Income Tax Appellate Tribunal - Pune
Sandvik Asia Ltd. vs Deputy Commissioner Of Income Tax on 22 July, 1998
Equivalent citations: [1999]69ITD59(PUNE)
ORDER
K.C. Singhal, J.M.
1. The effective issue arising out of this appeal in ground Nos. 1 to 7, is whether the Revenue was justified in rejecting the method of valuation of closing stock i.e., last in first out (LIFO) adopted by the assessee consistently for 18 years i.e., from asst. yr. 1976-77 and also accepted by the Tribunal and IT authorities.
2. It is necessary to briefly discuss the history of the case. The assessee is a manufacturer of various tungsten carbide products such as tips, dyes, nibs, drill steels, cutting tools, etc. Initially, the assessee was valuing the stock on weighted average cost upto 31st December, 1974, which means the consumption of raw material was charged with the cost of opening stock and purchases during the year calculated to the cost of per unit of average basis. This was illustrated by the Tribunal in assessee's own case in ITA No. 143/(Bom)/1979 vide para 8 as under :
Units cost Opening stock 20 100 Purchases 30 170 ------- ------- 50 270 ------- ------- weighted average cost 5.4 per unit.
The above average cost was applied to the units consumed by the assessee during the year upto 31st December, 1974, to the raw material consumed in the process of manufacturing.
3. However, the assessee changed its method of valuation of closing stock to LEFO method. According to this method, the material purchased last is presumed to be consumed first. The rationale behind it is that the cost of product is determined on the basis of cost of raw material purchased during the year. It is pertinent to note that the assessee has continued to adopt the LIFO method consistently till date.
4. The above change in the method of valuation of stock was rejected by the AO for asst. yr. 1976-77 and made the addition of Rs. 58,46,535 which was confirmed by the CIT(A). On further appeal to the Tribunal, the Members of the Division Bench deferred on this issue. The Judicial Member was of the view that LIFO method was recognised method and there was nothing wrong in managing the affairs in a way which minimises the tax effect. Accordingly, he allowed the appeal. On the other hand, the Accountant Member was of the view that LIFO was incorrect method in view of the decision of the Privy Council in the case of Minister of National Revenue v. Anaconda American Brass Ltd. (1956) 30 ITR 84 (PC). In view of the difference of opinion between the Members, the matter was referred to the Third Member who after hearing both the parties was of the view that LIFO method was the recognised method of accountancy and there was nothing in accountancy or income-tax law which prohibited the assessee from adopting the LIFO method. According to him, the option was with the assessee to adopt any recognised method of valuation of stock. In case of bona fide change, it could not be rejected. However, he was further of the view that in the year of change, the addition to the extent the profit was lowered due to change in the valuation was justified. According to him, one must follow the same method for opening and closing stock consistently. If any change is effected, it will result in lowering the profit which cannot be allowed. On the basis of this reasoning, he justified the one time addition.
5. The assessee had challenged the second part of his order in reference proceedings i.e., one time addition. On the other hand, the Revenue did not challenge the other part of order i.e., LIFO method was the recognised method and the assessee was entitled to adopt the same provided it was bona fide.
6. This matter was again the subject-matter of controversy before the Tribunal for asst. yr. 1977-78 to 1982-83 since no finality had been reached till the time the above assessments were framed. The Tribunal vide its order dt. 19th October, 1988, in ITA Nos. 2206 to 2210/Pn/1982 decided the issue in favour of the assessee following the Third Member decision. No reference was sought by the Revenue against this order.
7. While framing the assessment for the asst. yr. 1989-90, the AO accepted the fact that the assessee had continued to value the stock by applying the LIFO method. He also noticed that such method has been accepted by the Tribunal in the past and no reference application was made by the Department. Accordingly, he found the method as correct and accepted the valuation made by the assessee on the basis of LIFO method. The AO vide his order dt. 30th April, 1990, also rectified the assessments for asst. yrs. 1983-84 to 1988-89 by accepting the LIFO method. The AO has also accepted the assessee's method upto asst. yr. 1993-94.
8. Surprisingly, the matter has again been reopened by the AO in asst. yr. 1994-95 by rejecting the aforesaid method adopted by the assessee and accepted by the Revenue from asst. yrs. 1977-78 to 1993-94. The reasons given by him are that the Tribunal in latter decisions in the cases of M/s. P. N. Gadgil and Kirloskar Cumins Ltd. has decided the issue in favour of the Department. The CIT(A) has confirmed the order of the AO since according to her the LIFO system of valuation of stock is defective and true profits cannot be ascertained. According to the CIT(A) though the last purchases are at the highest cost, the same are taken at lowest cost as LIFO system provides consumption of last purchased first than the purchases in the opening stock and a part of opening stock continues to form part of closing stock at the lower rates. According to her, it is the last purchases which remained in the closing stock which could be valued at a higher rate. She took the view that first in first out (FIFO) is a right method.
According to her, the last purchases remained in the closing stock. In coming to this conclusion, she relied on the judgment of the Privy Council reported at (1956) 30 ITR 84 (supra).
It was also mentioned by her that the Third Member of the Tribunal did not consider the correctness of LIFO method. Accordingly the CIT(A) s. 145 provides that if on the basis of any method of valuation of the closing stock, the true and correct profits cannot be deduced then the same can be rejected and true profits can be arrived at by applying the correct method. She was further of the view that FIFO method was the correct method for arriving at the true profits. Accordingly, she upheld the order of the AO. Aggrieved by the same, the assessee is in appeal before us.
9. The learned counsel for the assessee Mr. Dalvi took us through the history of the case and submitted that the issue involved is covered in favour of the assessee by the two decisions of the Tribunal in the assessee's own case. It was also submitted by him that the IT Department has also accepted the orders of the Tribunal as is apparent from the assessment order for asst. yr. 1989-90 and also by the fact that no reference application was filed by the Department against any of the orders of the Tribunal. Proceeding further it was contended by him that once the matter had reached the finality, the same should not be disturbed. Reliance was placed by him upon the decision of the apex Court in the case of Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC). He also relied on the decision of the Tribunal, Ahmedabad Bench in the case of Dy. CIT vs. Harjivandas J. Zaveri (ITA No. 3300/Ahd/1992, dt. 28th August, 1997 [reported at (1998) 60 TTJ (Ahd) 155], for the proposition that LIFO method for valuing the closing stock is the well recognised method which can be adopted by the assessee. A copy of order of the Ahmedabad Bench of the Tribunal is placed on record.
10. On the other hand, the learned Senior Departmental Representative has supported the order of the CIT(A) reiterating the reasoning given by the AO as well as the CIT(A). According to him, the Tribunal in the subsequent decisions in the case of P. N. Gadgil and M/s. Kirloskar Cummins Ltd. has rejected the LIFO method for valuing the stock. It was further contended by him that if true profits cannot be deduced from the method adopted by the assessee then the book results can be rejected and true profits can be arrived at by applying the correct method despite the fact that incorrect method was consistently being applied by the assessee in the past. In support of this contention, he relied on the decision of the Supreme Court in the case of British Paints India Ltd. vs. CIT (1991) 188 ITR 44 (SC). It was also the submission of the learned Senior Departmental Representative that the Privy Council in the case reported as 30 ITR 84 (supra) has rejected the LIFO method. In view of these submissions, he justified the order of the CIT(A).
11. The rival submissions of the parties as well as material placed before us and the case law referred to by the parties have been considered. The crucial question arising in this appeal for our consideration is whether the issue which had become final and acted upon by the parties could be reopened again in the year under consideration. It is well settled legal position that principle of res judicata does not apply to income-tax proceedings. However, there are certain exceptions to the above principle, viz., (i) that there should be finality and certainty in all the litigations including the litigation under the IT Act; (ii) the matter reaching the finality should not be reopened unless fresh facts are placed before the Tribunal; (iii) the Tribunal should be extremely slow to depart from the finding given by the earlier Bench of the Tribunal; (iv) that the effect of revising the decision in subsequent year should not lead to injustice.
12. The aforesaid principle was applied by the Hon'ble Bombay High Court in the case of H. A. Shah & Co. vs. CIT (1956) 30 ITR 618 (Bom). The relevant extract of the judgment is reproduced below :
"As a general rules the principle of res judicata is not applicable to decisions of IT authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the IT Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. A Tribunal like the Appellate Tribunal should be extremely slow to depart from a finding given by an earlier Tribunal.
There is also a further limitation, namely, that the effect of revising a decision in a subsequent year should not lead to injustice and the Court must always be anxious to avoid injustice to the assessee. For instance, if the Court is satisfied that by depriving the assessee of his right's under the later decision, in an earlier year, the assessee lost an important advance or lost some benefit which he could have got under the IT Act, then the Court may take the view that departing from the earlier decision leads to injustice or denial of justice and the Court may prevent an IT authority from doing something which would be unjust and inequitable.
These principles apply not only to the IT authorities strictly so called but also to the Tribunal; for, though the Tribunal is not included in the class of IT authorities in the Act, it is a part of the machinery for collection of income-tax, and is not in the same position as the High Court, the jurisdiction of which is purely advisory."
13. The same view has been reiterated by the apex Court in the case of Radhasoami Satsang vs. CIT (supra). The relevant portion of the judgment is extracted as below :
"Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."
14. The study of the aforesaid two decisions clearly shows that the settled position should not be unsettled. In the present case, the issue has reached to the finality by the two decisions of the Tribunal in the assessee's own case. The Third Member of the Tribunal in the assessee's own case for the asst. yr. 1976-77 held that LIFO method of valuing the stock was a recognised method of accountancy and there was no prohibition under the Act for adopting such method. It was also held that the assessee was entitled to change the method of valuing the closing stock to LIFO method. However, he was of the view that the addition should be sustained as it lowered the profits of the year under consideration but as far as the subsequent years are concerned, he was of the view that the same should be adopted by the assessee if followed consistently. In the subsequent assessment for asst. yrs. 1977-78 to 1982-83 the Tribunal accepted the LIFO method adopted by the assessee. It is pertinent to note that the Revenue did not challenge the orders of the Tribunal by making reference applications. Subsequently, the IT Department also accepted the LIFO method without any reservation for asst. yr. 1989-90. Not only that the AO also rectified the assessment orders for asst. yrs. 1983-84 to 1988-89. Further, such method was accepted in subsequent years upto 1993-94. Therefore, it is clear that the Department had accepted the LIFO method for valuing the closing stock in the case of the assessee for more than 20 years and no litigation is pending before the High Court or the Supreme Court. Thus, the finality has reached in respect of this issue. Accordingly, in view of the judgment of the Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) the Revenue cannot be allowed to unsettle the settled position unless there are compelling reasons for doing so.
15. In our opinion, there is no fresh material on record on the basis of which the settled issue could be reopened by the AO. The reason given by the lower authorities is that the Tribunal has given two decisions favourable to the Revenue i.e., in the case of P. N. Gadgil and M/s. Kirloskar Cummins Ltd. Let us go through these decisions.
16. In the case of P. N. Gadgil, the assessee was a jeweller who used to value the closing stock at the market value upto asst. yr. 1979-80. Thereafter, he changed method of valuation. According to the new method, the closing stock was valued at the value at which opening stock was valued. In case the closing stock was more than the opening stock, the excess stock was valued at average price of the purchase made during the year. This method of valuation was described as last in first out (LIFO) method. The issue before the Tribunal was whether the assessee could be allowed to change the method of valuation. We have gone through the said order of the Tribunal. The Tribunal nowhere says that LIFO is incorrect method. On the contrary, it was observed that although such method is one of the recognised method, in the case of jewellers, it was not appropriate method. Therefore, it is incorrect to say that the Tribunal's decision disapproved the LIFO method for all kinds of businesses. In our view, that decision is distinguishable on the facts of the case and has to be restricted to the facts to that case. Therefore, the said decision cannot be considered as fresh material for reopening the issue. However, it is pertinent to note that the said decision also disapproved the FIFO method in the case of jeweller which has been applied to the present case by the lower authorities.
17. We have also gone through the decision of the Tribunal in the case of Kirloskar Cummins Ltd. This decision in clear terms rejected the LIFO method of valuation of closing stock. Thus, it favours the Revenue. But we find that the said decision was rendered by following Privy Council decision in the case reported as 30 ITR 84 (supra). This decision of Privy Counsel has already been considered by the Tribunal in the assessee's own case for asst. yr. 1976-77. Despite that decision it took a view that the LIFO method was one of the recognised method which was approved not only by the Institute of Chartered Accountants of India but also by the International : Accounting Standard. Hence the assessee was entitled to change the method of valuation if bona fide. In view of the above, the decision of the Tribunal in the case of Kirloskar Cummins Ltd. also cannot be considered as fresh material.
18. Lastly, we shall deal with the contention of the learned Senior Departmental Representative that true profits cannot be deduced on the basis of LIFO method and, therefore, the same should be rejected despite the fact that the same was being consistently followed by the assessee in the past. Such a contention has been raised in view of the Supreme Court decision in the case of British Paints India Ltd. (supra). We have given our deep thought to this contention but we are unable to accept the same. The LIFO method is one of the recognised method of valuation of closing stock as per Accounting Standard 2 laid down by the Institute of Chartered Accountants of India and para 26 of the International Accounting Standard (IAS-2) as observed by the Third Member of the Tribunal in the assessee's own case. This shows that much water has flown after the decision of the Privy Council in the case reported as 30 ITR 84 (supra). One cannot keep his eyes shut to the latest development of the modern age. The Tribunal in the country have also accepted the LIFO method. The Delhi Bench of the Tribunal in the case of Jain Abhushan Bhandar vs. ITO (1987) 29 TTJ (Del) 75 and the Cochin Bench of the Tribunal in the case of ITO vs. Sree Padmanabha Jewellery Mart (1987) 28 TTJ (Coch) 15 : (1986) 19 ITD 816 (Coch) have accepted the LIFO method in the past. Even recently, the Ahmedabad Bench of the Tribunal in the case of Dy. CIT vs. M/s. Harjivandas J. Zaveri (supra) to which one of us (A.M.) was a party, has approved the LIFO method. Therefore, it is wrong to say that LIFO method is incorrect method.
19. It has been observed by the learned CIT(A) that such method may be recognised for corporate accounting, but it does not give the correct and true profits for the purposes of IT Act. The defect pointed out by her is that the profits are lowered by this method as stock purchased in the last are valued at lower rates of past years, while such stock should be valued at the cost of the material purchased in the last. This observation of the learned CIT(A) is based on assumptions; viz. (i) that price of the material will always rise; (ii) that material is always consumed in the seriatum in which it is purchased. In our opinion, no method can be described as incorrect on the basis of assumption. If assumptions are to be taken into consideration, then such assumption may be to the contrary also. The possibility of prices being declined at the end of the year cannot be ruled out. Similarly, the consumption of raw material out of stock purchased in the last, cannot be ruled out. On the basis of such assumptions LIFO method cannot be described as incorrect. Rather, it would be incorrect to apply the FIFO method on the basis of such assumption. Therefore, in our opinion, none of the methods can be said to the 100 per cent correct if it is tested on the basis of assumption. Even the cost method or market value method which are well recognised by the apex Court would have such defect if such assumptions are raised. Where the assessee is adopting the market value on the last date of the year, it will not give true profits where the market value has fallen suddenly on the last date while the stocks in hand might have been purchased at a higher cost. If assumptions are taken into account, then different methods can be applied in respect of different years. This is not the intention of the legislature. That is why, the legislature has provided for adopting a particular method consistently.
20. In view of the above discussions, we are of the view that FIFO as well as LIFO methods are recognised methods and the assessee has the option to adopt either of them subject to the condition that it is adopted consistently. It is only in the year of change that IT authorities and the Tribunal have to consider the bona fides of the assessee. Once the change has been accepted and the matter has reached to its finality and the changed method is being consistently followed then the Revenue should not be allowed to disturb the settled position. In the present case, the LIFO method is being adopted consistently by the assessee from asst. yr. 1976-77 an the decisions of the Tribunals have been accepted by the Revenue by not challenging the same in reference proceedings. If the Revenue is allowed to disturb the existing position, then it would cause great injustice to the assessee. In view of the Supreme Court decision in the case of Radhasoami Satsang (supra) and the decision of the Bombay High Court in the case of H. A. Shah & Co. (supra) the stand of the Revenue cannot be allowed. Accordingly, the order of the CIT(A) is set aside on this issue and the addition sustained by her is deleted.