UNIFLEX INDUSTRIES (P) LTD. v. INCOME TAX OFFICER
[Citation -2007-LL-0316-2]

Citation 2007-LL-0316-2
Appellant Name UNIFLEX INDUSTRIES (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 16/03/2007
Assessment Year 2002-03
Judgment View Judgment
Keyword Tags change in method of valuation • valuation of closing stock • private limited company • annual general meeting • method of accounting • revenue authorities • accounting standard • valuation of stock • accounting policy • work-in-progress • opening stock • modvat credit
Bot Summary: In reply to AO s query, the assessee explained that it had changed its accounting policy of valuation of stock to follow the mandatory AS-2 as per which the closing stock of finished goods and work-in-progress had to be valued at lower of cost or net realizable value. For ascertaining the true profits of a year, both the opening stock and closing stock have to be valued by the same method. In the case of the appellant, the opening stock has been valued at the net realizable value but the closing stock has been valued at cost or net realizable value whichever is lower. Either the appellant adopts the revised method for both the opening stock and closing stocks or else he has to follow the old system, where again opening and closing stocks are valued by the same method. The learned counsel further submitted that the changed method of valuation of closing stock adopted by assessee is commercially accepted mode of valuation of closing stock and relied on the decision of the Hon ble Bombay High Court in the case of CIT vs. Indo Nippon Chemical Co. Ltd. 164 CTR 78: 245 ITR 384, which was confirmed by the Hon ble Supreme Court, in CIT vs. Indo Nippon Chemicals Co. Ltd. 182 CTR 291: 261 ITR 275, to submit that whatever method the AO adopts after invoking the provisions of s. 145, it has to be consistent with the accepted principles of accountancy. Now coming to the objection of lower Revenue authorities that valuation of opening stock also should have been done on the same basis on which closing stock was valued. In the case of J.B. Chemicals Pharmaceuticals Ltd., it was held that modvat credit available to the assessee had to be included by valuing closing stock, sales and purchases and it was not necessary that opening stock should also be disturbed.


appeal has been filed by assessee against order dt. 10th Aug., 2006 of learned CIT(A)-II, Kanpur, for asst. yr. 2002-03. only ground raised by assessee is that learned CIT(A) erred in law and on facts in confirming addition of Rs. 1,30,087 on account of change in method of valuation of closing stock in accordance with AS-2 issued by Institute of Chartered Accountants of India. assessee, private limited company, was engaged in business of manufacturing of multi layer and mono layer films and was also C&F Agent of GAIL. AO noticed that during accounting period relevant to asst. yr. 2002-03, assessee had changed method of valuation of closing stock of finished goods and work-in-progress from net realizable value to lower of cost or net realizable value . This change had resulted in net profit being decreased by Rs. 1,30,087. In reply to AO s query, assessee explained that it had changed its accounting policy of valuation of stock to follow mandatory AS-2 as per which closing stock of finished goods and work-in-progress had to be valued at lower of cost or net realizable value . It was further pointed out that valuation of closing stock at lower of cost or net realizable value was only recognized accounting principle, in support of which assessee relied upon decisions of Hon ble Supreme Court in Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) and A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133: (1991) 189 ITR 285 (SC). AO, however, did not accept assessee s contention and observed that assessee had been valuing closing stock of finished goods and work-in-progress at net realizable value since last many years and there appeared no reason to change accounting policy except to reduce taxable profit during accounting year relevant to assessment year under consideration. He further observed that claim of assessee regarding change in method of accounting could not be accepted because no impact of same nature had been given in value of opening stock. He, thus, concluded that sole purpose of change in accounting policy was to reduce t h e taxable profits by Rs. 1,30,087 and change was not bona fide. He, accordingly, rejected change in method of valuation of closing stock and made addition of Rs. 1,30,087. learned CIT(A) confirmed order of AO, inter alia, observing as under: "Even if, it is accepted that appellant had changed method of accounting following guidelines issued by ICAI, for purposes of IT, provisions of s. 145 will have to be followed. For ascertaining true profits of year, both opening stock and closing stock have to be valued by same method. In case of appellant, opening stock has been valued at net realizable value but closing stock has been valued at cost or net realizable value whichever is lower. Either appellant adopts revised method for both opening stock and closing stocks or else he has to follow old system, where again opening and closing stocks are valued by same method." learned counsel submitted that in view of insertion of s. 211(3)(c), by Companies (Amendment) Act, 2000, it has now become mandatory for companies to follow mandatory accounting standards issued by Institute of Chartered Accountants of India. He submitted that in view of mandatory requirement of law, assessee had to effect change in valuation of closing stock and therefore, it cannot be said that change in accounting policy was made with intention to reduce taxable income of company. He further submitted that changed accounting policy has consistently been followed in all subsequent years. In regard to observations of lower Revenue authorities regarding simultaneous change being not effected in opening stock valuation, learned counsel submitted that opening stock need not be changed. In this regard, learned counsel relied on following decisions: (1) Ram Luxman Sugar Mills vs. CIT (1967) 63 ITR 51 (All); (2) CIT vs. Mopeds India Ltd. (1988) 173 ITR 347 (AP); (3) IB. Chemicals & Pharmaceuticals Ltd. vs. Addl. CIT (2006) 10 SOT 362 (Mumbai). learned counsel further submitted that changed method of valuation of closing stock adopted by assessee is commercially accepted mode of valuation of closing stock and relied on decision of Hon ble Bombay High Court in case of CIT vs. Indo Nippon Chemical Co. Ltd. (2000) 164 CTR (Bom) 78: (2000) 245 ITR 384 (Bom), which was confirmed by Hon ble Supreme Court, in CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291: (2003) 261 ITR 275 (SC), to submit that whatever method AO adopts after invoking provisions of s. 145, it has to be consistent with accepted principles of accountancy. We have considered rival submissions and have perused record of t h e case s. 210 of Companies Act requires board of directors of company to place at every annual general meeting balance sheet as at end of accounting period of company and P&L a/c for that period. Sec. 211 of Companies Act deals with form and contents of balance sheet and P&L a/c. basic requirement of this section is that balance sheet of company shall give true and fair view of state of affairs of company at end of financial year and every P&L a/c of company shall show true and fair view of profit or loss of company at end of financial year. balance sheet as well as P&L a/c is required to be prepared as per Sch. VI of Companies Act. In order to ensure that both these accounting statements present state of affairs of company as per requirements of Companies Act, specific provisions have been incorporated in Act itself. In sub-s. (3)(a) to (3)(c) of s. 211 inserted by Companies (Amendment) Act, 1999 (with retrospective effect from 31st Oct., 1998), it was provided that P&L a/c and balance sheet of company had to comply with Accounting Standards. As per sub-s. 3(c) "accounting standards" means standard of accounting recommended by Institute of Chartered Accountants of India constituted under Chartered Accountants Act, 1949, as may be prescribed by Central Government in consultation with National Advisory Committee on accounting standards established under sub-s. (1) of s. 210A. It is not disputed that AS-2 issued by Institute of Chartered Accountants of India has been made mandatory in case of companies. This accounting standard deals with valuation of inventories. As per cl. 5 of this AS-2, inventories should be valued at lower of cost and net realizable value . Therefore, assessee had no option but to value its closing stock of finished goods and work-in-progress at lower of cost or net realizable value instead of valuing at net realizable value as in earlier years. Since change in method of accounting had been made on account of statutory requirements, therefore, it cannot be branded as mala fide change in method of valuation of closing stock. Now coming to objection of lower Revenue authorities that valuation of opening stock also should have been done on same basis on which closing stock was valued. This objection is not tenable in law. Before considering issue any further, it has to be kept in mind that valuation of closing stock is not source of profit to concern but has to be made in order to determine true profits of current year as was held by Hon ble Supreme Court in case of Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC). It is well-settled principle of accounting that closing stock of one year telescope in opening stock of subsequent year and it is not vice versa. effect on profit due to change in method of valuation of closing stock gets transferred to subsequent year s profit. opening stock of subsequent year also .gets reduced to same extent thereby enhancing profits of subsequent year. This principle of accountancy has judicial recognition also. first decision in this regard is of Hon ble Allahabad High Court in case of Ram Luxman Sugar Mills (supra), wherein it was held that course adopted by ITO of revaluing opening stock of 1949-50 at cost merely because assessee had valued closing stock at cost was not justified in law. Similarly, in case of Mopeds India Ltd. (supra), Hon ble A.P. High Court, inter alia, held that Tribunal was justified in holding that CIT(A) was not correct in directing ITO to revalue opening stock also consistently along with closing stock. In this case, CIT(A) had reached conclusion that change in method of valuation of closing stock was bona fide and had directed AO to revalue opening stock on basis of which closing stock was valued. In case of J.B. Chemicals & Pharmaceuticals Ltd. (supra), it was held that modvat credit available to assessee had to be included by valuing closing stock, sales and purchases and it was not necessary that opening stock should also be disturbed. Thus, it is now well-settled that opening stock need not be disturbed when there is bona fide change in method of valuation of closing stock. In view of aforementioned discussion, this ground of appeal is allowed. In result, appeal of assessee is allowed. In result, appeal of assessee is allowed. *** UNIFLEX INDUSTRIES (P) LTD. v. INCOME TAX OFFICER
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