High Court and apex court, which emphasized the importance of following a consistent accounting system. However, the High Court distinguished these cases, stating they did not address an assessee's right to change accounting systems. The court referenced the Karnataka and Bombay High Court judgments, which supported an assessee's right to change valuation methods under specific circumstances. The High Court found merit in the assessee's reasoning for the change, considering the practical difficulties faced and the impact on subsequent years' income. Ultimately, the court rejected the Revenue's appeal, upholding the deletion of the addition made on account of the method change.In conclusion, the High Court dismissed the Revenue's appeal, affirming the ITAT's decision in favor of the assessee regarding the change in the method of valuation of closing stock and the deletion of the additional income amount.