Income Tax Appellate Tribunal - Kolkata
Radharani Tea & Estates (P.) Ltd. vs Deputy Commissioner Of Income-Tax on 2 June, 1997
Equivalent citations: [1998]65ITD490(KOL)
ORDER
P.J. Goradia, V.P.
1. This appeal arises from the order dated 30-4-92 passed by Shri U. P. Singh, CIT(A)-XIV, Calcutta, in Appeal No. 3/19/CIT(A)-XIV/91-92.
2. The issue involved here is, whether an assessee, who has changed the method of valuation of the closing stock, is also entitled to claim appropriate adjustment in the value of the opening stock on changed basis of valuation of closing stock.
3. The assessee is engaged in the plantation and production of tea. It is regularly assessed to tax for last several years. For the purpose of accounts, it follows calendar year as the previous year and for our purpose the previous year starts from 1-1-1987 and ends on 31-12-1987. Until 31-12-1986 the assessee's closing stock of tea was valued on cost basis. In doing so, it was not including the element of depreciation, interest on Nabard Loan and also some other element of cost. However, while valuing the closing stock as on 31-12-87, the above three elements of expenditure were included in the closing stock. In audited accounts, statutory Auditors have stated that the method of valuation of stock in the year under review underwent a change because of which there was increase in the profit of Rs. 7,11,680 and further the valuation of the stock was fair and proper and in accordance with normally accepted accounting principles. In the return of income originally filed by the assessee, it claimed this deduction of the amount of Rs. 7,11,680 on the basis that there was excess valuation of closing stock of tea owing to change in the method of valuation. The assessee filed revised return in which such deduction was limited to a sum of Rs. 5,14,458. This revision took place on account of adjustment in the valuation of the opening stock also on the basis of change in the method of valuation of the closing stock. The Assessing Officer rejected the claim for deduction on the ground that when the changed method of valuation of the closing stock was consistently followed in subseqment years, the increase in the valuation of closing stock will get adjusted in the following year on account of increased value of the opening stock and, therefore, the assessee will not be put to any disadvantageous position. This was confirmed by the Commissioner (Appeals).
4. At the time of hearing, the learned counsel for the assessee placed reliance on in the case of K. G. Khosla & Co. (P.) Ltd. v. CIT (1975) 99 ITR 574 (Delhi). This was brought to the notice of the Bench when the Bench enquired whether there was any judicial pronouncements supporting the view taken by the assessee. The Ld. Sr. Departmental Representative strongly supported the appellate order.
5. On consideration of the material, we are not inclined to agree with the stand taken by the assessee. Firstly let us consider the controversy on the basis of pragmetic approach. Normally the opening stock of quantity gets disposed of during the previous year and, therefore, sales are reflected in the books of account and, therefore, appropriate profit or loss on the stock carried forward gets accounted for in the books of account. When the previous year ends, the trader takes account of the stock lying on hand and which is unsold during the year, but for which the expenditure is debited in the Trading and Profit & Loss Account. Therefore, appropriate adjustment is necessitated by reducing the expenditure which is embedded in the stock lying at the close of the accounting year and, therefore, valuation of the closing stock is made for which credit is taken to Trading Account and thereby only that much amount of expenditure remains debited in the books of account of which the goods are sold and sales are recorded in the books of account. Such being the position, it would be immediately realised that quantitatively and qualitatively the stock lying by way of closing stock is quite different from stock carried forward from the earlier year and appearing as opening stock. Both the stocks are distinctly processed as far as accounts are concerned and, therefore, merely because a closing stock is valued on changed method, the same does not necessitate the valuation of the opening stock. This discussion should meet the contention of the assessee that true profits cannot be determined unless the method of valuation is same for the closing stock as also for the opening stock of the previous year. In fact, it would be otherwise.
6. Now we go to various judicial pronouncements. The assessee had relied upon the decision in the case of K. G. Khosla & Co. (P.) Ltd. (Supra). This decision was considered by the Madras High Court in the case of CIT v. Carborandum Universal Ltd. (1984) 149 ITR 759/16 Taxman 25, where exactly similar controversy arose and how the controversy got decided at different levels can be understood from the head-notes reproduced below :-
"After filing its return of income for the accounting year ending on August 31, 1970, relevant for the assessment year 1971-72, the assessee-company filed a revised return showing a lower total income and claiming that the difference between the income returned in the two returns did not represent the profits of the company for the year ended August 31, 1970, as that sum represented part of the value of the closing stock of finished goods as on August 31, 1970. The assessee claimed that though in valuing the closing stock of all the items in the earlier years, it had adopted total cost, from the assessment year in question it had changed the valuation of the closing stock in respect of work-in-progress and finished goods from total cost to direct cost, the difference between the total cost and the direct cost being that in the direct cost the overheads such as administrative department expenses were excluded while in the total cost such overheads were included. The assessee further claimed that the change in the method of valuation was a bona fide and it would be adopting the same method consistently in future. The Income-tax Officer, however, refused to allow this amount as a deduction but added back the same on the ground that by the adoption of the new method, the assessee was claiming a part of the production overheads of the earlier years and thereby understated the income of the previous year by the corresponding amount included in the opening stock. The AAC, on appeal, accepted the assessee's claim for the change in the valuation of the closing stock but, however, directed that the officer should work out the value of the opening stock as on September 1, 1969, also on direct cost basis or market price basis, whichever was lower, and recompute the profits. The Tribunal upheld the claim of the assessee that as the change in the method of valuation was bona fide and was to be adopted in future year after year, it was entitled to adopt the direct cost method only for valuing the closing stock. On a reference :
Held, that in view of the finding of the Tribunal that the adoption of the direct cost method was bona fide and was a permanent arrangement with the intention to follow the same method year after year, the change would have to be accepted notwithstanding the fact that during the assessment year in question, which was the first year when the change of method was brought about, a prejudice or detriment might be caused to the revenue. As the method of valuation adopted by the assessee had obtained recognition from practising accountants and the commercial world for valuation of stock-in-trade, the adoption of that method could not be questioned by the Revenue unless the adoption of that method was found to be not bona fide or restricted to a particular year. If the assessee is called upon to apply the new method of valuation to the opening stock of the accounting year as well, the value of the closing stock of the year previous to the accounting year will also have to get altered which will result in a modification of the assessment of that previous year. The Tribunal was, therefore, right in its conclusion that the assessee was entitled to alter its method of valuation of closing stock and, consequently, the difference between the valuation according to the old method and according to the new method could not be included for assessment."
In the said case, the learned counsel for the Revenue had relied upon the case of K. G. Khosla & Co. (P.) Ltd. (Supra) and Their Lordships of the Madras High Court at page 768, after narrating the facts and controversy stated that this position should be confined to the facts of that case as the Court in that case refused to direct a reference on the ground that no question of law arose out of the order of the Tribunal. Accordingly, the High Court did not follow the case of K. G. Khosla & Co. (P.) Ltd. (supra). Similarly, as also obviously, we are also not inclined to follow the aforesaid decision for the said reasons stated by Their Lordships of the Madras High Court.
7. In the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC), it was held that it is misconception to think that any profit arose out of the valuation of the closing stock. It was further held in the said case as also in the case of Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.) that merely because the new method adopted (by the assessee) was detrimental (to the Revenue), that alone can never be the basis for denying the right to change the method because once the method is followed consistently year after year in future, the apparent detriment (to the Revenue) will get adjusted and disappeared. Keeping this principle in mind and applying the same test, even if it is found by the assessee that in this year the changed method worked to the detriment of the assessee, yet since it is admittedly followed year after year, the detriment would vanish. In fact, from commercial point of view it should get vanished in the next year itself.
8. Lastly, an aspect of pure Accountancy requires to be considered. At the end of the year when the unsold stock is inventorised and valued, in the books of account an entry is passed debiting the (closing) stock and crediting the trading account. Next year this (closing) stock is carried forward in the new ledger as (opening) stock. Now suppose if this opening stock is to be revalued, say on higher side, then some entry shall have to be passed in the books of account. The only entry which can be envisaged is debiting the opening stock by the differential amount by giving corresponding credit to the trading account. If this is done, then again the result will not be as is claimed by the assessee. This aspect will clarify how without substance the assessee's claim is.
9. We also came across a judgment of the Bombay High Court in the case of Melmould Corpn. v. CIT [1993] 202 ITR 789 where similar controversy arose. In that case, during the previous year relevant to the assessment year 1969-70, the assessee valued its opening stock on the basis of cost plus overheads which was the method adopted by the assessee in the years prior thereto, so that the value of the closing stock for the year ending on 31-3-68 was carried forward as the value of the opening stock on 1-4-68. The assessee, however, decided to change its method of valuation by valuing the stock at cost price only excluding the overheads. The assessee, accordingly, valued its closing stock as on 31-3-69 on cost price. The Assessing Officer increased the gross profit rate in view of the difference in the method of valuation of opening stock and closing stock. The Tribunal accepted the valuation of the closing stock at cost price excluding overhead expenses but directed the Assessing Officer to redetermine the value of the opening stock at cost price after excluding all overheads. On reference, the High Court held that the assessee could not be required to revalue the opening stock as directed by the Tribunal when the assessee had been permitted to revise the method of valuing the closing stock and the same was adopted year after year. While giving this judgment. Their Lordships of the Bombay High Court took into consideration the Accountant's approach as given in book written by Shri G. P. Kapadia and brought out by Indian Merchants' Chamber Economic Research & Training Foundation, the booklet called "Valuation of Stock and Work-in-progress - Normally Accepted Accounting Principles". The High Court also observed that same principle had been adopted by Karnataka High Court in the case of CIT v. Corporation Bank Ltd. (1988) 174 ITR 616/41 Taxman 161 and further similar view was expressed by Andhra Pradesh High Court in the case of CIT v. Mopeds India Ltd. (1988) 173 ITR 347/38 Taxman 123.
10. In view of the discussions above, we upheld the appellate order.
11. In the result, the appeal is dismissed.