TaxTMI 
TaxTMI 
2009 (6) TMI 122
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....98,390 on account of Mandi-tax. The Dy. CIT has erred in facts and law on disregarding the MoU between the company and erstwhile partnership firm whereby all the liabilities of the firm including contingent liabilities were to be borne by the company. The learned CIT(A) has wrongly and illegally confirmed the action of AO." 3. The assessee is a limited company engaged in the business of manufacturing of condensed milk, Ghee and butter. During the asst. yr. 2002-03, it was found by the AO, in a scrutiny assessment, that it had changed its system of accounting in respect of valuation of closing stock of inventories. In earlier years they were valued 'at cost' while in this year the same have been valued 'at net realizable value'. The assessee was asked to provide reason for such change in the system of the valuation of closing stock to justify its acceptance by the IT Department. The assessee explained as under: "Note on valuation of closing inventory Please refer to para (6) of Annex. W to the auditors report which is submitted as under: On the basis of the examination of stock records, we are of the opinion that the valuation of stock is fair and proper in accordance with ....
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....; 52,90,973.18 ------------------------------------------------------------------ Total deviation 83,87,792.18 ------------------------------------------------------------------ The ICAI has issued various Accounting Standards to be followed by all limited companies which includes valuation of inventories (AS-2). A primary issue in accounting for inventories is the determination of the value at which inventories are carried in the financial statement until the related revenues are recognized. This standard deals with the determination of such value, including the ascertainment of cost of inventories and any written down to net realizable value. This standard provides that the acceptable basis of inventory valuation or measurement of inventories is at cost or net realizable whichever is lower. Net realizable value may be used for valuing inventories that are damaged or they have become wholly or partially obsolete or if their selling price has declined. The practice of writing down inventories below cost to net realizable value is cons....
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.... for the purpose of its shareholders on the basis of the changed accounting policy but as far as IT Act, 1961 is concerned, the provisions of s. 145A are very clear and the assessee was required to value the same method as it has been valuing in the earlier years. In other words, according to him the assessee's method of accounting in relation to closing stocks is not in accordance with the requirement of s. 145A of the Act. Therefore, the AO rejected the assessee's claim and the resultant losses to the extent of Rs. 83,87,792 resulted in a disallowance. 7. The CIT(A) concurred with the views of the AO that the assessee has not complied with the requirement of s. 145A of the IT Act, 1961. According to him the relevance of AS-2 is misplaced. The learned CIT(A) was of the opinion that the decision of the Karnataka High Court in the case of Karnataka State Forest Industries Corpn. Ltd. vs. CIT (1993) 201 ITR 674 (Kar) is not of much help to the assessee. In that case according to the CIT(A) the AO again rejected the change only on the ground that the statutory auditors have not agreed to it. According to the CIT(A) in the case before him the view of the AO is not based on the opini....
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....r any assessment year, the same shall be the basis for valuation of the purchases and sale of goods and inventory in all the subsequent years. After the introduction of provisions of s. 145A there is little scope for change in the method of valuation of the inventory. According to learned Departmental Representative the AS-II which has been relied upon by the learned counsel for the assessee, although relevant for the determining of income under s. 145 of the Act is not so relevant for the purpose of valuation of inventory for the said purpose of determining the income chargeable under the head "Profits and gains of business or profession". According to the learned Departmental Representative, these provisions are specific provisions and, therefore, the special provisions will prevail over general provisions of s. 145. According to learned Departmental Representative, on and from1st April, 1999the assessee will not be permitted to change the method of valuation of closing stock once he adopts the method in the initial year. The learned Departmental Representative heavily relied upon the decision of the Allahabad High Court in the case of Badri Prasad Kedar Nath Sarraf vs. CIT (2005....
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....r to asst. yr. 1998-99 the entire provisions relating to method of accounting were contained in s. 145 only. As per that section the income under the head 'Profits and gains of business' or 'Other sources' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In other words, the IT Act, 1961 recognized two systems of accounting, cash system of accounting and mercantile system of accounting as the methods of accounting. It was also provided in the same section that the Central Government is authorized to notify from time to time the Accounting Standards to be followed particularly in case of assessee or in respect of any income. In pursuance thereof, certain Accounting Standards were issued by means of notifications. By Notification No. SO 69E, dt.25th Jan., 1996reported in (1996) 130 CTR (St) 33 : (1996) 218 ITR (St) 1 were issued (to maintain the brevity in the order the said notification is not reproduced). Accounting Standard-2, by its cl. (9) provides that a change in the accounting policy shall be made only if the adoption of a different accounting policy is required by the statute or if it is considered that th....
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....e in accordance with the method of accounting regularly employed by the assessee. Now the question is when once the assessee has chosen to adopt cost as the method of valuation and it was regularly employed by the assessee he may not be permitted to change in subsequent year. 16. Now coming to s. 145 and justifying the change on the basis of the AS-2 referred to earlier, will only mean that the provisions of s. 145A will get negated. The purpose of the non obstante clause is just to prevent that happening. The legislative intent appears to be that as regards the valuation of the purchase and sale of goods and inventory the Act it is rigid or inflexible and the change in the method once regularly employed may not be strictly permissible under the provisions of s. 145A of the Act. With regard to issues other than aspects of valuation of stocks the provisions of s. 145(1) and (2) would be enabling assessee to claim the changed method if it is bona fide and is regularly employed by the assessee. Even the changed method of accounting is permissible under s. 145(1) and (2) are not so provided in s. 145A of the Act. 17. In a way the provisions of s. 145A are specific provisions. The....
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....nsel for the assessee before the Revenue authorities have been reiterated before us. 21. The learned Departmental Representative, on the other hand, strongly relied upon the findings of the CIT(A). According to him the deduction that is claimed is not in respect of any liability of the assessee. It is just a write off to the P&L a/c. 22. We have carefully considered the rival contentions and gone through the records. In our view the order of the CIT(A) does not require any interference on this issue. First of all, these were not the assessee's liabilities. The liability was of the erstwhile firm and moreover the Mandi-tax became payable by virtue of the order dt.16th Aug., 1996on the erstwhile firm by the High Court of judicature in the miscellaneous Writ Petn. No. 24696 of 1996. In pursuance thereof, the money seems to have been paid in 1996 and were shown as recoverable from Krishi Utpadan Mandi Samiti,Agra. This write off in the accounts for the relevant assessment year appears to be on the basis of the opinion expressed by the advocate on 20th Feb., 2002 stating that the recoveries are not possible to be made and suggested write off to the P&L a/c. Accordingly the sums we....