GOODLASS NEROLAC PAINTS LTD. v. INSPECTING ASSISTANT COMMISSIONER
[Citation -1984-LL-1129-1]

Citation 1984-LL-1129-1
Appellant Name GOODLASS NEROLAC PAINTS LTD.
Respondent Name INSPECTING ASSISTANT COMMISSIONER
Court ITAT
Relevant Act Income-tax
Date of Order 29/11/1984
Assessment Year 1979-80 TO 1982-83
Judgment View Judgment
Keyword Tags principles of commercial accounting • undervaluation of closing stock • contribution to provident fund • commencement of production • valuation of inventories • valuation of inventory • value of closing stock • computation of income • excise duty liability • manufacturing expense • method of accounting • statutory liability • mala fide intention • method of valuation • valuation of stock • direct cost method • assessable income • audited accounts • work-in-progress • returned income • general reserve • trading account • income returned
Bot Summary: Emphasis supplied Shri Mehta then added that as regards its accounts for the year ended 31- 12-1978, the assessee valued its closing stock in the manner it had valued its closing stock for the immediately preceding the assessment year and that as a result, the assessable income for that year was enhanced similarly by a sum of Rs. 32,19,575. Shri Mehta pointed out that when for the two years under consideration, the assessee followed the same method of ascertainment of cost as for the year ended 31-12-1979 and was followed uniformly up to the accounting year ended on 31-12-1976, there was no justification for the IAC to make the disputed addition for the reason that for the two intermediate accounting years ending 31-12-1977 and 31-12-1978, the assessee had followed a different method of ascertainment of cost. Shri Mehta submitted that not only up to the assessment year 1977-78, at a point of time when there was no change, the assessee's method of ascertainment of cost the method adopted was accepted by the department but that the assessee's method of ascertainment of cost was accepted for the two intermediate years, when there was an enhancement and equally for the year 31-12-1979, when the assessee had reverted to its original method of ascertainment of cost. According to Shri Tuli one ought not to attach undue importance to the fact that the department had accepted the assessee's method of ascertainment of cost for some years for the years up to 31-12-1976, the change in that method for the two years 31-12-1977 and 31-12-1978 and the acceptance of the reversion of that method for the year 31-12-1979. According to Shri Tuli, when in the first or second year of change, the ITO accepted the refinement in the assessee's method of ascertainment of cost, there is no discussion on the issue by the ITO. Shri Tuli emphasised the fact that for the first time for the year 31-12-1978, the assessee considered for the purposes of ascertainment of cost certain additional element of cost and the additional element of cost considered for the first time in the accounts for the year ended 31-12-1978, was the excise duty element of cost of goods in stock but which were cleared from the bonded warehouse on payment of excise duty. Assuming, we are wrong in our decision that the ITO was not justified in making the adjustment of the type which he did for any of the two years in the second year, it has to follow that the ITO must reduce the assessee's assessable income by Rs. 34,64,179 and also revalue the opening stock for the first year. In view of the findings of the Tribunal that the change of the method is bona fide and is intended to be followed in future, year after year, the change has to be accepted by the revenue, notwithstanding the fact that during the assessment year which is the first year when the change of method is brought about it has resulted in a prejudice or detriment to the revenue.


BOMBAY C BENCH INSPECTING GOODLASS NEROLAC v. ASSISTANT PAINTS LTD. COMMISSIONER November 29, 1984 JUDGMENT 13 ITD 270 Goodlass Nerolac Paints Limited. vs Inspecting Assistant Commissioner. Bench: ITAT BOMBAY ORDER Per Shri N.Y. Tamhane, Accountant Member--These are four appeals by limited company in income-tax assessment for assessment years 1979- 80 to 1982-83. As certain common contentions are raised, these four appeals are disposed of by this common order. 2. As its name suggests assessee-company is carrying on business of manufacture of paints. For each of four assessment years under consideration, assessee has returned income exceeding Rs. 1,50,00,000. 3 to 18. [These paras are not reproduced here as they involve minor issues.] 19. Valuation of closing stock, effect of excise duty: Shri Mehta submitted that in his order for assessment year 1981-82 for first time, IAC examined issue of valuation of closing stock. For reasons given in paras 4 and 5 of his order for that year and for similar reasons given in para 6 of his order for subsequent year, IAC, respectively, added to returned income for two years amount of Rs. 34,64,179 and Rs. 34,02,272. Dealing with this issue in his consolidated order for two years, Commissioner (Appeals) considered assessee's method of valuation of closing stock. It was brought to notice of Commissioner (Appeals) that Research Committee of Chartered Accountants of India prepared guidelines published in October 1979, for valuation of closing stock wherein it was observed, noted Commissioner (Appeals): " In their recommendation, it is submitted, committee has expressed its preference for treating excise duty as part of manufacturing cost to be included in valuing inventories; but they have also opined that system of valuation of inventory on direct cost not including excise duty as permissible one. " Commissioner (Appeals) considered assessee's method of valuation of stock for and from previous year relevant for assessment year 1976-77 and he concluded by observing that: " Even if method followed by assessee in two years under appeal is accepted method of valuation, IAC having regard to past practice of assessee in sense that method of accounting has been altered more than once is within his rights to determine value of closing stock inventory in realistic manner. " Commissioner (Appeals) then considered guidelines issued by Institute of Chartered Accountants and then concluded by observing in para 15.4 as under: " amendment is not based on any accepted or approved principles of commercial accounting and this would be evident from speech of Finance Minister explaining rationale behind introduction of new provisions of section 43B. Such remarks are as under: Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, employees State Insurance Scheme, for long period of time. For purpose of their income-tax assessments, they nonetheless claim liability as deduction even as they take resort to legal action, thus, depriving Government of its dues while enjoying benefit of non-payment. To curb such practices, I propose to provide that irrespective of method of accounting followed by taxpayer, statutory liability will be allowed as deduction in computing taxable profits only in year and to extent it is actually paid. It may not be out of place to mention in this connection that excise duty is payable by industrial enterprise in respect of goods lodged in warehouse even if such goods are lost or destroyed by unavoidable accident. No doubt, under rule 147, Collector has discretion to remit duty payable thereon. liability to pay duty even in respect of lost or destroyed goods is clearly demonstrative proof of proposition that excise is element of cost. " He further observed as under: " law as it stands today, before introduction of section 43B, requires IAC/ITO to allow excise duty payable by assessee on its manufactured goods as deduction in computing profits or losses of that year. provisions of section 43B do not lay down any principles of accounting but are intended to compel assessees to pay their statutory duties before deduction in respect of same could be claimed. direct cost method can be considered as accepted method of stock inventory valuation but same would not be complete without inclusion of excise duty which for all purposes has to be considered as element of cost. " As such, Commissioner (Appeals) upheld IAC's action for both years. 20. Shri Mehta for assessee pointed out that up to assessment year 1980-81, IAC had accepted valuation of stock as made by assessee. In this regard, Shri Mehta brought to our notice assessee's balance sheet for accounting year ended on 31-12-1973. This balance sheet discloses that stocks are valued in following manner: " At cost (in case of stock in process and manufactured goods at raw material cost) or market whichever is lower, as certified by director. " Shri Mehta pointed out that for first time in accounts for year ended 31-12-1976, there was slight change in method of ascertaining cost for purposes of valuation of closing stock. In accounts for year ended 31-12-1976 on this issue in their report, auditors have commented as under: " company has changed basis of valuing its stock in process and manufactured goods. As result, value of these stocks has increased by Rs. 11,49,296 and profit for year by like amount before tax and Rs. 3,86,394 after tax. other stocks have been valued on same basis as in earlier years. In our opinion, valuation of stocks is fair and proper in accordance with normally accepted accounting principles. " 21. Shri Mehta added that, thus, for assessable income for year 1977-78, value of closing stock was enhanced by sum of Rs. 11,49,296 from figure which otherwise would have been on basis of principles of ascertainment of cost followed up to accounting year 31-12-1975. Shri Mehta then added that in accounts for year ended 31-12-1977, company introduced yet another refinement for ascertainment of cost element. In accounts for this year, on this issue, auditors' comment was: " company has changed basis of valuing its manufactured goods by inclusion of certain additional element of cost. As result, value of these stocks has increased by Rs. 7,26,524 and profit for year by like amount before tax and Rs. 1,81,174 after tax. other stocks have been valued on same basis as in earlier years. In our opinion, valuation of stocks, subject to exclusion of excise duty (Rs. 12,25,536) from valuation of finished goods and work-in-progress having been valued at direct cost, is fair and proper and in accordance with normally accepted principles. " [Emphasis supplied] Shri Mehta then added that as regards its accounts for year ended 31- 12-1978, assessee valued its closing stock in manner it had valued its closing stock for immediately preceding assessment year and that as result, assessable income for that year was enhanced similarly by sum of Rs. 32,19,575. Shri Mehta brought to our notice auditors' comments on this to which we are not making reference as primarily they are of same type as those for year ended 31-12-1977. In its accounts for year ended 31- 12-1979 on reconsideration of issue of ascertainment of cost, company considered it advisable for purpose of ascertainment of cost 'to exclude excise duty and certain additional element' which were considered for purposes of ascertainment of cost in accounts for years ended 31-12-1977 and 31-12-1978. Shri Mehta pointed out that on this issue in their report for year ended 31-12-1979, auditors commented as under: " company has changed basis of valuing its stocks of manufactured goods by exclusion of excise duty and certain additional elements of cost. As result of exclusion of excise duty from cost, value of finished goods stock has decreased by Rs. 43,10,907 and profit for year by like amount before tax and Rs. 10,56,721 after tax. other stocks have been valued on same basis as in previous year. In our opinion, valuation of stocks is fair and proper and in accordance with normally accepted accounting principles. " 22. For two years ended under consideration, viz., 31-12-1980 and 31-12-1981, assessee proceeded to ascertain cost in same manner as it had done for accounting year ended 31-12-1979. auditors, comments for these two years were as under: 31-12-1980: " company has changed basis of valuing its stocks of manufactured goods and stock in process by exclusion of certain elements of costs and inclusion of certain other elements of cost. As result of this change, value of stocks has increased by Rs. 6.83 lakhs and profit for year by like amount before tax and Rs. 2.45 lakhs after tax. other stocks have been valued on same basis as in previous year. In our opinion, valuation of stocks is fair and proper and in accordance with normally accepted accounting principles. " 31-12-1981: " In our opinion, valuation of stocks is fair and proper and in accordance with normally accepted accounting principles and is on same basis as in previous year. " Shri Mehta pointed out that when for two years under consideration, assessee followed same method of ascertainment of cost as for year ended 31-12-1979 and was followed uniformly up to accounting year ended on 31-12-1976, there was no justification for IAC to make disputed addition for reason that for two intermediate accounting years ending 31-12-1977 and 31-12-1978, assessee had followed different method of ascertainment of cost. Shri Mehta submitted that not only up to assessment year 1977-78, at point of time when there was no change, assessee's method of ascertainment of cost method adopted was accepted by department but that assessee's method of ascertainment of cost was accepted for two intermediate years, when there was enhancement and equally for year 31-12-1979, when assessee had reverted to its original method of ascertainment of cost. 23. On above basic and primary facts, Shri Tuli for revenue has no quarrel. However, he added that acceptance by department of assessee's original method of ascertainment of cost or changed method of ascertainment of cost was acceptance without any discussion and, therefore, acceptance without any application of mind by assessing officer. According to Shri Tuli, therefore, one ought not to attach undue importance to fact that department had accepted assessee's method of ascertainment of cost for some years for years up to 31-12-1976, change in that method for two years 31-12-1977 and 31-12-1978 and acceptance of reversion of that method for year 31-12-1979. According to Shri Tuli, it was for first time for assessment year 1981-82 that assessing officer considered this issue in its proper perspective and that there was full justification for additions as made by IAC and sustained by Commissioner (Appeals). 24. Shri Mehta for assessee pointed out that as observed by Commissioner (Appeals). Section 43B of Income-tax Act, 1961 ('the Act') was inserted by Finance Act, 1983, with effect from 1-4-1984. According to Shri Mehta, issue of principles of ascertainment of cost had been receiving attention at different levels and that when department had reopened certain assessments and one such concerned assessee filed writ proceedings before Bombay High Court wherein reliance was placed on behalf of department on certain circulars issued by CBDT and Commissioner. According to Shri Mehta, genesis of action of IAC in adding for two years under consideration amount exceeding Rs. 34 lakhs each has to be seen in circular of Commissioner, dated 9-4-1981. Shri Mehta submitted that he is in position to file copies of these papers as these papers were relied upon by department in writ proceedings to which reference has been made. 25. Now, Shri Mehta points out that by his letter, dated 9-4-1981, Commissioner, brought to notice of officers working under his charge, CBDT circular dated 24-3-1981, wherein Commissioner observed that: " Board is of opinion on basis of expert opinion from Institute of Chartered Accountants of India that normally customs duty and excise duty will enter into manufacturing expenses and will, therefore, form element of cost for inventory valuation. All ITOs are requested to study above Instruction No. 1389 along with guidance notes and take suitable action under section 145(1) proviso as recommended by Director of Inspection (Special Cell) wherever under valuation of closing stock has been resorted to by assessee by above method. " Vide their Instruction No. 1389, CBDT has stated that on reference made to Institute of Chartered Accountants of India, CBDT has been informed that question of appropriate accounting treatment of excise duty as part of cost price has already been examined by Research Committee of Institute and opinion of Research Committee was that normally excise duty should be considered as manufacturing expense and as element of cost for inventory valuation. position will be same in respect of customs duty also. copy of conclusion arrived at by Research Committee of Institute in this matter is enclosed. Shri Mehta then brought to our notice, extract from Chartered Accountants' Journal, October 1979, pages 387-391 giving guidelines on accounting treatment for excise duties. He then brought to our notice conclusion as drawn which are to be seen in para 37 as under: " 37.(a) excise duty should normally be considered as manufacturing expense and like other manufacturing expenses be considered as element of cost for inventory valuation. (b) Where excise duty contributes directly to bringing inventory to its present location and condition and is direct cost, it must be included as element of cost in valuation of inventories, irrespective of whether direct costing or absorption method of costing is used. Excise duty would normally be so considered when it is specific or ad valorem duty. (c) Where excise duty contributes directly to bringing inventory to its present location and condition but is in nature of manufacturing overhead, it need not be included as element of cost when 'direct costing' system is used but must be included when absorption costing system is used. Such situation will normally arise when excise duty is levied on compounded basis. " 26. Shri Mehta then brings to our notice, publication by Institute of Cost and Works Accountants of India, published in October 1979. Shri Mehta specifically brings to our notice that said publication refers to notification of Ministry of Law, Justice and Company Affairs, Shri Mehta pointed out that assessee manufactures dyes according to proforma prescribed. In this regard, Shri Mehta brings to our notice proforma 'C' printed at pages 19 and 20 of publication, according to which manufacturer has to give information to concerned authority regarding different elements of cost, selling and distribution expenses, etc. Shri Mehta then adds that in respect of quantity sold within country, one is required to give total expenses excluding excise duty for quantity sold and similarly total sales realisation excluding excise duty for quantity sold, difference being margin. Shri Mehta added that it would thus be manifest that with regard to statement to be filed by paint and dyes manufacturer with concerned authority, excise duty has to be separately indicated. According to Shri Mehta, primarily, assessee's method of valuation of stock was as seen from accounts for year ended 31-12-1973 'at cost or market value whichever is lower'. According to Shri Mehta, concept of cost ordinarily should not create any difficulties. However, Shri Mehta added that at times basic concepts are not free from doubt and it would be manifest that concept of cost is one such basic concept which is not free from doubt. Shri Mehta added that whereas at one stage, Institute of Chartered Accountants gave opinion that excise duty be considered as element of cost for determining valuation. Later, institute has observed that: " Where excise duty contributes directly to bring inventory to its present location and condition and is direct cost it must be included as element of cost in valuation of inventories, irrespective of whether direct costing or absorption method of costing is used. Excise duty would normally be so considered when it is specific or ad valorem duty." Shri Mehta further adds that conclusion drawn by Institute of Chartered Accountants is: " Where excise duty is not considered as manufacturing expense on basis that liability arises only after manufacture is completed and inventory is valued at direct manufacturing cost it may be charged out as expense of period in which expenditure is incurred. " According to Shri Mehta, merely by valuation of closing stock, one does not either make profit or incur loss but that stocks had to be valued so as to ascertain properly result of transaction of year, profit being difference between sale realisation and cost of goods sold as held by Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481. According to Shri Mehta, any adjustment made on account of valuation of stock is primarily made to give true trading results of year and that merely because on proper advice assessee changes method of ascertainment of cost, it cannot be said that there is under valuation of stock much less with intention to reduce taxable income. In this regard, Shri Mehta brought to our notice copy of letter dated 5-10-1980 from Director of Inspection (Investigation) (Special Cell), New Delhi, being one of papers relied upon by department in writ proceedings, which states as under: " On my recent tour to Bombay. I found that certain other big companies have also started resorting to same method of undervaluation of stocks as described above. In case of Goodlass Nerolac Paints (P.A. No. 34-009-CM- 5335)/BMY-COM-IV-3 undervaluation of closing stock in this manner was Rs. 43,10,907 in 1979. relevant extract from annual report of company for year 1979 reads as under: 'The company has changed basis of valuing its stocks of manufactured goods by exclusion of excise duty and certain additional elements of cost. As result of exclusion of excise duty from cost, value of finished goods stock has decreased by Rs. 43,10,907 and profit for year by like amount before tax and Rs. 10,56,721 after tax. other stocks have been valued on same basis as in previous year. In our opinion, valuation of stocks is fair and proper and in accordance with normally accepted accounting principles'. " Shri Mehta submitted that in manner in which both authorities below have proceeded to examine issue, it appears to me that dispute is blown out of proportion. According to Shri Mehta, reliance by Commissioner (Appeals) on speech of Hon'ble Minister while introducing new provision, was dealing with entirely different issue, viz., claim of manufacturer as permissible deduction in computation of income that amount of excise duty which is being challenged in writ proceedings in respect of which stay was obtained from Courts. According to Shri Mehta in present case, there was no dispute regarding assessee's liability towards excise duty and that neither of authorities below has even remotely suggested that present assessee is one, who has obtained deduction for excise duty liability in respect of which it has obtained stay of recovery of excise duties from Courts. According to Shri Mehta, this dispute should be considered without clouding thinking on account of insertion of section 43B, which comes into force from 1-4-1984 only. Shri Mehta brought to our notice decision of Madras High Court in CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759. 27. Shri Tuli for revenue referred to pages 77 and 78 of assessee's compilation being extracts from auditors' note on accounts for years 31-12-1976 to 31-12-1981. We have made reference to those earlier in paras 20 to 22. According to Shri Tuli, when in first or second year of change, ITO accepted refinement in assessee's method of ascertainment of cost, there is no discussion on issue by ITO. Shri Tuli emphasised fact that for first time for year 31-12-1978, assessee considered for purposes of ascertainment of cost certain additional element of cost and additional element of cost considered for first time in accounts for year ended 31-12-1978, was excise duty element of cost of goods in stock but which were cleared from bonded warehouse on payment of excise duty. According to Shri Tuli, ITO accepted this change equally without any discussion. Shri Tuli further submitted that when in accounts for year ended 31-12-1979, i.e., accounts for first year after guidance note was published in October 1979 issue of Chartered Accountants' Journal, assessee had reverted to its original method of ascertainment of cost ignoring element of excise duty and that on basis followed by assessee for year ended 31-12-1979, there was under statement of Rs. 43,10,907. Shri Tuli submitted that in accepting assessee's method, ITO did not discuss issue in assessment order and in assessment order there was no whisper about change in method of ascertainment of cost effected by assessee in accounts for year under consideration by reverting to original method. Shri Tuli submitted that it was this aspect of assessment, which was commented by Director of Inspection (Investigation) (Special Cell), New Delhi, to which reference has been made in letter filed by department in certain writ proceedings to our attention was drawn by Shri Mehta and to which we have made reference earlier in paras 24 to 26. According to Shri Tuli, since assessee had made certain changes in method of valuation of cost unilaterally, ITO was justified in ignoring change which assessee made. Shri Tuli stressed fact that method of ascertainment of cost is to be consistent and for long period. According to Shri Tuli, manner in which assessee changed method of ascertainment of cost over period 31-12-1976 to 31-12-1979, showed that assessee was not following consistently particular method and that assessee was not entitled to revert in accounts for year ended 31-12- 1979 to method of ascertainment of cost which it had followed up to year ended 31-12-1975. Shri Tuli's attention was drawn to Madras High Court's decision in CIT v. Chari and Ram [1949] 17 ITR 1, more particularly, observations of Court at p. 8. Shri Tuli's attention was further drawn to decision of Supreme Court in Chainrup Sampatram's case. Shri Tuli had nothing of special importance to urge on what was brought to his attention. 28. Having heard parties and examined record on this last issue, we find that there is no dispute on facts which have been indicated in some details in earlier paragraphs while recording submissions of Shri Mehta. We have further recorded Shri Tuli's submission that we need not attach undue importance to fact that department had accepted assessee's method of ascertainment of cost for years up to 31-12-1976, change in method for two years 31- 12-1977 and 31-12-1978 and acceptance of reversion of that method to old method for year ended 31-12-1979. Apart from noting of Director of Inspection (Investigation) (Special Cell), New Delhi, brought to our notice by Shri Mehta, we do not find any materials on record which would justify one in coming to conclusion that change of method of ascertainment of cost by assessee over years was motivated one. As we have noted, initially for every one of years under consideration, assessee had returned income of more than crore and half rupees. We have further noted fact that for first time in accounts for year ended 31-12-1976 owing to change in method of ascertainment of cost, value of closing stock was increased by amount of Rs. 11,49,296 and for year ended 31-12-1977, increase was by amount of Rs. 7,26,524. Similar increase in accounting year ended 31-12-1978 was Rs. 32,19,575. In so increasing valuation, we are unable to find any ulterior motive of assessee. This is because if for one year there is enhancement in value of closing stock, automatically that figure has to be taken as opening stock so that there is merely shifting of profits from one year to another year. Inasmuch as for every one of years now under consideration, assessee has returned income of well over crores of rupees, increase in value of closing stock owing to change in method of ascertainment of that value cannot be considered as motivated one. In accounts for year 31-12-1979 on assessee's reverting to its original principle of ascertainment of cost from method that is adopted in accounting year 31-12-1978, there was understatement of amount of Rs. 43,10,907. On same basis for two years under consideration, assessing officer has worked out that had assessee followed method of valuation that it had followed in accounting year ending 31-12-1976, profits would have been, respectively, larger by amount of Rs. 34,64,179 and Rs. 34,02,272. Inasmuch as without considering this adjustment, assessee's returned profits were over Rs. 1,50,00,000, we are unable to attribute any motive to assessee when assessee reverted to its original method of ascertainment of cost. 29. Once assessee's bona fides are accepted, one can consider in proper perspective issue now under consideration. It is unnecessary to add that concept of cost is not simple concept to appreciate. In this connection, one finds decision of Madras High Court in case of Chari and Ram. In that case, dispute was whether while valuing stock at cost or market whichever is lower what exactly was concept of cost. assessee while ascertaining opening stock had considered average cost. However, for ascertaining valuation of closing stock assessee adopted slightly different method as seen from headnote: " ....At time of valuing closing stock, with regard to some of articles market rate was lower; whereas with regard to other articles market rate was higher than average cost. assessees took average cost as value of closing stock for those articles of which cost was lower than market rate and adopted market rate for other articles of which market rate was lower than average cost. Commissioner contended that this method was wrong and that correct method would be to arrive at two separate valuations of closing stock, one aggregate of actual average cost for each of articles and other aggregate of market value of same articles and to adopt lower of two aggregates: " This was dispute referred for Court's opinion. In this connection, one has to consider observations of Court as under: " ....But if it is found as in this case that method adopted by assessee in period of assessment is in accordance with method of accounting regularly followed by assessee in past then that method must be accepted in absence of anything to suggest that it is improper or patently false.... " [Emphasis supplied] Unlike issue before us, which relates to income-tax assessment before High Court, dispute related to both income-tax and excess profit tax and as such that principle applies in present case with greater force. 30. We do not find anything on record even to remotely suggest that one could justifiably say that reversion to original method of ascertainment of cost by assessee was improper or patently false. This conclusion has to be followed as in very first year when assessee effected change, it so effected on basis of guidance note prepared by Institute of Chartered Accountants to which our attention was drawn by Shri Mehta. As brought to our notice earlier and found to be correct, in account for year ending 31-12-1976, on basis of advice, which assessee was able to obtain, assessee made refinement for purposes of ascertainment of cost and that on that basis, it ascertained cost for years ended 31-12-1976, 31-12-1977 and 31-12-1978. We find nothing on record to suggest that when assessee valued its stock for year ended 31-12-1979 on same principles as it had followed up to year 31-12-1975, there was any mala fide intention. We equally do not find anything on record which would suggest that when for two years under consideration, assessee followed same method for ascertainment of cost as it followed up to 31-12-1975, there was any mala fide intention on part of assessee. Shri Mehta pointed on that in reverting to original method, assessee strictly followed guidance notes where it is observed 'it is also advisable in such circumstances to disclose accounting treatment followed'. On basis of facts brought to our notice by Shri Mehta, we find that it would be illogical, unjust, unfair and unreasonable, to challenge with view to ascertain whether adjustment or purposes of ascertainment of cost of closing stock as made by assessee, has any ulterior motive or purpose, we have directed assessee to file for accounting years 1978 and 1979, position as it has emerged as recorded in accounts and as it would emerge if excise duty incidence is not given effect to in audited account. For accounting years ended 31- 12-1978 and 31-12-1979, position is as under: Rs. in lakhs 1978 1979 -------------------- ---------------------- I II I II --------------------------------------------- Profit before tax 155 123 219 262 Tax 98 78 149 182 Profit after tax 57 45 70 80 Dividend 32 32 35 35 General reserve 25 13 35 45 I--As reported in audited accounts II--If change in excise duty incidence is not given effect to in audited accounts. 31. With view to highlight understanding of controversy of this issue, we would like to give illustration. Let us assume that assessee manufactures only three articles, which will No. 'A', 'B' and 'C' and basic cost of each is Rs. 100 and on which excise duty of Rs. 20 is payable. Let us further assume that assessee has removed from bonded warehouse items 'A' and 'B' on payment of excise duty of Rs. 40. Thus, to debit of manufacturing and trading account, would appear total debit for basic cost of Rs. 300 and payment of excise duty of Rs. 340. Let us further assume that assessee has sold item 'A' for sum of Rs. 150. issue now is what exactly profit is which assessee has made during year of account. According to assessee's original method of ascertainment of cost for purposes of valuation of closing stock, assessee was disregarding excise duty payment of Rs. 20 in respect of item 'B', which has been cleared from bonded warehouse but has not been sold. Thus, assessee has valued in its accounts for years under consideration, viz., 31-12-1980, items 'B' and 'C' at Rs. 100 each. There is no dispute that item 'C' is properly valued. dispute is only about ascertainment of cost of item 'B'. According to department, assessee ought to have valued at Rs. 120 for item 'B', so that in respect of sale of item 'A' during year of account assessee's profit is shown correctly at Rs. 30 and not at Rs. 10. This amount of Rs. 20 is addition as made by ITO for two years under consideration, viz., Rs. 34,64,179 for first year and Rs. 34,02,272 for second year. 32. We are satisfied that at no stage, when assessee changed method of ascertainment of cost, assessee's bona fide can justifiably be doubted or challenged. We further have to take note of fact that income returned for each of years is of same order and that no one could justifiably say that assessee was contemplating adjustment of profits from year to year so as to reduce tax liability. 33. We would now consider Shri Tuli's objection that assessee had changed its method of accounting. As we have made it clear earlier, assessee did not make any change in its method of accounting but had made certain changes in principles followed for ascertainment of value of stock. Even if one were to assume that change in method of ascertainment of value of closing stock was change in method of accounting, unless such change was mala fide, change has to be accepted. This follows from decision of Calcutta High Court in CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 122 ITR 575. In that case, there was specific change in method of accounting from mercantile to cash, which method was regularly followed from accounting year relevant for assessment year 1966-67. As seen from head-note " As result of change result was loss whereas under previous method it would have been profit. " Court observed that: " ...that Appellate Tribunal had found that there was no mala fide motive in changing method of accounting and that new method had been regularly followed and accepted by department in subsequent years. Therefore, assessee could elect to be assessed on basis of cash system of accounting. " 34. During course of hearing, we had asked Shri Tuli whether assessing officer had made adjustment so that for every year both opening and closing stock have been valued on basis of identical principles of ascertainment of cost. Shri Tuli replied that ITO need to make adjustment only in respect of valuation of closing stock and need not revalue opening stock. For this purpose, Shri Tuli relied on Allahabad High Court in case of Ram Luxman Sugar Mills v. CIT [1967] 63 ITR 51. When one turns to that decision, it is seen that question referred was answered in favour of department. One also finds that Court's attention was not drawn to decision of Privy Council in CIT v. Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245. comments on that case of learned authors Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edn., Vol. 1, are to be seen as follows: " Where opening as well as closing stock for year is undervalued, ITO should not revalue closing stock only at its true value, while declining to revalue opening stock also on same basis, for, obviously, proper valuation at one end and undervaluation at other would not disclose true profits of year. " Were one to assume that assessing officer was justified in making additions he did, following Privy Council's decision in Ahmedabad New Cotton Mills Co. Ltd.'s case, it was incumbent on assessing officer to evaluate both opening and closing stock on same principles. Apparently, this has not been done. Based on Privy Council's decision in case of Ahmedabad New Cotton Mills Co. Ltd., it is manifest that in assessment for year 1982-83, ITO necessarily had to make adjustment by reducing opening stock value by amount of Rs. 36,64,179. To revert to illustration which we had given earlier, if on valuing item 'B' at Rs. 100 in subsequent year, assessee sells item at Rs. 155, profit would be Rs. 35. assessee has accounted for this profit at Rs. 35 in second year's account. However, in manner in which ITO has made assessment, when he has enhanced profit of first year by Rs. 20, he has not reduced profit of Rs. 35 for purposes of second year's assessment. Assuming, we are wrong in our decision that ITO was not justified in making adjustment of type which he did for any of two years in second year, it has to follow that ITO must reduce assessee's assessable income by Rs. 34,64,179 and also revalue opening stock for first year. Once we find that assessee's bonafides are not suspect but, dispute is merely in which year particular income is to be taxed and more particularly in case of limited company, we recollect observations of Bombay High Court in CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 at p. 684. We are aware that Supreme Court in case of CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134 has stated that deduction for profit bonus is admissible in year in which dispute was settled by award of Industrial Tribunal. However, enunciation of that principle by Supreme Court does not detract merits of observation of Mr. Justice Tendolkar in Nagri Mills Co. Ltd.'s case that: " ...Judging from references that come up to us every now and then, department appears to delight in raising points of character which do not affect taxability of assessee or tax that department is likely to collect from him whether in one year or other. " To best of our knowledge, this observation of Mr. Justice Tendolkar has not been overruled by Supreme Court. 35. We would now refer to decision brought to our notice by Shri Mehta, viz., Carborandum Universal Ltd.'s case. It will be seen from that decision that Madras High Court was examining, among others, total cost and direct cost method for purposes of ascertainment of cost. After considering difference between two methods and referring to decision of Allahabad High Court in Ram Luxman Sugar Mills' case relied upon by Shri Tuli and Kantilal Chandulal Dharia v. CIT [1976] 104 ITR 487 (Bom.) classic decision of Supreme Court in Chainrup Sampatram's case Madras High Court in Carborandum Universal Ltd.'s case observed as under: " ...The Court found that different accountants were applying either one or other of two methods producing true figure of profit. On question as to which of method of valuation should be applied for valuing work-in-progress in case, Court held that in determining what, in circumstances of particular business, was figure which fairly represented cost of work-in-progress as per method employed consistently since 1924, inland revenue has not discharged burden of showing good reason that method should be changed to 'on cost' method and, therefore, assessee is entitled to continue to adopt 'direct cost' method as before. Thus, adoption of 'direct cost' method by assessee cannot be questioned by revenue as it has been found by Tribunal that adoption of this method is bona fide and is permanent arrangement. revenue's only contention is that it has shown to be prejudicial to revenue. As pointed out in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.), merely because new method adopted by assessee was detrimental to revenue, that alone can never be basis for denying right to change method. Further, even though change of method has resulted in detriment to revenue in year in question, since method is to be followed consistently year after year in future, this apparent detriment to revenue will get adjusted and disappear. Therefore, in view of findings of Tribunal that change of method is bona fide and is intended to be followed in future, year after year, change has to be accepted by revenue, notwithstanding fact that during assessment year which is first year when change of method is brought about it has resulted in prejudice or detriment to revenue. So long as method of valuation adopted by assessee gets recognition from practising accountants and commercial world for evaluation of stock-in-trade, adoption of that method cannot be questioned by revenue unless adoption of that method is found to be not bona fide or restricted for particular year. " 36. We need not refer that in present case, when assessee reverted to its original method of ascertainment of cost, assessee's bonafides can never be justifiably doubted or challenged or it can be said that even attempt has been made by revenue to doubt assessee's bona fide. In our opinion, this is most important fact and further fact that as we had explained above, over period of time there is no difference between income offered for assessment and income brought to charge, we do not find any justification to sustain disputed addition made for any of two years. It will be seen that in reverting to its original method of ascertainment of cost, assessee has followed guidance notes on accounting treatment for excise duty published in Chartered Accountants' Journal, October 1979, pages 387-391. In this regard, one recollects observation of Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 thus: " It would appear from above that accepted accountancy rule for determining cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by newly started company which is in process of constructing and erecting its plant, interest incurred before commencement of production on such borrowed money can be capitalised and added to cost of fixed assets which have been created as result of such expenditure. above rule of accountancy should, in our view, be adopted for determining actual cost of assets in absence of any statutory definition or other indication to contrary. " (p. 175) It is for this reason, we considered it proper to accept assessee's action in reverting to its original method of ascertainment of cost and on that basis, we delete addition made for each of two years, respectively, at Rs. 34,64,179 and Rs. 34,02,272. 37. Assuming that our decision be not correct and there is any justification to make addition for assessment year 1981-82 of Rs. 34,64,179, on basis of Privy Council's decision in Ahmedabad New Cotton Mills Co. Ltd.'s case opening stock for assessment year 1981-82 must be valued on same principles even though closing stock for year 1980-81 may not be or cannot be valued on that basis. Therefore, if there be any justification in adding to closing stock, value for assessment year 1981-82, amount of Rs. 34,64,179, assessee must be allowed deduction of Rs. 43,10,907, undervaluation of closing stock in 1979 as observed by Director of Inspection (Investigation) (Special Cell), and referred to by us at page 19 of our order and Auditor's note as referred to by us in para 14 of this order. For assessment year 1982-83, if on that basis, addition of Rs. 34,02,272 is to be confirmed, ITO is bound to reduce value of opening stock by amount of Rs. 34,64,179 added to value of closing stock for year 1981-82. It would thus be seen that if we be wrong in our decision in accepting assessee's appeal on this ground for these two years, net result would be that for assessment year 1981-82 assessee's income would be reduced by Rs. 8,46,728 (reduction of opening stock by Rs. 43,10,907 less addition to value of closing stock by Rs. 34,64,179). For assessment year 1982-83, opening stock will have to be reduced by Rs. 34,64,179 and closing stock will have to be enhanced by Rs. 34,02,272, so that on this account, assessee's income for year 1982-83 will have to be reduced by Rs. 61,907. We have taken note of fact that statement was made at bar, which was not controverted that in its subsequent accounting years assessee has regularly followed same system that it had followed originally up to year ended 31-12-1975 and to which it had reverted in its account for year ended 31-12-1979. To put it specifically, if our decision for deletion of two additions now under consideration be held incorrect on this issue alone assessee's income for year 1981-82 will have to be reduced by Rs. 8,46,728 and for year 1982-83 by amount of Rs. 61,907. 38. In circumstances, considering facts and law, we do not find any justification to sustain disputed addition for any of two years. 39. In result, all appeals are partly allowed. *** GOODLASS NEROLAC PAINTS LTD. v. INSPECTING ASSISTANT COMMISSIONER
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