TaxTMI 
TaxTMI 
2006 (9) TMI 489
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.... as stock-in-trade by the appellant. 3. Both the lower authorities have erred in law and on facts in not considering and grossly ignoring various explanations, submission and evidences placed on record by the appellant in its proper perspective and further erred in not appreciating the view point of the appellant. This action of both the lower authorities is in clear breach of principles of natural justice and therefore deserves to be quashed. 4. Levy of interest under section 234A/B/C of the Act is not justified. 5. Initiation of penalty proceedings under section 271(1)(c) of the Act is not justified. 6. Initiation of penalty proceedings under section 271E of the Act is not justified." The main issue involved in this appeal relates to the disallowance of the claim of the assessee amounting to Rs. 16,88,76,463 on account of change in the method of valuation of the closing stock. The brief facts relating to this issue are that the Assessing Officer on verification of the final accounts noted in Schedule 14 that the chartered accountant that has given the following note : "......8. The company has changed its accounting policy for valuation of quoted shares, held as....
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.... 19. MTNL 4100 3543250 0 0 0 0 4100 20. VSNL 100 785710 0 0 0 0 100 21. Cadila Zydus 100 25000 0 0 0 0 100 Total 4808985 196629965 0 0 0 0 4808985 In view of these facts, the Assessing Officer was of the view, that the assessee has claimed substantial loss on the revaluation of the shares of Core Healthcare Limited and accordingly the details of the shares of Core Healthcare Limited held by the assessee-company were called for and the Assessing Officer pointed out to the assessee that shares of Core Healthcare Ltd. held as stock in trade are pledged with banks/institutions. The pledging of shares with the banks/institutions shows that these stocks were held as investment and pledging is not for the purpose of the business. It was also pointed out that the revaluation was carried out for shares held as stock-in-trade and not for shares held as investment. The reply submitted by the assessee was considered but the Assessing Officer did not accept the contention of the assessee that the change in the m....
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....mputation of income notwithstanding the system has been regularly employed by the assessee in earlier years. In the instant case, the assessee-company had been regularly following the system of valuation at cost which has been accepted by the Assessing Officer as per the provisions of section 145 of the Income-tax Act. I do not see any infirmity in the action of the Assessing Officer with reference to the provisions of section 145 of the Act, particularly having regard to the discussion in paragraph 3.2, b, c, d of this order. (b) As observed by the Assessing Officer, if the method of accounting is not bona fide or does not reflect the true and correct income of the assessee, the same can be rejected as held by the apex court in the case of British Paints [1991] 188 ITR 44, relied upon by the Assessing Officer in the instant case. The argument of the asses-see's representative Shri S. N. Soparkar that since cost or market price whichever is lower ought to have been accepted by the Assessing Officer, as held by the Supreme Court in the case of CIT v. British Paints has to be viewed in the context of the facts which have been brought on record by the Assessing Officer. In particul....
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.... the chain of events which have been taken place relating to the assessee-company's investments in Core Health Care Limited and subsequently treating part of them as stock-in-trade although there was never any intention to sell them in the market which is borne from the fact that the said investments have been utilised for non-business purposes, the reference to McDowell & Co. and the ratio of the apex court by the Assessing Officer is, therefore, relevant and applicable to the facts of the case. (c) As discussed above and also observed by the Assessing Officer in the assessment order, there is no justification for treating 37,000 shares of Core Health Care Limited as investment and the balance 4792930 shares as stock-in-trade when the assessee-company never had any intention to trade in the said shares in the light of the discussion in the preceding paragraphs. (d) Reference to the decision of the hon'ble Supreme Court by the assessee's representative in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 and other decisions referred earlier does not help the case of the assessee in view of the facts in the present case. It is clear from the facts reproduced above and al....
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....rust Fund [1986] 162 ITR 612 (Guj) ; (ii) CIT v. Andhra Prabha Ltd. [1998] 231 ITR 81 (Mad) ; (iii) CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) ; (iv) Shri Dinesh Mills Ltd. v. Asst. CIT [2000] 72 ITD 110 (Ahmedabad) ; (v) Gujarat Machinery Mfrs. Ltd. v. ITO [1992] 42 ITD 35 (Ahmedabad ; and (vi) CIT v. Mopeds India Limited [1988] 173 ITR 347 (AP). It was further pointed out that so far the fact that the change is bona fide, no material to the contrary was brought on record by the Assessing Officer. The assessee has followed the change continuously in the subsequent years and the Revenue has not disputed the change in the subsequent years. The fact that in the year of change, there is a revenue loss, the change cannot be denied. The Assessing Officer has treated the stock-in-trade as the capital assets. The Assessing Officer does not have any power to convert the stock-in-trade into capital assets when it has been earlier accepted as stock-in-trade merely on the fact that the shares were held as pledge with the banks/financial institutions. Our attention was drawn towards page 19 of the paper book, which consists of note No. 16 relating to the notes....
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....erused the materials on record and gone through the orders of tax authorities as well as the case laws relied on before us: This is an undisputed fact that the assessee was holding shares as stock-in-trade since April 1, 1995. The assessee was consistently valuing shares since then at cost. During the impugned assessment year the assessee changed method of valuation of stock-in-trade from cost to cost or market value whichever is less. The Assessing Officer rejected the claim of the assessee treating the change in the method of valuation not to be a bona fide one. The reason for the change in the method of valuation of the stock was explained to be the accounting standards as notified by the Central Board of Direct Taxes being made mandatory in view of the provisions of section 145(2). The question arise whether the change in the method of valuation adopted by the assessee can be regarded to be bona fide one or not. There is no dispute of the fact that the shares were being shown by the assessee as stock-in-trade since April 1, 1995. The Revenue has also accepted the shares held by the assessee as stock-in-trade up to the assessment year 2000-01. The assessee has pledged 72,00,300 ....
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....ion. In other way, it recognises that anticipate all the losses but not provide for the profit until and unless it is not realised. Valuing the closing stock at cost or market value whichever is lower is a well established method of accounting. This method is based on the principle of prudency. The hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT[1953] 24 ITR 481 as relied on by the learned authorised representative accepted this principle. We noted from this decision that the hon'ble court explained the reasons for the said practice at page 485 which is reproduced as under : "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading.....
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.... 'Under this law (Revenue law) the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value'." There is no dispute on the valuation of shares on the basis of the method of stock valuation adopted by the assessee but it was also held that the change is not bona fide. The income-tax is on the real income. In view of the prudency, the appropriate method of valuation is cost or market value whichever is less. The bona fide therefore in our opinion cannot be doubted. The assessee is following the same method of valuation in the subsequent years as has not been disputed clearly proves bona fide of the change in the method of valuation. We find that it has been held by the hon'ble Delhi High Court in the case of CIT v. Bharat Commerce and Industries Ltd. [1999] 240 ITR 256 that, in view of the findings of the Tribuna....
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....The income-tax authorities, therefore were not justified in rejecting the changed method of stock valuation as adopted by the assessee-company. The new method of accounting cannot be rejected merely because there would be loss of revenue in the year of change. What is relevant is to consider whether the method adopted is one of the recognised methods and further whether the changed method of stock valuation was followed consistently year after year. Change in the method of stock valuation cannot be restricted to a particular year. If the new method of stock valuation is followed consistently year after year, the tax authorities had no option but to accept such method notwithstanding the fact that in the initial year when the changed method is brought about, it may result in a prejudice or detriment to the revenue. The change of method must be bona fide and must not be restricted to a particular year. However, the Tribunal had not recorded any finding to the effect that the new method of stock valuation was being followed by the assessee-company year after year. This aspect had to be examined by the Tribunal." There may be number of reasons due to which the assessee would have no....
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....al authorities, on the ground that the assessee was maintaining balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investment) because the bank was required to prepare balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to be deducted on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the instant case. Therefore, the order of the High Court was to be set aside." We have gone through the various decisions relied on before us by the learned Departmental representative. The decision of the Calcutta High Court in the case of CIT v. UCO Bank [1993] 200 ITR 68 has already been reversed by the hon'ble Supreme Court as stated by us in the preceding paragraph, otherwise also in our opinion, this decision will not help the Revenue because in that case the hon'ble Calcutta High Court clearly laid down that a trader is permitted to value his trading stock at the end of each year....
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....t or market value whichever is less and the assessee has explained it to be one of the reasons for changing the method of valuation. This is a settled law that the assessee is free to value the stock in accordance with the method of valuation as he may choose but the method once chosen has to be adopted consistently. The assessee can change the method of valuation if the change is bona fide and the assessee has explained the reasons for such change. If there will be any change in the method of stock valuation, it is bound to make some changes in the taxable income. Simply because due to the change introduced by the assessee, the taxable income of the assessee got reduced, it cannot be said that the asses-see had intention to deliberately undervalue the stock so as to reduce its tax burden. The hon'ble Gujarat High Court also took the similar view in the case of CIT v. Atul Products Ltd. [2002] 255 ITR 85 after discussing the judgments in the case of CIT v. Delta Plantation Ltd. [1993] 71 Taxman 329 (Cal) ; [1993] 114 CTR 271, CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612 (Guj), CIT v. Dalmia Cement (Bharat) Ltd. [1995] 215 ITR 441 (Delhi), CIT v. Carborandum Universal Ltd. [19....