Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Mopeds India Limited on 3 March, 1988
Equivalent citations: [1988]173ITR347(AP)
JUDGMENT Y.V. Anjaneyulu, J.
(1) This reference concerns the income-tax assessment year 1979-80. The Tribunal referred the following questions of law for consideration of this court :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the Commissioner of Income-tax (Appeals) is not correct in directing the Income-tax Officer to revalue the opening stock also consistently along with the closing stock when it wants to adopt the method known as 'works cost' method for the assessment year 1979-80 ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the guarantee commission constitutes revenue expenditure ?"
(2) We may dispose of the second question first, since it is represented that it is covered by the decision of this court in favour of the assessee, viz., Addl. CIT v. Akkamba Textiles Limited . Having regard to this representation, we answer the second question in the affirmative, i.e., in favour of the assessee and against the Revenue.
(3) So far as the first question is concerned, a few facts may be noticed : The assessee was valuing its closing stock, in the past years, by what is known as the "total cost" method. In this method, proportionate overheads for administrative expenses, selling expenses and interest in stock valuation were taken into account. While valuing the closing stock for the assessment year under consideration, the assessee found the earlier system to be somewhat unscientific and problematic and, therefore, switched on to what is recognised as the "works cost" system where administrative overheads are not taken into account. While scrutinising the accounts for the assessment year under consideration, the Income-tax Officer went into the question of the closing stock valuation and found that the assessee adopted a different method for valuation of the closing stock. The assessee explained that the change was made for bona fide purposes and it was to replace a somewhat unscientific method of valuation by a more scientific and recognised method of closing stock valuation. The Income-tax Officer did not accept the explanation of the assessee. He valued the closing stock on the basis adopted in the past year and made an addition of the difference in the value of the closing stock. On appeal, the Commissioner of Income-tax (Appeals) examined the question at considerable length and was satisfied that the change in the method of valuation of closing stock was for bona fide purposes. He called for a report from the Income-tax Officer as to whether the closing stock was strictly valued on the basis of the "works cost" method. The Income-tax Officer replied in the affirmative. While thus recording a finding that the assessee did not change its method of valuation of closing stock for any ulterior purpose or for reducing income for income-tax purposes, the Commissioner directed that the opening stock of the relevant accounting year should also be valued on the same "works cost" basis and the difference reckoned after the opening stock was revalued should be added.
(4) The assessee objected to the direction of the Commissioner of Income-tax by filing an appeal before the Tribunal, and submitted that where, on an investigation and inquiry, the Revenue authorities are satisfied that the change in the method of valuation of closing stock is brought about for bona fide purposes, the Revenue has no right to interfere with the valuation of the closing stock. The assessee pointed out to the detailed enquiry made by the Commissioner and to the finding recorded by him that the change effected by the assessee was for bona fide purposes. It was also pointed out that the earlier system which was not at all scientific was replaced by the present system which is recognised as acceptable in commercial and accounting circles. In these circumstances, the assessee claims that the direction of the Commissioner of Income-tax to revalue the opening stock of the relevant year also on the "works cost" method is uncalled for.
(5) The Tribunal accepted the assessee's plea and, in particular, it had taken note of the fact that any disturbance in the valuation of the opening stock would have a snowballing effect in the sense that the closing stock of the immediately preceding year would be affected and the computation of profits of that year would have to undergo a change and this process would go on for a number of years. The Tribunal felt that such an exercise is uncalled for, where the Revenue is satisfied that the assessee has brought about the change for bona fide purposes, and all that was required, the Tribunal decided, was to satisfy that the closing stock valuation was made strictly on the basis of the "works cost" method. In view of the Income-tax Officer's report in the affirmative, the Tribunal held that the direction of the Commissioner of Income-tax to revalue the opening stock also on the same basis was uncalled for. The Commissioner felt aggrieved by the decision of the Tribunal and sought for the present reference and that is how question No. 1 was referred to this court.
(6) We have not the slightest doubt that the view of the Tribunal was correct. In the face of the finding hat the change adopted by the assessee was for bona fide purposes and was not actuated by considerations of reducing the income for income-tax purposes, the Revenue has no right to interfere with the change in the method of valuation of the closing stock. The Tribunal had referred to a long list of cases supporting the above view and we are in entire agreement with the proposition.
(7) Having regard to the above, the answer to the first question is in the affirmative, i.e., in favour of the assessee and against the Revenue.
(8) No costs.