Tc/879/2007 Of Commissioner Of Income Tax v. B.amrithalakshmi

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 04.06.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.879 and 880 of 2007 Commissioner of Income Tax,Coimbatore. Coimbatore. ..Appellant in boththe T.Cs.VsB.Amrithalakshmi ..Respondent in boththe T.Cs. Appeals under Section 260A of the Income-tax Act, 1961against the order of the Income Tax Appellate Tribunal, MadrasBench 'B', Chennai in I.T.A. Nos.2043 & 2044(Mds)/96 dated24.04.2002 for the assessment years 1992-93 and 1993-94. againstITA No.924-C & 923-C/95-96 on the file of the Commissioner ofIncome Tax, Coimbatore, in PA.No.PT.6018/Cont.I/CBE dated16.2.1996 on the file of the Asst Commissioner of Income TaxCoimbatore. For Appellant :Mrs.Pushya Sitaraman,Sr.Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.)These appeals are filed under Section 260A of the IncomeTax Act, 1961 by the Revenue, against the order of the IncomeTax Appellate Tribunal, Madras Bench 'B', Chennai in I.T.A.Nos.2043 & 2044(Mds)/96 dated 24.02.2002 raising the followingsubstantial questions of law:- 1. Whether in the facts and circumstances ofthe case, the Tribunal was right in holdingthat the switch over from valuation as permarket price to cost price was correct, beinga substitution of one method by another https://hcservices.ecourts.gov.in/hcservices/ scientific method?2. Whether in the facts and circumstances ofthe case, the Tribunal was right in holdingthat the assessee was right in changing overthe method of valuation, when it does notreflect the true picture of profits andgains? 2.The facts leading to the above substantial questionsof law are as under: The assessee is a dealer in shares. The relevant assessmentyears are 1992-93 and 1993-94 and the corresponding accountingyears ended on 31.03.1992 and 31.03.1993 respectively. For theassessment year 1992-93, the assessee filed Return of income on24.02.1994 admitting a total income of Rs.3,85,540/-. TheReturn was processed under Section 143(1)(a) of the Income-taxAct ("Act" in short) and notice under Section 143(2) was issued.Later the assessment was finalised under Section 143(3) of theAct determining the total income at Rs.11,91,910/-. For theassessment year 1993-94, the assessee filed Return of income on01.02.1995 admitting total income of Rs.3,23,960/-. The Returnwas processed under Section 143(1)(a) of the Act and noticeunder Section 143(2) was issued. The assessment was completedas "N.A." for the said assessment year. For both the assessmentyears, the assessee changed the method of valuation of closingstock of shares from market price to cost price. The AssessingOfficer was of the view that the valuation of the shares held asstock in trade has to be valued at market price only as againstthe claim of the assessee to value at cost. Aggrieved by theorders, the assessee filed appeals to the Commissioner ofIncome-tax (Appeals). The C.I.T.(A) decided the cases in favourof the assessee and held that the valuation of the shares heldas stock in trade by the assessee is correct. Aggrieved, theRevenue filed appeals to the Income-tax Appellate Tribunal("Tribunal" in short). The Tribunal dismissed the appeals andconfirmed the orders of the C.I.T.(A). Hence the Revenuepreferred the present tax cases. 3.Learned Standing Counsel appearing for the Revenuesubmitted that the Tribunal erred in approving the irregularadoption of change in method of valuation of shares held asstock in trade from market price to cost price. It is alsosubmitted that the change in valuation does not result in thedetermination of the true profits for tax purpose and the sameis arbitrary and does not give a true picture of the profit andhence the order of the Assessing Officer is in accordance withlaw. 3.Learned Standing Counsel appearing for the Revenuesubmitted that the Tribunal erred in approving the irregularadoption of change in method of valuation of shares held asstock in trade from market price to cost price. It is alsosubmitted that the change in valuation does not result in thedetermination of the true profits for tax purpose and the sameis arbitrary and does not give a true picture of the profit andhence the order of the Assessing Officer is in accordance withlaw. 4.Heard the counsel. The Tribunal as well as the C.I.T.(A) have given a finding that the changed method has beenregularly followed by the assessee and it is only a substitution https://hcservices.ecourts.gov.in/hcservices/ of one method by another scientific method. The first appellateauthority considered the matter in detail and held as follows:-"2. Shri G.Sarangan, Advocate and Shri R.Mahadevan, Chartered Accountant appearingbefore me on behalf of the appellant havevery strongly objected to the action of theassessing authority. And in my opinion,their contentions are well founded also. Asregards the decision in 111-ITR-53 relied onby the Assistant Commissioner, the facts areclearly not applicable to the present case.It cannot certainly be said that the methodadopted by the assessee in this case doesnot result in the determination of the trueprofits. Valuation of stock at cost price,market price, or the lesser of the costprice or market price are all accepted andestablished principles of accountancy. Ifan assessee follows such a method regularly,it cannot be said that it is improper. Thequestion then is whether there wassufficient reason or justification fordeparting from the method followed earlier.First of all it must be noted that theassessment year 91-92 was the first year ofbusiness for the assessee and thereforethere is no meaning in saying that themethod of valuation followed for that yearwas the method which was being hithertoadopted by the assessee. Such a valuationhad been adopted for a solitary year. Thereason for the change had also beensatisfactorily explained by the assessee.Due to wide range of fluctuation in theshare price during February, 92 to June, 92,the value of shares held as stock as on31-3-92 would have been artificially boostedand abnormally high if it had been valued atmarket price; it would not have reflectedthe correct position. It was because ofthis that the appellant switched over tovaluation at cost price which was morerealistic. Incidentally, the learnedrepresentatives also point out to me thatthe market price which was adopted forassessment year 90-91 was less than the costprice for that year and the cost price whichhasbeenadoptedconsistentlyfromassessment year 92-93 onwards has been lessthan the market price. Thus the valueadopted for all the years has been actually the lesser of the cost price or marketprice. As regards the decision cited by theassessing authority as reported in 171-ITR-8, there is clearly a mistake in thecitation. There is no such decision in 171-ITR. The name of the case has also not beenquoted by the Officer. However, the actualratio of the decision relied on by theassessing authority was to the effect thatan assessee cannot be allowed to arbitrarilychange the method of accounting to suit itspurposes. This decision has clearly norelevance here since the appellant has notresorted to such an arbitrary change.Instead, I must observe that an assessee isentitled to adopt valuation at cost price ormarket price or the lesser of cost or marketprice. This does not mean that the choiceonce made by the assessee can never bechanged thereafter. An assessee cancertainly change the method if it is bonafide and it is regularly followedthereafter. There are several decisions insupport of this view. In MelmouldCorporation vs. CIT (202-ITR-789) theBombay High Court has categorically heldthat irrespective of the basis adopted forvaluation in the earlier years, an assesseecan change the method of valuation providedsuch changed method is an accepted principleof accountancy and such changed method isregularly followed thereafter. It is truethat the change effected should not becasual, for temporary gain, or for temporarypurposes restricted to one year. The Courtalso held that there was no merit in theargument that in the event of a change inthe method of valuation, the opening stockshould have also been suitably revalued.The value of opening stock cannot bedisturbed merely because the closing stockis valued on a different method. The valueof opening stock for this year has to benecessarily the value of closing stock forthe earlier year. It is true that in theyear of change of method of valuation ofclosing stock there is bound to be someanomaly; but that will get absorbed incourse of time as the new method is going tobe applied on a permanent basis thereafter.In the absence of any finding to the effect that the assessee had resorted to an ad hocchange in valuation merely to secure anytemporary gain or advantage, I hold that theassessee is entitled to change the method ofvaluation of closing stock especiallybecause the new method adopted is based onsound principles of accountancy and theChartered Accountant has also submitted thatthe changed method has been regularlyfollowed from this year onwards. IthereforedeletetheadditionofRs.7,12,280/- made on this account for theassessment year 92-93." The above finding given by the C.I.T.(A) was confirmed by theTribunal. It is also seen that the assessee's first year ofbusiness was the assessment year 1991-92 and for the said year,the assessee valued the closing stock of shares at the marketvalue as this was less than the cost price. From the assessmentyear 1992-93, the assessee changed the method of valuation tocost price as that happened to be less than the market price.Further it is seen that there is no finding to the effect thatthe assessee had resorted to an adhoc change in valuation merelyto secure any temporary gain or advantage. The concurrentfindings given by the first appellate authority as well as theTribunal are based on valid materials and evidence. Recently,the Supreme Court in the case of Commissioner of Income-tax Vs.P.Mohanakala (291 ITR 278) held that whenever there is aconcurrent factual finding by the authorities below, the sameshould be accepted and no interference should be called for bythe High Court. Under these circumstances, we do not find anyerror or legal infirmity in the order of the Tribunal so as towarrant interference. 5.In view of the foregoing reasons, no substantialquestions of law arise for consideration of this Court andaccordingly, the tax cases are dismissed. No costs. km To 5.In view of the foregoing reasons, no substantialquestions of law arise for consideration of this Court andaccordingly, the tax cases are dismissed. No costs. km To 1. The Assistant Registrar, Income-tax Appellate Tribunal, Madras Bench 'B', Chennai. 2. The Secretary, Central Board of Direct Taxes, New Delhi. 3. The Commissioner of Income-tax (Appeals), Coimbatore.4. The Assistant Commissioner of Income-tax, Central Circle-I, Coimbatore.+ 1 cc to M/s. Pushpa sitaraman, SCGS Counsel CCSR 31672MBS(CO)SR/18.6.2007 T.C.(A) Nos.879 and 880 of 2007