Permissible permanent change in stock valuation to weighted average cost upheld; packing expenses not deductible under Section 35B(1)(b)

HC held that a bona fide, permanent change in stock valuation from lowest price during the year to weighted average cost was permissible, and the Tribunal's contrary finding was without merit, decision against Revenue. Separately, packing expenses for exported goods did not qualify for deduction under section 35B(1)(b) of the Act, and that issue was decided against the assessee.

---

---

Issues Involved:

1. Change in the method of valuation of closing stock.
2. Rejection of the change in the method of valuation of closing stock.
3. Qualification of packing expenses for export market development allowance under Section 35B.

Issue-wise Detailed Analysis:

1. Change in the method of valuation of closing stock:

The assessee, a manufacturer of scooters, three-wheelers, and their parts, had traditionally valued its closing stock based on cost or market value, whichever was lower, using the "lowest purchase price during the year." However, for the accounting year ending on June 30, 1976, the assessee switched to the "weighted average cost" method for determining the cost of closing stock. This change was made in consultation with auditors following the Manufacturing and Other Companies (Auditor's Report) Order, 1975, which necessitated a more scientific method of cost determination. The new method considered both opening quantities and purchases during the year, dividing their combined value by the total quantity to arrive at the cost. This change resulted in a reduction of inventory and profits by Rs. 12,03,509.

2. Rejection of the change in the method of valuation of closing stock:

The Assessing Officer rejected the new method and added Rs. 12,03,509 to the assessee's income. On appeal, the Commissioner of Income Tax (Appeals) [“CIT(A)”] deleted this addition, finding the change bona fide and proper. However, the Tribunal restored the Assessing Officer's order. The High Court considered whether the assessee was entitled to employ the new method for closing stock valuation. Under Section 145 of the Income Tax Act, the Assessing Officer can reject the method of accounting if it does not allow proper deduction of income or if no method is regularly employed. The court noted that the change was in the method of ascertaining cost, not in the accounting method itself, and was intended to be a regular, bona fide change in line with international standards. The Tribunal's rejection was found to lack merit as the change was bona fide and intended for regular use. The court cited precedents, including Indo Commercial Bank Ltd. Vs. Commissioner of Income Tax and Melmould Corporation Vs. Commissioner of Income Tax, to support the assessee's right to change the method if done bona fide and regularly. The court concluded that the Revenue had no cause to complain if the change was bona fide and permanent, answering questions (a) and (b) in favor of the assessee.

3. Qualification of packing expenses for export market development allowance under Section 35B:

Regarding the qualification of packing expenses for export market development allowance under Section 35B, the court referred to the decision in Commissioner of Income Tax Vs. Zenith Steel Pipes and Industries Ltd, which held that packing expenses did not qualify for the allowance. The court answered this question in the affirmative, in favor of the Revenue and against the assessee.

Conclusion:

The High Court concluded by answering questions (a) and (b) in favor of the assessee, allowing the change in the method of valuation of closing stock. Question (c) was answered in favor of the Revenue, denying the allowance for packing expenses. The reference was disposed of with no order as to costs.

---