Mandatory FIFO method under ICDS Clause 16 constitutional but cannot force LIFO users to change opening stock valuation

Kerala HC held that mandatory adoption of FIFO or weighted average cost method under ICDS Clause 16 for stock valuation is constitutionally valid and not arbitrary. However, for Assessment Year 2017-18, assessees who consistently used LIFO method before the amendment cannot be compelled to apply FIFO for opening stock valuation, as opening and closing stock must be valued using the same method. The retrospective amendment under Section 145A applies only to assessees who had already adopted FIFO. Writ petitions partly allowed; impugned notices quashed.

---

---

Issues Involved:
1. Validity of Clause 16 of ICDS (II) and its retrospective application.
2. Constitutionality of Section 145A as amended by the Finance Act, 2018.
3. Impact of mandatory FIFO or Weighted Average Cost method on valuation of inventory.

Summary of Judgment:

Issue 1: Validity of Clause 16 of ICDS (II) and its retrospective application.
The petitioner, engaged in the business of trading jewellery, consistently used the LIFO method for inventory valuation since 1978. The introduction of ICDS by Notification No. S.O. 3079(E) dated 29.09.2016 mandated the use of FIFO or Weighted Average Cost for inventory valuation from Assessment Year 2017-18. The Delhi High Court in *Chamber of Tax Consultants v. Union of India* (2018) held that the ICDS cannot override judicial precedents or provisions of the Act. The retrospective application of Section 145A, substituted by the Finance Act, 2018, mandated FIFO or Weighted Average Cost, invalidating the LIFO method previously used by the petitioner. The court held that the retrospective amendment would not apply to assessees who had not adopted FIFO for the Assessment Year 2017-18.

Issue 2: Constitutionality of Section 145A as amended by the Finance Act, 2018.
The petitioner argued that Clause 16 of ICDS (II) and the retrospective amendment of Section 145A were arbitrary and violative of Articles 14, 19(1)(g), and 265 of the Constitution. The court found that the legislative intent behind the amendment was to maintain uniformity in accounting standards. However, it held that the retrospective amendment should not apply to assessees who had consistently followed the LIFO method and filed their returns before the Finance Act, 2018.

Issue 3: Impact of mandatory FIFO or Weighted Average Cost method on valuation of inventory.
The court acknowledged that the valuation of opening and closing stock must be consistent and that the retrospective application of FIFO or Weighted Average Cost would create discrepancies. The court highlighted that the valuation of inventory is not a source of income but a method to balance the cost of goods. The mandatory adoption of FIFO or Weighted Average Cost resulted in an artificial increase in the petitioner's income by Rs. 51.07 crores for the Assessment Year 2017-18.

Conclusion:
The writ petitions were partly allowed. The court quashed the impugned notices and directed the respondents to either accept the valuation of both opening and closing stock based on the LIFO method for the Assessment Year 2017-18 or permit the petitioners to value their stocks by applying the FIFO or Weighted Average Cost method.

---