2009 (6) TMI 122 - AT - Income Tax

Issues of income addition, Mandi-tax disallowance, and stock value upheld in court; consistency in accounting crucial.

The case involved issues related to addition to income due to non-compliance with s. 145A of the IT Act, disallowance of Mandi-tax liability, and addition ... Method of accounting regularly employed - valuation of inventories at cost or net realizable value - non obstante clause and overriding effect of a special provision - change in accounting policy permissible only if required by statute or resulting in more appropriate presentation - deductibility of writeoff and crystallisation of liabilityMethod of accounting regularly employed - valuation of inventories at cost or net realizable value - change in accounting policy permissible only if required by statute or resulting in more appropriate presentation - Whether the assessee could change valuation of closing stock from cost to net realizable value for the purpose of computing income under the head 'Profits and gains of business' contrary to s.145A - HELD THAT: - The Tribunal held that s.145A, which begins with a non obstante clause, prescribes that valuation of purchases, sales and inventories for computing business income shall be in accordance with the method of accounting regularly employed by the assessee, and thus overrides contrary implications of s.145. Although AS2 permits a change in accounting policy only if required by statute or if it produces a more appropriate presentation, that permissive or normative role cannot negate the specific mandate of s.145A. Consequently, once an assessee has regularly employed valuation at cost, it is not freely permissible, for incometax purposes, to adopt valuation at net realizable value in a subsequent year so as to alter taxable income; the AO and CIT(A)'s disallowance of the resultant reduction in closing stock was thus upheld. [Paras 14, 15, 16, 17, 18]Addition made by enhancing value of closing stock on account of change from cost to net realizable value confirmed; change not permitted for the purpose of s.145A.Deductibility of writeoff and crystallisation of liability - opinion of advocate not determining year of deductibility - Whether the assessee company could claim deduction for amounts written off in respect of Manditax liabilities of an erstwhile partnership firm - HELD THAT: - The Tribunal found that the sums related to liabilities of the erstwhile firm, which had been shown as recoverable and paid pursuant to an earlier High Court order; the assessee company had written them off in the relevant year relying on legal opinion. The writeoff was not a deduction in respect of any liability of the assessee nor an amount that crystallised as the assessee's liability in the relevant year. The advocate's opinion could not determine the year in which deductibility arose. On these grounds the AO and CIT(A)'s disallowance of the writeoff was sustained. [Paras 19, 20, 21, 22]Deduction for the writeoff of Manditax not allowable; CIT(A)'s order confirmed.Method of accounting regularly employed - valuation of inventories at cost or net realizable value - Whether the addition made in assessment year 200304 by enhancing closing stock value stands in light of the finding in 200203 - HELD THAT: - The Tribunal noted that the 200304 addition was consequential to the earlier finding for 200203 that the assessee could not change its method of valuation for incometax purposes. Accordingly the AO was to determine income for 200304 in accordance with the method of accounting regularly employed prior to 200203, and the addition for 200304 was maintained. [Paras 23, 24, 25]Addition in assessment year 200304 by enhancing closing stock confirmed as consequential on the 200203 finding.Final Conclusion: All appeals by the assessee are dismissed; the disallowances in respect of change in valuation of closing stock and the writeoff of Manditax are upheld, and the consequential addition for 200304 is sustained. Issues Involved:1. Addition to income due to non-compliance with s. 145A of IT Act.2. Disallowance of Mandi-tax liability.3. Addition to income due to enhanced value of closing stock inventory for the asst. yr. 2003-04.Summary:Issue 1: Addition to income due to non-compliance with s. 145A of IT ActThe assessee, a limited company engaged in the manufacturing of condensed milk, Ghee, and butter, changed its system of accounting for the valuation of closing stock from 'at cost' to 'net realizable value' for the asst. yr. 2002-03. The AO found this change inconsistent with s. 145A of the IT Act, 1961, which requires inventory valuation in accordance with the method of accounting regularly employed by the assessee. The AO rejected the change, resulting in an addition of Rs. 83,87,792 to the income. The CIT(A) concurred with the AO, stating that the relevance of AS-2 was misplaced and the change was not bona fide. The Tribunal upheld the disallowance, emphasizing that s. 145A, which starts with a non obstante clause, overrides s. 145 and restricts frequent changes in the method of valuation of stocks.Issue 2: Disallowance of Mandi-tax liabilityThe assessee claimed a deduction for Mandi-tax payable by the erstwhile firm, which was converted into the assessee company. The AO disallowed the claim, stating that the liability was contingent and not crystallized during the relevant previous year. The CIT(A) endorsed this view, noting that the liability was not of the assessee but of the erstwhile firm, and the write-off was based on an advocate's opinion, which cannot determine the year of deductibility. The Tribunal upheld the disallowance, confirming that the liability did not crystallize during the assessment year in question.Issue 3: Addition to income due to enhanced value of closing stock inventory for the asst. yr. 2003-04The assessee raised a ground regarding the addition of Rs. 51,58,595 to the income due to the enhanced value of closing stock inventory for the asst. yr. 2003-04. This issue was a consequence of the change in the method of valuation of inventory, which was already decided against the assessee for the asst. yr. 2002-03. The Tribunal upheld the AO's determination of income in accordance with the method of accounting regularly employed by the assessee prior to the asst. yr. 2002-03.Conclusion:In the result, the appeals were dismissed.