Income Tax Appellate Tribunal - Kolkata
Turner Morrison Land Ltd., Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - "A", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- A , KOLKATA
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बी. आर. सी. डȣ.
डȣ. राव,
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Before Shri B.R.Mittal, Judicial Member & Sri C.D. Rao, Accountant Member
आयकर अपील संÉया / ITA No. 1840 (Kol) of 2009
िनधॉरण वषॅ/Assessment Year 2005-06
Dy.Commissioner of Income-tax -वनाम- M/s.Turner Morrison Land Ltd.
Circle-4, Kolkata. -Versus- Kolkata. (PAN-AAACT9173G)
(अपीलाथȸ/APPELLANT) (ू×यथȸ/RESPONDENT)
अपीलाथȸ कȧ ओर से/ For the Appellant: ौी/Sri L.S. Negi
ू×यथȸ कȧ ओर से/For the Respondent: ौी/Sri Arvind Agarwal
आदे श/ORDER
बी.
बी. आर.
(बी आर. िमƣल),् Ûयायीक सदःय (B.R.Mittal), Judicial Member :
The department has filed this appeal for assessment year 20065-06 against the order of ld. C.I.T.(A)-IV, Kolkata dated 24/07/2009 on the following grounds :-
"1. That, on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of Rs.2.25 Cr. without appreciating the fact that there was no change of method of accounting or valuation of stock, which is evident from the tax audit report.
2. That, on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in holding that the principal of accounting, regularly employed by the assessee, has been followed during the year under consideration.
3. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deciding that the loss on valuation of closing stock of shares is admissible, without examining the fact that loss on valuation of share is a speculation loss."
2. The assessee-company is engaged in the business of real estate and development. During the course of assessment proceedings, the A.O. observed that the opening stock of shares of the assessee-company has been shown at Rs.2.5 crores, while the closing stock was taken at Rs.25 lakhs, although there was no evidence of any sale of shares. In response to notice, the assessee explained that the assessee-company had acquired shares of M/s. Inalsa Appliances Ltd. in the financial year 2003-04 at issue price of Rs.10/- each. In the financial year relevant to assessment year under consideration, i.e. 1 A.Y. 2005-06, M/s. Inalsa Appliances Ltd. had gone in liquidation by the order of Hon'ble Delhi High Court dated 11/4/2005 and official liquidator was appointed. That the official liquidator has taken over the reins of M/s. Inalsa Appliances Ltd. and has not discharged any payment to its creditors, let alone shareholders. The auditor of the assessee-company, therefore, valued the shares of M/s. Inalsa Appliances Ltd. at the taken value of Re.1/- per shares, which was vindicated as commercially prudent. It was further submitted before the A.O. that against confirmed liability of Rs.319.99 lacs as on 31/7/2005 (including preferential creditors of Rs.30.49 lacs), M/s. Inalsa Appliances Ltd.'s assets have a realizable value of merely Rs.52.31 lacs. According to the assessee, therefore, the A.O. should have accepted valuation of the stock-in-trade adopted by the management of the assessee-company which was based on well accepted principles of stock valuation, i.e. cost or market price, whichever is lower and on commercial prudence. The above explanation of the assessee was not found acceptable to the A.O. as, according to him, valuation of stock is guided by provisions of sec. 145A of the Act. He further observed that the value of shares of M/s. Inalsa Appliances Ltd. held as inventory in the books of the assessee-company was Rs.25 lakhs, i.e. @ Re. 1/- per share, whereas the opening stock of the said shares @ Rs.10/- per share was valued at Rs.2.5 crores. The A.O. further observed that the opening stock of shares of the said company was valued at cost while the closing stock of such shares was valued at realizable/market value for the same financial year, which has resulted in adoption of different method of valuation, one for the opening stock and the other for the closing stock, which was not acceptable in terms of provisions of sec. 145A of the Act. Based on the above observation, the A.O. held that the method of valuation of stock adopted by the assessee by way of changing the valuation of closing stock only from cost to realizable/market value without corresponding change in the value of opening was erroneous and against the established principle of accountancy. He, therefore, took the increase or decrease in closing stock at nil in place of decrease in closing stock of Rs.2.25 crores as shown by the assessee-company and a net addition of Rs.2.25 crores was made to the assessee's total income.
3. On appeal before the ld. C.I.T.(A), the assessee reiterated the facts and submissions made before the A.O. The assessee also cited several case laws in support of the submission that whenever there is change in the method of valuation, there is 2 bound to be some distortion in the calculation of profit in the year in which such change takes places. But if the change is brought about bona fide and is in accordance with the normally accepted accounting principles, there is no reason to disallow the change in method of valuation. It was further submitted that the assessee-company followed the principles of Accounting Standard (AS) 13 issued by the Institute of Chartered Accountants of India on accounting for investments and this principle of AS-13 is also applicable to shares, debentures and other securities held as stock-in-trade. The ld. C.I.T.(A) after considering the arguments of the assessee, judidical pronouncements relied upon by it and perusing the assessment order and evidences on record directed the A.O. to delete the addition of Rs.2.25 crores made on account of valuation of closing stock. His observation in this regard is reproduced below :-
"5. I have considered the argument of appellant. I have perused the assessment order and detailed observations and findings recorded therein. I have also carefully considered the submission of the AR and provision of Section 145A & Sec 145 of the Income Tax Act, and also Case laws relied upon by appellant.
On analysis of various judicial pronouncements regarding change in method of valuation in my opinion, actually following circumstances has to be looked into. Whether the accounts of the company are reliable, audited and accepted? In this case the appellant has audited books of account and A.O. in his finding no where has commented adversely on this aspect. Once the accounts are accepted it is very difficult to attract provision of section 145 and 145A. The second aspect is whether the change is bonafide? Though the word bonafide is not used in section 145 judiciary has laid down that the change on method should be bonafide and not for any other collateral purposes. The company has changed the method of valuation from "cost to cost of market value whichever is lower", which was out come of the High Court order which liquidated Investee Company. Thus appellant has abandoned the earlier method and adopted a new regular method and has followed it consistently. The company also followed the principal of accounting standard AS13 on accounting for investment. The Company was bound to follow the accounting standards as it was mandatory and obligatory to follow normally accepted accountings principals. The method which has been adopted is followed consistently by appellant and has been accepted by the A.O. in other assessment years.
In view of the fact that the A.O. has not disputed the bonalide, genuineness and accounting principals applied in method of valuation and accepted the change method of valuation in other asst. year. The test that there has been revenue loss and hence method of valuation is not accepted by A.O. does not seems to be proper. The appellant company is following same method of valuation after that and in subsequent year changed method of valuation has been accepted by the Assessing Officer. In the case of Melmould Corporation V. CIT (1993) 202 ITR 789 (Bombay High Court), wherein it vas held that whenever there is change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year 3 in which such change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting principles, there is no reason why the change shall not be allowed. There was no observation of the assessing officer in respect mala fide intention of assessee, on the record. It is for the Assessing Officer to establish such inference to bring on record, a concrete material to that effect and otherwise the same will be lacking support. This view is supported by jurisdictional High Court in the case of CIT Vs. Delta Corporation (1993) 71 Taxman 329 (Calcutta).
In view of the above and relying on the above cited case laws, and my observations and findings, I direct the Assessing Officer to delete the addition of Rs.2,25,00,000/- made on a/c of valuation of closing stock. Appellant's appeal is allowed on this point."
The department being aggrieved is in appeal before us.
4. The ld. Departmental Representative submitted that the ld. C.I.T.(A) has given relief to the assessee stating that there is no observation of A.O. that there is any mala fide intention of the assessee to change method of valuation of closing stock of shares held by the assessee. The ld. Departmental Representative submitted that the ld. C.I.T.(A) was not justified to put onus on the A.O. He submitted that the assessee had changed method of valuation and, therefore, onus is on the assessee to prove that valuation is bona fide. He, therefore, submitted that the order of the A.O. should be confirmed.
5. On the other hand, the ld. A/R of the assessee submitted that ground No.3 of the appeal taken by the department does not arise out of the orders of the authorities below. He further submitted that the assessee applied for shares of M/s. Inalsa Appliances Ltd. in the assessment year 2003-04. He submitted that the entire assets of M/s. Inalsa Appliances Ltd. wiped out and an official liquidator was appointed by the Hon'ble Delhi High Court. He submitted that the official liquidator had not discharged any payment to the creditors, let alone shareholders. The ld. A/R submitted that the auditor of the assessee-company valued shares of M/s. Inalsa Appliances Ltd. @ Re.1/- per share and the assessee accepted the same as commercially prudent and, accordingly, valued the closing stock. He submitted that the assessee as per Accounting Standard-13 adopted the value of the closing stock of shares at market value or cost price, whichever is lower. He further submitted that the assessee followed the same method in the subsequent year and the same has not been disputed by the department. The ld. A/R 4 also submitted that the change in method of valuation was adopted by the assessee bonafidely and relying on decision of Hon'ble Calcutta High Court in the case of Hela Holdings (P) Ltd. vs. C.I.T. [263 ITR 129 (Cal)] submitted that whenever there is a change in method of valuation bonafidely, the department should accept the same. He, therefore, submitted that the order of the ld. C.I.T.(A) should be confirmed.
6. We have carefully considered the orders of the authorities below and the submissions of the learned representatives of the parties. The issue is whether the closing stock of shares of M/s. Inalsa Appliances Ltd. shown by the assessee at Rs.25 lakhs as against opening stock of the said shares of Rs.2.5 crores has been bonafidely shown by the assessee and the same should be accepted as per Accounting Standard-13. The assessee acquired shares of M/s. Inalsa Appliances Ltd. of the total value of Rs.2.5 crores at issue price of Rs.10/- each in assessment year 2003-04. M/s. Inalsa Appliances Ltd. went into liquidation during the assessment year under consideration. Entire assets of the said company were wiped out and the official liquidator appointed by the Hon'ble Delhi High Court has not discharged any payment to the creditors or even to the shareholders. In the above circumstances, the auditor of the assessee-company took the value of closing stock of shares of M/s. Inalsa Appliances Ltd. @ Re.1/- per share at Rs.25 lakhs on the basis of cost price or market value, whichever is lower. The A.O. rejected the valuation of closing stock based on different method of valuation as, according to him, it was not acceptable in terms of provisions of Sec. 145A of the Act. He, therefore, took the decrease in closing stock at nil in place of decrease in closing stock of Rs.2.25 crores [Rs.2.5 crores - Rs.25 lakhs] as shown by the assessee-company and a net addition of Rs.2.25 crores was made to the assessee's total income. The accounts of the assessee-company are duly audited and we find no adverse comment on such audited accounts having been made by the A.O. We further observe that the A.O. has not disputed the rate of valuation of closing stock. Therefore, in our considered opinion, the ld. C.I.T.(A) has rightly held that once the accounts are accepted, there is hardly any scope to attract provisions of Secs. 145 and 145A of the Act. Sec. 145A of the Act was introduced by the Finance (No.2) Act, 1998 w.e.f. 1/4/1999 and circular No. 772 dated 23/12/1998 was issued by the C.B.D.T. explaining the purpose of such introduction of Sec. 145A. Paras 52.1 & 52.2. of the said circular explain the method of accounting in certain cases, which read as under :-
5"52.1. The issue relating to whether the value of the closing stock of the inputs, work-in-progress and finished goods must necessarily include the element for which MODVAT credit is available, has been the matter of considerable litigation over the years.
52.2. Consistent with the other provisions of the Act, with a view to put an end to this point of litigation and in order to ensure that the value of opening and closing stock reflect the correct value, a new section 145A is inserted. This section provides that the valuation of purchase, sale and inventory shall be made in accordance with the method of accounting regularly employed the assessee and such valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation."
[Emphasis supplied] On reading of the aforesaid explanation contained in Circular No.772 dated 23/12/1998, it is evident that Sec. 145A of the Act was introduced to put an end to various litigations as to treatment of tax, duty, cess or fees paid on purchases in valuation of stock-in-trade. Barring this, the position of sec. 145 of the Act has remained the same. It is a settled law that although the word 'bona fide' is not used in sec. 145 of the Act, but the assessee can change the method of valuation for bona fide reasons provided he continues to follow the same consistently thereafter. For this proposition, we may refer to the decision of Hon'ble Calcutta High Court in the case of Hela Holdings (P) Ltd. vs. C.I.T. (supra), wherein it has been held as under :-
"Held, that the method of valuation of stock was acceptable. The method was the correct method, accepted by all the accountants. That the method gave rise to a picture of true accounting and a reflection of the true profits was also not disputed. The Tribunal should not have disallowed the assessee's claim by a mere reference to non-satisfaction of conditions, without mentioning those conditions specifically and without mentioning the breaches by the assessee, if any, equally specifically. An assessee is permitted to change its method of stock valuation honestly and in accordance with the principles of permitted tax avoidance. In this case the assessee changed its stock valuation method correctly and was entitled to the tax benefit arising therefrom."
6.1. Further, as per decision of Hon'ble Apex Court in the case of Sanjeev Woolen Mills Vs. CIT [279 ITR 434 (SC)], the right to change the method of valuation vests with the assessee, if the change in method is a recognized method of valuation and has been regularly followed. The relevant excerpts from the head notes of the decision are reproduced hereinunder :-
6"Choice of the method of accounting lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee's choice of the method regularly employed unless by this method the true income or profits cannot be arrived at. The assessee's regular method would not be rejected as improper merely because it gives him the benefit in certain years or because as per the A.O the other method would have been more preferable. The method of accounting cannot be substituted by the A.O merely because it is unsatisfactory. What is material for the purpose of section 145 of the Income-Tax Act, 1961, is, the method should be such that the real income, profits and gains can be properly deduced therefrom."
Further the Hon'ble Apex Court at page 448 of the said judgment has observed as under :
"The recognized and settled accounting practice of accounting with the closing stock in the accounts has to be valued on cost basis or at market value basis if the market value of the stock is less than the cost value."
6.2. It is not disputed that the assessee-company has followed the changed method of valuation after that and in subsequent year, changed method of valuation has been accepted by the A.O. The A.O. also commented that when the assessee chose to change the valuation of its stock for a particular year with respect to earlier year, then it should be consistent in changing the method of valuation both for the opening as well as the closing stock. We are not inclined to endorse this view of the A.O., because the closing stock of a year would be the opening stock of the subsequent year and if the changed method is not accepted it will increase the opening stock of the subsequent year by an equivalent amount reducing the profit for that year by the same amount. The tax rate of the company being same, it will not affect the overall taxability of this amount. In fact by reducing the closing stock for this year, the opening stock for the subsequent year is reduced thereby increasing the profit for the subsequent year. However since the change in the method of valuation has been to a recognized method which has been followed regularly in all subsequent years, the same, in our considered opinion, is bona fide and is duly supported by various decisions including the decisions of Hon'ble Supreme Court and Calcutta High Court, referred to above.
6.3. Further, as stated by the assessee, it has followed the guidelines of AS-13 on accounting of investments, i.e. cost or market price whichever is lower and on commercial prudence. The assessee has filed a copy of AS-13 in the paper book and para-14 of AS-13 explains the term 'Carrying Amount of Current Investments' in the following manner :-
7"14. The carrying amount for current investments is the lower of cost and fair value. In respect of investments for which an active market exists, market value generally provides the best evidence of fair value. The valuation of current investments at lower of cost and fair value provides a prudent method of determining the carrying amount to be stated in the balance sheet." [Emphasis supplied].
The assessee-company is bound to follow the accounting standard as it was mandatory and obligatory to follow normally accepted accountings principals. There is no dispute to the fact that the shares of M/s. Inalsa Appliances Ltd., after it went into liquidation, did not have any active market. Therefore, the valuation of current investments of the assessee-company, which were shares of M/s. Inalsa Appliances Ltd., has rightly been taken at lower of cost and fair value, whichever is lower, as a prudent method of valuation of closing stock.
6.4. In view of our discussions above, we are of the considered opinion that the ld. C.I.T.(A) has rightly directed the A.O. to delete the addition of Rs.2.25 crores made on account of valuation of closing stock. His order on this issue is, therefore, upheld.
7. In the result, the appeal of the Revenue is dismissed.
यह आदे श खुले Ûयायालय मɅ सुनाया गया है This order is pronounced in the open Court on 11.03.2011.
Sd/- Sd/-
सी.
सी.डȣ.
(सी डȣ.राव)
राव लेखा सदःय ौी बी.
(ौी बी. आर.
आर. िमƣल)् Ûयायीक सदःय
(C.D.Rao), Accountant Member (B.R.Mittal), Judicial Member
(तारȣख)
तारȣख) Date: 11 -03-2011
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. अपीलाथȸ / The Appellant : D.C.I.T., Circle-4, Kolkata.
2 ू×यथȸ / The Respondent : M/s. Turner Morrison Land Ltd., 6, Lyons Range,
Kolkata-700 001.
3. आयकर किमशनर (अपील) : The CIT(A)-IV, Kolkata.
4. आयकर किमशनर/The CIT, Kol-
5 वभािगय ूितनीधी / DR, ITAT, Kolkata Benches, Kolkata
6 Guard file.
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
(dkp)
उप पंजीकार/Deputy Registrar.
8