Income Tax Appellate Tribunal - Chandigarh
Punjab Communications Ltd. vs Deputy Commissioner Of Income-Tax on 12 September, 2002
Equivalent citations: [2003]84ITD505(CHD)
ORDER
Joginder Pall, Acountant Member
1. This appeal of the revenue arises from the order of the Commissioner (Appeals), Chandigarh for the assessment year 1989-90.
2. The first effective issue raised in this appeal is that the Commissioner (Appeals) was not justified in upholding an addition of Rs. 45,50,618 on account of excise duty. Briefly stated, the facts of the case are that the Assessing Officer observed that prior to assessment year under reference, the assessee used to value the closing stock of finished goods by including excise duty (Modvat), but for the assessment year under reference, the assessee changed the method of valuation of closing stock of finished goods by excluding the value of excise duty (Modvat). This resulted in undervaluation of closing stock to the tune of Rs. 45,50,618. The asses-sec's explanation before the Assessing Officer was that the method of accounting now followed by the assessee was more scientific and logical and was approved by the Accounting Standards. However, the Assessing Officer did not accept the contention of the assessee on the ground that by changing the method of valuation of the closing stock, the assessee had understated the value by Rs. 45,50,618. He, therefore, made an addition of the same.
3. Aggrieved, the assessee impugned the addition in appeal before the Commissioner (Appeals). It was submitted before the Commissioner (Appeals) that in the earlier years, the element of excise duty was being loaded in the closing stock but the excise duty was a running account, which was to be adjusted or paid on account of excise duty payable on sales. The amount of excise duty paid was adjusted against the modvat credit and the remaining amount was shown in the balance sheet as the current assets and current liabilities. It was submitted that the changed method of valuation of closing stock by excluding the excise duty was adopted to determine the correct profitability based on the advice given by the auditor. Since the change in the method of valuation was bona fide and thereafter the same method had been regularly followed, the assessee had contended that the addition made by the Assessing Officer be deleted, however, these submissions did not find favour with the Commissioner (Appeals), who observed that there was no justification in changing the method of valuation of closing stock in the assessment year under reference. She further observed that the only purpose of changing the method of valuation of closing stock was with a view to reducing the profits and postponing the incidence of tax to future assessment years. Thus, she upheld the addition of Rs. 45,50,618. Aggrieved, the assessee has now come in appeal before us.
4. The ld. Counsel for the assessee, Shri P.C. Jain, reiterated the submissions, which were made before the authorities below. He submitted that the change in the method of valuation of the closing stock by excluding the element of excise duty (modvat) was effected with a view to determine the correct profitability based on the advice given by the auditors. Thereafter, this method of accounting was regularly being followed. He submitted that for the assessment years 1990-91 and 1992-93 onwards, the Assessing Officer had accepted the changed method of valuation of closing stock. He further submitted that for the assessment year 1991-92, the Assessing Officer did not accept the changed method of valuation of closing stock and made similar addition. The matter was brought in appeal before the ITAT and the Tribunal vide its order dated 6-8-2002 in I.T.A. No. 657/Chd./96 for the assessment year 1991-92 deleted the addition. He submitted that the issue now stood squarely covered in favour of the assessee and against the revenue.
5. The ld. D.R., Shri Rajiv Hark, on the other hand, heavily relied on the orders of the authorities below. He submitted that the method of valuation of closing stock of finished goods by including the excise duty was also a correct method. Therefore, there was no justification for the assessee in effecting a change. He further drew our attention to the finding recorded by the Commissioner (Appeals) that change in the method was effected only with a view to reducing the profits and postponing the incidence of tax to future assessment years. Thus, the change was not bona fide. In the written submissions filed, the ld. D.R. submitted that the assessee was expected to follow a regular and consistent method of valuation. Thus, he urged that the order of the Commissioner (Appeals) did not merit any interference.
6. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We find that similar issue came before us for the assessment year 1991-92 where the addition sustained by the Commissioner (Appeals) on this ground was deleted by recording the following finding in para 16 of our aforesaid order :
16. We have heard both the parties and carefully considered their rival submissions with reference to the facts, evidence and material placed on record. We find that this issue is covered in favour of the assessee and against the revenue by our aforesaid order in the case of M/s. Swaraj Engineers Ltd. In addition to this case relied upon by the assessee, same view has been taken by ITAT, Chandigarh Bench in the case of DCIT, Spl. Range, Chandigarh v. M/s. Punjab Chemicals & Pharmaceuticals Ltd. in ITA No. 250/Chd./94 for the assessment year 1990-91, where the Tribunal has held as under :
'6. We have carefully considered the rival submissions and examined the facts, evidence and material on record. We have also perused the orders of the authorities below. We have also referred to the judicial pronouncements to which our attention was drawn. Now the only issue that needs to be considered is whether the Commissioner (Appeals) was justified in deleting the impugned addition. One of the reasons given by the Commissioner (Appeals) in deleting the addition is that the assessee has been following the same method of accounting for the last several years and the same has been accepted by the department. The method adopted by the assessee for valuation of closing stock can be disturbed only if it is found that the method adopted by the assessee does not enable the Assessing Officer to compute the correct income. In such a case, the method of valuing the closing stock can be disturbed even if it was accepted by the Assessing Officer in earlier assessment years. Reliance in this regard is placed on the judgment of Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd., [1991] 188 ITR 44. In the case of Investment Ltd. v. CIT [197O] 77 ITR 533, the Hon'ble Apex Court has held that a taxpayer is free to employ for the purpose of his trade is own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts of valuation. The method of accounting regularly employed may be discarded only if in the opinion of taxing authorities, income from the trade cannot be properly deduced therefrom. Now the method adopted by the assessee has been duly recognized by the ICAI. The guidance notes issued by the ICAI while accounting the closing stock net of modvat credit has been duly accepted by the ITAT, Bombay Bench in the case of S.H. Kelkar & Co. Ltd., cited supra and ITAT, Calcutta Bench in the case of Berger Paints India Ltd. v. DCIT [1961] 42 ITD 546, by referring to the judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. Considering the fact that the method of valuation of closing stock has been accepted by the 'Guidance Notes on Accountancy Treatment for Modvat' issued by the ICAI vide which cognizance has duly been taken by the ITAT Benches of Calcutta and Bombay in the cases cited supra and the Supreme Court, we are of the view that the method of accounting followed by the assessee for valuation of closing stock net of modvat was the correct method from which it was possible to deduce correct profit therefrom. Apart from the judgments mentioned above, the latest judgment of Bombay High Court in the case of CIT v. Indo Nippon Chemical Ltd. cited supra, also supports the case of the assessee.
7. The other reasons given by the Commissioner (Appeals) in deleting the impugned addition is that the Assessing Officer was not correct in changing the valuation of closing stock of the assessee by including the gross value of the modvat without making corresponding change in the value of opening stock. This issue has been considered by them ITAT, Bombay Bench in the case of S.H. Kelkar & Co. Ltd. and Calcutta High Court in the case of Berger Paints India Ltd., both cited supra. The Bombay High Court has also considered this aspect of the matter in the case of CIT v. Indo Nippon Chemical Ltd., cited supra. These judicial authorities have come to the conclusion that if corresponding effect is not given to the value of closing stock, this is bound to project a distorted picture. Therefore, the method of valuation of closing stock adopted by the assessee is the correct method of valuation. Apart from these, the various authorities, referred to above, have also come to the conclusion that by changing the method of valuation at gross value of the modvat, it does not make any difference to the income of the assessee because the corresponding effect is required to be given to the valuation of opening stock in identical manner. Having regard to the facts and circumstances of the case and respectfully following the various judicial authorities, cited above and in view of our detailed discussion on this issue, we are of the view that Commissioner (Appeals) has correctly deleted the addition of Rs. 7,12,000 made by the Assessing Officer. We confirm her order and dismiss the grounds of the appeal relating to this issue.' The facts of the present case are the same as in the above-mentioned cases. Respectfully following the aforesaid orders of the Tribunal, we set aside the order of the Commissioner (Appeals) and delete the impugned addition. This ground of appeal is also allowed.
The facts of the present case are similar to the facts of the case for the assessment year 1991-92 except that the assessment year under reference was the first assessment year when change in the method of valuation of closing stock was made. We find that the changed method of valuation of closing stock of finished goods by excluding the modvat credit from valuation of closing stock is one of the recognised methods of valuation duly approved by the Institute of Chartered Accountants of India. While deciding the assessee's appeal for the assessment year 1991-92, we have also referred to the various judicial pronouncements on the subject including that of the Bombay High Court in the case of CIT v. ndo Nippon Chemical Co. Ltd. [2000] 245 ITR 384 : 112 Taxman 555 and the decisions of the various Benches of the ITAT. The mere fact that the change in the method of valuation of closing stock has resulted in reducing the income of the assessment year under reference does not make the change in the method of valuation of closing stock as mala fide. Moreover, the same method of accounting has been consistently followed in the subsequent years and accepted by the Department also. In the light of these facts and circumstances of the case and respectfully following the aforesaid order of the ITAT for the assessment year 1991-92, we set aside the order of the Commissioner (Appeals) and delete the impugned addition. This ground of appeal is allowed.
7. The next issue raised in this appeal relates to sustaining an addition of Rs. 41,24,374 on account of change in the method of valuation of stock of semi-finished goods work-in-progress. The assessee has also raised an alternative ground that even if the change in the method of valuation of closing stock was not accepted, the addition called for on this account was Rs. 12,24,688 and not Rs. 41,24,374. The facts of the case are that due to changes introduced in the Act, the previous year of the assessee was of 21 months i.e., from 1-7-1987 to 31-3-1989. The Assessing Officer observed that prior to the assessment year under reference, the assessee used to value the closing stock of sub-assemblies at cost or on net realizable value, which was less. Actual cost was arrived at by taking the cost of raw material plus overhead expenses. However, for the assessment year under reference, the assessee changed the system of valuation of the closing stock of sub-assemblies by apportioning the overhead expenses depending on the stage of completion of sub-assemblies based on man-hour. The Assessing Officer observed that due to such change in the method of valuation, there was a reduction in the value of closing stock to the tune of Rs. 28,99,688 as on 30-7-1988 and further reduction of Rs. 12,24,688 (both aggregating to Rs. 41,24,374) as on 31-3-1989. The Assessing Officer did not accept the change in the method of valuation of closing stock and accordingly made an addition of Rs. 41,24,374 as on 31-3-1989.
8. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was submitted before the Commissioner (Appeals) that the method of valuation of closing stock of sub-assemblies adopted by the assessee in the past did not depict the true picture and reflect the correct profitability. It was submitted that the entire overhead cost was being taken into account while valuing the closing stock of sub-assemblies, though the stage of completion of the items varied considerably. Thus those items, which had just crossed the raw material stage and required several other processes to reach the final stage, were valued by including the total overhead expenses, which was not correct. In order to show the correct picture of the value of these semi-finished goods depending upon the stage of completion, the assessee introduced a change in the method of valuation by taking the cost at the stage of completion on the basis of man-hours. It was stated that the changed method was more scientific and reflected the correct picture of the profits of the year. It was also submitted that the Assessing Officer had neither disputed the method of valuation of sub-assemblies nor the calculation made by the assessee. It was submitted that the change introduced by the assessee was bona fide and the same method had been followed in the future. Therefore, the addition made by the Assessing Officer was not correct.
9.1 The assessee had also made an alternative submission that in case the change in the method of valuation of closing stock was not accepted, the addition should be reduced from Rs. 41,24,234 to Rs. 12,24,688 in view of the fact that accounting period of the assessee was of 21 months. Whatever value of the closing stock was shown as on 30-6-1988, the same would become the opening stock as on 1-7-1988 and the net effect would be an addition of Rs. 12,24,688. The Commissioner (Appeals) was not impressed with these submissions. She observed that the change in the method of valuation was made only with a view to lowering the value of closing stock. Therefore, she upheld the addition by recording the following findings in para 3.3 of the appellate order :
3.3 I have given careful consideration to the submissions made by the appellant's counsel. Here again, it is observed that there was change in the method of valuation of closing stock of the sub-assemblies. In the earlier years, the actual cost was arrived at by taking into account the cost of raw material and overhead expenses. In this year, overhead expenses were stated to be apportioned based on actual process stage of completion of sub-assemblies. According to the appellant, the change in the method of accounting deserves to be allowed as the method being adopted now was the most scientific. Reference in this regard was made to the detailed calculations made for the purpose of valuation of closing stock of each item of sub-assemblies. The change being bona fide, it was pleaded that the new method for valuation of closing stock deserves to be accepted even if it resulted in lower valuation of closing slock. I am unable to find merit in this contention of the Id. counsel. The appellant had been following the consistent method of valuation of closing stock in the earlier years. The method of accounting followed for valuing sub-assemblies cannot be called unscientific as cost of raw-material plus overhead expenses were being taken into account at the time of such valuation. The profit was being disclosed from year to year following the same method of valuation consistently, which was accepted by the Department also. There is no change in the facts and circumstances of the case under consideration as compared with the preceding assessment year calling for any different method of the valuation of closing stock. The only purpose of changing the method of valuation of closing stock appeared to be reduction in profits and postponement of incidence of tax with reference to reduction in income relatable to such lower valuation of closing stock. In fact, the appellant's representative who attended the proceedings with the appellant's counsel had conceded that the change in the method of valuation of closing stock was brought out as inventories of closing stock were rising. This indicates that the purpose for bringing the change in the method of accounting was to lower the valuation of closing stock. Even otherwise, there docs not appear to be any compelling circumstances warranting change in the method of accounting of valuation of sub-assemblies which was consistently being followed and correct profits were stated to have been reflected by following the said method from year to year. In my view, if the appellant is allowed to change its method of accounting claimed to be most scientific, it would open channel for changing the method of accounting of valuation of some items or the other after a while and thus, postponing the incidence of tax whenever there are higher inventories. The change in the method of accounting of valuation of closing stock deserves to be allowed in case it is a bona fide and is not brought out to lower the incidence of tax. In the case of the appellant, the only purpose for bringing out the change appears to be reduction in the value of closing stock and thereby postponing the incidence of tax thereon. Considering these facts, I am of the view that the Assessing Officer was justified in not accepting the changed method of valuation of closing stock and thereby making addition of Rs. 41,24,374 on this account.
As regards the alternate submission of the ld. counsel, it is observed that the accounting period for the year under consideration comprised of 21 months. The difference in the valuation of closing stock has been worked out taking into account the opening stock as on 1-7-1987 and closing stock as on 31-3-1989. Thus, there is no merit in the contention that addition, if any, could only be made with reference to difference in the value of stocks for the period 1-7-1988 to 31-3-1989. This contention of the appellant's counsel is rejected and addition of Rs. 41,24,374 made by the Assessing Officer is upheld.
The assessee is aggrieved by the order of the Commissioner (Appeals) and has now come in appeal before us.
10. The ld. Counsel of the assessee reiterated the submissions, which were made before the authorities below. He submitted that in the manufacturing operation of various items, each product has to undergo several stages involving number of processes. In the past, the assessee used to value the closing stock by taking the entire overhead cost, though the item used to be at the initial stage of processing. This used to result in artificial loading/inflating the cost. He submitted that the closing stock is to be valued either at cost price or market price, whichever is lower. He relied on the judgment of Supreme Court in the case of Chainrup Sampatram v. CIT 1953] 24 ITR 481. He submitted that method of valuation adopted by the assessee in the past neither reflected cost price nor the realizable market value depending upon the stage of processing. Drawing our attention to page 31 of the paper book, he submitted that the assessee had maintained job cards in respect of each item reflecting the number of man-hours required to complete the assembly. He submitted that the various items in process were divided in stages and were valued by apportioning the overhead cost to each stage of manufacturing and man-hour spent for the same. It was submitted that the change effected by the assessee reflected the correct picture about the cost of items depending upon their stage of completion and, therefore, such method was more scientific and reflected the true profitability of the assessee. He submitted that the changed method of accounting has been regularly followed for all the subsequent 13 assessment years. The Assessing Officer has not disputed that the changed method of valuation of closing stock was not correct. He has also not disputed the calculations made by the assessee. Copy in respect of some of the items was placed at pages 23 and 24 of the paper book. He submitted that the only objection raised by the Assessing Officer was that the change in the method was resulted in reduction in value of the closing stock and, therefore, was not acceptable. He submitted that the bona fide change in the method of valuation of closing stock, which has been consistently and regularly followed in the subsequent assessment years in permissible. He relied on following judgments :
(i) CIT v. Corporation Bank Ltd. [1988] 174 ITR 616 : 41 Taxman 161 (Kar.)
(ii) Indo Commercial Bank v. CIT [1962] 44 ITR 22 (Mad.)
(iii) CIT v. Bharat Commerce & Industries Ltd., [1999] 240 ITR 256 : 107 Taxman 135 (Mad.)
(iv) United Commercial Bank v. CIT [1999] 240 ITR 355 : 106 Taxman 601 (SC) (v) CIT v. Haryana Minerals Ltd. [2000] 242 ITR 704 (Punj. & Har.) He further submitted that the same method of valuation of closing stock has been followed in all subsequent years till date and there is no dispute in regard to the same. He also mentioned that the Assessing Officer did not allow the consequential effect in the immediate succeeding assessment year by taking the value of the closing stock adopted for this year as the opening stock of the next year. He further submitted that the assessee is a Government company and all throughout is being assessed to tax and the rate of tax is the same. Therefore, there is no intention on the part of the assessee to understate its income and tax by changing the method of valuation of closing stock. He also reiterated the alternative submission for reducing the addition to Rs. 12,24,688 on account of the reason that the previous year being of 21 months, the corresponding effect was required to be given on 1-7-1988 by taking the value of the closing stock as on 30-6-1988 as the opening stock as on 1-7-1988.
11. The ld. D.R., on the other hand, heavily relied on the orders of authorities below. He also filed written submissions. He submitted that due to change in the method of valuation of closing stock of sub-assemblies, it resulted in under valuation of the closing stock to the tune of Rs. 41,24,374. Thus, the change in the method of valuation of closing stock was not bona fide. Relying on the judgment of Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 : 54 Taxman 499, the ld. D.R. submitted that any system of valuation of closing stock adopted by the assessee, which docs not take into account the manufacturing cost of finished goods, results in painting a distorted picture of the state of the business for the purpose of computing the chargeable income. The total cost of all the overheads was required to be included while valuing the closing stock. He drew our attention to page 9 para 3.3 of the Commissioner (Appeals)'s order, where she has recorded the finding that the only purposes of changing the method of valuation of closing stock appears to be reduction in profits and postponement of incidence of tax and, therefore, such change in the method was not bona fide. Thus, he submitted that the changed method of valuation of closing stock of sub-assemblies deserves to be rejected. As regards acceptance of the changed method of valuation by the Department in the subsequent years, the ld. D.R. submitted that each assessment year is a separate unit and the mere fact that such method has been accepted in the subsequent years does not mean that the addition made for the assessment year under reference should be deleted. As regards the alternative submission of the assessee that the value should be at Rs. 12,24,688, the ld. D.R. submitted that the accounting period of the assessee was of 21 months. Therefore, the addition in respect of the entire period amounting to Rs. 41,24,374 by rejecting the method of valuation of closing stock was rightly made.
12. We have heard both the parties at some length and given our thoughtful consideration to their rival submissions. We have also carefully gone through the evidence and material placed on record and examined the facts of the case. We have also referred to the various judgments cited at the bar. The undisputed facts of the case are that earlier also, the assessee used to value the closing stock of sub-assemblies at cost. However, while working out the cost, the assessee used to load the entire overhead cost of the sub-assemblies irrespective of the stage of completion of goods-in-process. This, according to the assessee, projected a distorted picture of the value of the closing stock of semi-finished goods as these neither reflected he cost price nor the realisable value. Therefore, the assessee changed the method of valuation by apportioning the overhead cost to the sub-assemblies depending upon the stage of completion. Nowhere the Assessing Officer has recoded a finding that the changed method of valuation of the stock was faulty or the calculation made by the assessee did not project the correct method of valuation of the closing stock of these items at cost. The only objection raised by the Assessing Officer is that by changing the method of valuation of closing stock, the assessee has reduced its income by Rs. 41,24,374 and, therefore, such change was not acceptable. Even the Commissioner (Appeals) has observed that by changing the method of valuation of the closing stock, the assessee has reduced the profits by the aforesaid amount and, therefore, the change was effected only with a view to reducing the income and postponing the incidence of tax.
Now, the question that requires to be considered is, whether the assessee is permitted to change the method of valuation of closing stock, if the earlier method followed by the assessee did not depict the true and correct picture of the valuation of closing stock at cost ? Secondly, the very fact that the change in the method of valuation has resulted in reduction of assessee's income to the extent of Rs. 41,24,374, whether it could be held that the changed method of valuation was not bona fide ? We have referred to page 31 of the paper book, which explains the logic behind changing the method of valuation of closing stock of sub-assemblies. The assessee is in the business of manufacturing communication equipment and its components. The manufacturing process involves several stages right from the stage when raw material is put into the assembly. The assessee has quantified number of man-hours consumed in converting the raw material to the final finished products. The whole manufacturing operation is divided into four stages. Earlier, the assessee used to load the cost of sub-assemblies even at the initial stage of processing/manufacturing by taking all 1500 man-hours, though in reality, these items were only at initial stage of manufacture. This certainly painted distorted picture in valuing the closing stock of sub-assemblies as the items at first stage had not actually consumed 1500 man-hours. Thus, even though the assessee was valuing closing stock at cost, the element of such cost was inflated in view of the method of valuation adopted by the assessee. Therefore, the assessee divided the manufacturing process into four stages and valued the closing stock of items at each stage by taking the actual man-hours consumed. It is not the case of the revenue that the working made by the assessee did not project the correct cost. The revenue has also not doubted the number of man-hours adopted by the assessee and the basis therefor. Therefore, even by changing the method of valuation of closing stock, the assessee continued to value the closing stock at cost. The Assessing Officer has not recorded any finding about the correctness of the changed method of valuation. It is trite law that the closing stock is to be valued either at cost price or market price, whichever is less. Reliance in this regard is placed on the judgments of Hon'ble Supreme Court in the cases of Chainrup Sampa-tram (supra) and British Paints India Ltd. (supra). We have also observed from pages 23 and 24 of the paper book that while valuing the closing stock, the assessee has included the entire overhead cost. Therefore, there was nothing wrong on the part of the assessee in changing the method of valuation of closing stock, which has since been regularly and consistently followed and accepted by the Department right from the assessment year 1990-91 till date. The mere fact that the change in the melhod of valuation of the closing stock has resulted in reduction of income for the assessment year under reference does not make such change as non-bona fide. What we have to see is whether the change in the method of valuation of the closing stock was bona fide and also whether the changed method has been regularly and consistently followed in the subsequent assessment years. The change in method, which is based on more scientific principle and does not alter the principle of valuation of closing stock either at cost price or market price, whichever is less, is permissible. Reliance in this regard is placed on the following judgments :
(i) Corpn. Bank Ltd.'s case (supra) - It has been held that irrespective of the basis adopted for valuation in the earlier year, the assessee has the option to change the method of valuation of the closing stock cither at cost price or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. The two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market price, whichever is lower and the fact that the closing stock must be the value of the opening stock in the succeeding year.
In the case in hand, even the effect of the addition in the value of the closing stock was not allowed by the Assessing Officer in the immediately succeeding assessment year 1990-91.
(ii) Indo Commercial Bank's case (supra) - In this case, the assessee used to value the closing stock of shares and securities at cost. The assessee changed the method of valuation of shares and securities at market price. The Assessing Officer rejected the changed method of valuation of closing stock. In the light of these facts, the Hon'ble Madras High Court held that the assessee is entitled to change his method of valuation provided it is bona fide and further that it is a method of valuation for regular employment for the assessee and not merely for a year in question. In other words, a change in the method of valuation of closing stock under such circumstances does not entail rejection of the method of assessee's choice.
(iii) Bharal Commerce & Industries Ltd.'s case (supra) - Where it has been held that the assessee is free to adopt a particular method of valuation of its closing stock, which it has to follow regularly from year to year. It is also well settled that irrespective of the basis adopted for valuation for earlier year, the assessee has an option to change the method of valuation of closing stock thereafter.
(iv) Haryana Minerals Ltd.'s case (supra) - In this case, the assessee changed the method of valuation of closing stock to cost price on the ground that the cost price was lower than the market price. The change in the method of valuation of closing stock was accepted by the Tribunal as bona fide and also the changed method was regularly employed by the assessee in the subsequent years. On these facts, the Hon'ble Punjab & Haryana High Court upheld the order of the Tribunal.
Thus from the above ratio of various judgments, it is very clear that the assessee is permitted to change the method of valuation of closing stock provided the change is bona fide and the changed method is regularly being followed in the subsequent years. The mere fact that such changed method results in reducing the income for one assessment year does not mean that change in the method of accounting is cither not bona fide or is not to be accepted. Such change would be in order, if the changed method of valuation of stock conforms to the accepted commercial principles i.e. either at cost or market price, whichever is less. There is no finding recorded by the authorities below that such changed method of valuation does not conform to these standards.
In the case of British Paints India Ltd. (supra), the Hon'ble Supreme Court has held that if the method of valuation of the closing stock does not conform to the accepted commercial standards, the Assessing Officer has a duty to reject such method irrespective of the fact that such method had been regularly and consistently followed and accepted in the past. Likewise, the assessee also has an option to change the method if the method followed in the past did not depict the correct picture of the closing stock i.e. the element of cost is inflated. The proper determination of the manufacturing cost for the purpose of valuation of the semifinished goods assumes greater importance in the cases where assessees are engaged in the manufacture of sophisticated equipment/components, where in certain cases, the manufacturing cost is likely to exceed the cost of raw-material. For example, in the making of wall clocks, steel and brass sheets are being used. The cost of brass and steel sheets consumed in a wall clock would be far less than the manufacturing cost of making the various components as these involve sophisticated and time consuming operations. It is, therefore, imperative that while valuing the closing stock of these items, the manufacturing cost up to the stage of completion of the manufacturing process should alone be included. In this case, the assessee used to value the closing stock of goods even at the initial stage of production by loading the entire manufacturing cost, which was not correct. This method neither reflected the value of the closing stock at cost or market value. Therefore, the assessee was justified in changing the method of valuation of closing stock of sub-assemblies, the correctness whereof has not be questioned or doubted by the authorities below. Moreover, the same method has been followed in all the subsequent years and the revenue has accepted the same. It is also a trite law that the value of closing stock becomes the opening stock of the immediately succeeding assessment year. If the Assessing Officer had made such addition, he ought to have allowed the same in the immediately succeeding assessment year by increasing the value of the opening stock by the same amount. This has not been done in the present case. The assessee has been hit twice, which is wrong.
Having regard to these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the Commissioner (Appeal) was not justified in not accepting the changed method of valuation of closing stock of sub-assemblies. We, therefore, set aside the order of the Commissioner (Appeals) and delete the impugned addition of Rs. 41,24,374. Since the entire addition is deleted, we don't consider it necessary to record our finding on the alternative submission of the ld. Counsel in reducing the addition to Rs. 12,24,688. Accordingly, this ground of appeal is allowed.
13. The last effective issue raised in this appeal is that the Commissioner (Appeals) was not justified in upholding the levy of interest under Sections 234B and 234C. Briefly stated, the facts of the case are that the Assessing Officer charged interest under Sections 234B and 234C at the time of completing the assessment. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer on the ground that charging of interest under Sections 234B and 234C is mandatory. The assessee has now filed this appeal before us.
14. The ld. Counsel for the assessee submitted that this ground is consequential only. The ld. D.R. didn't advance any specific arguments.
15. We have heard both the parties. While we confirm the order of the Commissioner (Appeals) in charging interest under Sections 234B and 234C, as the same is mandatory in nature, we direct the Assessing Officer to allow consequential relief after giving effect to this order. This ground of appeal is disposed of in these terms.
16. In the result, the appeal of the assessee is allowed.