2018 (12) TMI 696 - HC - Income Tax

High Court upholds assessee's 'since realized price' method for valuing stock, emphasizing conservatism and prudence

The High Court allowed the appeal filed by the assessee, setting aside the orders of the Tribunal and lower authorities. It concluded that the assessee's ... Valuation of the closing stock of shares on the basis of “since realized value” - whether Tribunal were right in coming to the conclusion that the method of accounting adopted by the assessee, is an unconventional method of accounting and an attempt to re-write his accounts? - whether the assessee should be precluded from reflecting the actual realised cost of share and should a figure which obviously does not match with the sale price realised, be relied on for the purpose of making the amount addition? - Held that:- In the case of CIT vs. Mahalaxmi Sugar Mills Co. Ltd [1992 (10) TMI 73 - DELHI HIGH COURT] Tribunal allowed the assessee's claim by examining the documents and found that the loss, in fact, was incurred and this is allowable as a deduction. The Tribunal pointed out that the method of valuation of the closing stock, which was adopted by the assessee, was that it would not take the value of the closing stock on the last date of the accounting year but, it took the estimated realisable market value by adopting the price of sugar subsequently realised or realisable before the balance sheet for the year in question was adopted. The Tribunal found this method to be scientific and accordingly, allowed the assessee's appeal. In our considered view, the decision in Mahalaxmi Sugar Mills Co. Ltd. (supra) would squarely apply to the case on hand. The Assessing Officer or the CIT(A) does not dispute the fact with regard to the loss suffered by the assessee. We say so after going through the factual matrix of the case, nor such a contention was advanced before us by the Revenue. From the assessment order, it is seen that for the subsequent year also, the assessee had generated huge loss from the share business and has settled all such loans from other incomes in various years. Thus, we are of the clear view that the 'since realised price', as adopted by the assessee, is the price realised by the assessee upon its sale and taking note of the law laid down in the aforementioned decisions, we hold that the method of valuation of the closing stock adopted by the assessee cannot be stated to be lacking in bona fides and the value adopted by the assessee is the value realised by the assessee upon sale of the share and such contingencies are clearly covered in Clause 8 of AS-4, which deals with events occurring after the balance sheet date. - Decided in favour of assessee Issues Involved:1. Valuation of closing stock of shares based on 'since realized value.'2. Confirmation of the value of closing stock determined by the Commissioner of Income Tax (Appeals).Issue-wise Detailed Analysis:1. Valuation of Closing Stock of Shares Based on 'Since Realized Value':The primary issue in this case is whether the assessee was justified in valuing the closing stock of shares on the basis of 'since realized value,' which is the value actually realized by the assessee on the sale of the stock during the first month after the end of the financial year.The assessee argued that due to significant fluctuations in share prices caused by a scandal, the valuation should reflect a realistic value. The assessee adopted the 'since realized price' method, which he claimed was an accepted method in accordance with the Accounting Standard (AS) prescribed by the Institute of Chartered Accountants of India (ICAI).The Assessing Officer (AO) rejected this method, asserting that the valuation should be based on the market value as of the balance sheet date, following the principle of 'market price' or 'cost price,' whichever is lower. The AO determined the market value of the closing stock from the National Stock Exchange website.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the valuation must be on 'cost' or 'market' basis and adopted the cost of the closing stock as it was lower than the market value.The Tribunal agreed with the CIT(A), emphasizing that the assessee cannot re-write his accounts based on events occurring after the finalization of the same. The Tribunal held that the valuation should be on 'cost' or 'market' value, whichever is lower.2. Confirmation of the Value of Closing Stock Determined by the Commissioner of Income Tax (Appeals):The CIT(A) and the Tribunal both confirmed the AO's determination of the closing stock value. They rejected the 'since realized value' method, stating that it was unconventional and an attempt to re-write accounts.The High Court reviewed the relevant accounting standards and legal precedents. It noted that the assessment year in question was the first year of the assessee's business in stock trading, which is significant since the question of maintaining a consistent accounting standard does not arise.The court referred to Accounting Standard-4 (AS-4) and Valuation of Inventories (AS-2) issued by the ICAI, which support the concept of net realizable value and contingencies occurring after the balance sheet date. The court also considered the Income Tax Department's notifications on accounting standards, emphasizing prudence, substance over form, and materiality.The court found that the assessee's method of valuing the closing stock based on the actual realized price was in line with the accounting standards and principles of conservatism. It held that the method adopted by the assessee did not lack bona fides and reflected the true state of affairs.Conclusion:The High Court concluded that the assessee's method of valuation based on the 'since realized price' was permissible and consistent with the accounting standards. It set aside the orders of the Tribunal and the authorities below, answering the substantial questions of law in favor of the assessee. The appeal filed by the assessee was allowed, with no costs.