IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : H : NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
ITA No.2071/Del/2008
Assessment Year : 2000-2001
Whirlpool of India Ltd., Vs. Addl. Commissioner of Income
Plot No.40, Sector-44, Tax,
Gurgaon, Range-18,
Haryana. New Delhi.
PAN : AAACK1024B
(Appellant) (Respondent)
Assessee by : Shri Rupesh Jain, Advocate
Revenue by : Shri A.K. Mishra, CIT, DR
ORDER
PER A.D. JAIN, JUDICIAL MEMBER
This is Assessee's appeal for Assessment Year 2000-01 against
the order dated 07.02.2008 passed by the CIT (A)-IX, New Delhi, taking
the following grounds:-
"1. That the Commissioner of Income Tax (Appeals) erred on
facts and in law in upholding the addition of Rs.3,06,53,000/-
made by the Assessing Officer on account of rejection of the
change in the method of valuation of closing stock.
1.1 That the Commissioner of Income Tax (Appeals) erred on
facts and in law in observing that there was no bona fide
need/coherent reason to change the method of valuation of
closing stock, thereby conforming the action of the Assessing
Officer in rejecting the change."
2. The facts are that according to the assessment order, the
Assessing Officer noticed that as per Annexure-III of the assessee's Tax
2 ITA No.2071/Del/2008
Audit Report, the assessee's auditors had mentioned, inter alia, as
follows:-
iv) The stock of Raw Materials, Loss for the year is over-
Components and Work in stated by Rs.306.53
Progress, which were hitherto Lacs.
valued at cost, have been valued
at lower of cost and net
realizable value.
3. On query, the assessee submitted before the Assessing Officer
that during the year, it had changed the method of valuation of its
stock of raw material, components, WIP, etc., from cost basis to lower
of cost or net realizable basis; that as recommended by the Institute of
Chartered Accountants of India (ICAI) through its Revised Guidelines
for valuation of stock, i.e., AS-II, which is mandatory in nature, the
assessee company had made changes in the valuation of stock; and
that since the said change in the valuation of stock was due to the
mandatory application of AS-II, for the accounting period starting from
01.04.1999, the said change should be accepted.
4. The Assessing Officer, however, did not find the aforesaid stand
taken by the assessee to be acceptable, since according to the
Assessing Officer, except the Guidelines of the ICAI, no other reason
had been advanced by the assessee to justify the change in the
method of valuation of stock. The Assessing Officer was of the opinion
that these Guidelines are mandatory in nature so far as the calculation
of a particular method is concerned, but they can never be mandatory
as far as regards which method of accounting is to be adopted; and
that since the assessee had changed its method of accounting which
had consistently been followed, the contentions of the assessee were
being rejected and the excess claim of loss of ` 306.53 lacs was being
added back.
3 ITA No.2071/Del/2008
5. By virtue of the impugned order, the Ld. CIT (A) confirmed the
findings of the Assessing Officer on this issue, holding as follows:-
"...... The assessee has been following the earlier method since
the very inception of the company. Change in method of
accounting is not prohibited. However, it is settled law that the
change must be due to valid reasons and should be for
legitimate business needs of the assessee. The only reason
forwarded by the assessee is that the Guidelines of the Institute
of Chartered Accountants recommends such change. The
Guidelines of the Institute are mandatory for its members.
However, they do not override the Income-tax Act. I am of the
opinion that the assessee has not been able to bring on record
sufficient and adequate reasons for the change in method of
accounting for valuation of closing stock. In light of this, I,
therefore, hold that Assessing Officer's action in this regard was
correct and this ground is dismissed."
6. Aggrieved, the assessee is in further appeal before us.
7. Challenging the impugned order, the ld. counsel for the assessee
has contended before us that the Ld. CIT (A) has erred in upholding the
addition of ` 3,06,53,000/- made by the Assessing Officer on account of
rejection of the change in method of valuation of closing stock; that
while doing so, the Ld. CIT (A) has erred in observing that there was no
bona fide need or coherent reason to change the method of valuation
of closing stock; that the assessee had been valuing the closing
inventory, spares and work in progress (WIP) on cost basis, following
the first in first out method; that during the relevant assessment year,
the assessee, in line with the accounting treatment prescribed in
Accounting Standard-2 issued by the Institute of Chartered
Accountants of India, which was mandatory w.e.f. 1.4.1999, changed
the method of valuation of closing stock of raw materials, components,
WIP, etc. from cost to lower of cost or net realizable basis. The
valuation basis as per AS-2 was scientific and rational method to work
out the correct value of the closing stock of inventories and profits;
that Sub-section 3A to 3C of Section 211 of the Companies Act, 1956,
4 ITA No.2071/Del/2008
postulates that the company should prepare its financial statements in
compliance with the accounting standards issued by the ICAI. The said
sub-section was introduced by the Companies (Amendment) Act, 1999,
w.r.e.f. 31.10.1998; that changed method resulted in lower valuation to
the extent of ` 3,06,53,000/-; that the Assessing Officer has added `
3,06,53,000/- being the diminution in the value of closing stock, as a
consequence of change in the method of valuation thereof, on the
ground that the assessee has increased its losses; that the CIT (A)
observed that merely because the method is prescribed by the AS
issued by the ICAI, cannot ipso facto be the reason for change in
method of valuation of inventory; that in the following cases, the
Courts have held that bona fide change in the method adopted by the
assessee for the valuation of the closing stock, in conformity with the
AS-2 issued by the ICAI, is allowable:-
i) `CIT vs. Indo Rama Synthetics (I) Ltd.', 180 Taxman 35 (Del)
ii) `CIT vs. Dalmia Cement (Bharat) Ltd.', 215 ITR 441 (Del)
iii) `CIT vs. Corborandum Universal Ltd.', 149 ITR 759 (Mad) (SLP
of the Department dismissed by the Hon'ble Supreme Court)
iv) `Finolex Pipes Ltd. vs. DCIT', 68 TTJ 422 (Del)
v) `DCIT vs. Discount and Finance House of India Ltd.', 14 SOT
334 (Mum)
vi) `Uniflex Industries (P) Ltd. vs. ITO', (2007) 15 SOT 246
(Lucknow)
vii) `DCIT vs. Hinduja Finance Corpn. Ltd.', ITA No.8726/Mum/2004
and ITA No.7664/Mum/2004 (Mumbai)
viii) `CIT vs. George Oakes Ltd.', 2007-TIOL-361-HC-MAD-IT
ix) `DCIT vs. Caprihans (I) Ltd.', 67 ITD 185 (Mum);
that the method of valuation of closing stock lower of cost or market
price, was recognized by the courts in following cases:-
5 ITA No.2071/Del/2008
i) `CIT vs. British Paints India Ltd.', 188 ITR 44 (SC)
ii) `Chainrup Sampatram vs. CIT', 24 ITR 48 (SC)
iii) `Ramswarup Bengalimal vs. CIR', 25 ITR 17 (All)
iv) `K. Mohammad Adam Sahib vs. CIT', 56 ITR 360 (Mad)
v) `India Motor Parts and Accessories (P) Ltd. vs. CIT' 60 ITR 531
(Mad)
vi) `CIT vs. Soma Textiles and Industries Ltd.', 253 ITR 137;
that in the following cases also, it has been consistently held that if
there is a bona fide change in the method of accounting which is
consistently followed, no adverse inference could be drawn:-
i) `E.I.D. Parry (India) Ltd. vs. DCIT', 46 ITD 387 (Mad)
ii) `Jackson Engineers (P) Ltd. vs. ITO', 31 ITD 79 (Del)
iii) `Gujarat Machinery Manufacturing Ltd. vs. ITO', 42 ITD 35
(Ahd)
iv) `DCIT vs. ITC Hotels Ltd.', (2004) 1 SOT 703 (Bang)
v) `Maharashtra Land Development Corpn. Ltd. vs. ITO', 36 ITD
118 (Pune)
vi) `Prajatantra Prachar Samity vs. ITO', 39 TTJ 280 (Ctk)
vii) `United Credit Ltd. vs. ACIT', 60 ITD 367 (Cal)
viii) `Hero Honda Motors Ltd. vs. JCIT', 103 ITD 157 (Del)
ix) `National Aluminium Co. Ltd. vs. DCIT', 101 TTJ 948 (Cuttack)
x) `CIT vs. B. Amrithlakshmi', 2007-TIOL-417-HC-MAD-IT
xi) `CIT vs. Destiny Investment Pvt. Ltd.', 218 ITR 232 (MP)
xii) `Jaipur Taj Enterprises Ltd. vs. ITO', 42 TTJ 200 (Del)
xiii) `Punjab Communications Ltd. vs. DCIT', 84 ITD 505 (Chd.)
xiv) `Snowhite Food Products Co. Ltd. vs. CIT', 141 ITR 861 (Cal)
xv) `JCIT vs. Pact Securities & Financial Ltd.', 86 ITD 115 (Hyd)
xvi) `DCIT vs. Venus Wire Industries Ltd.' 99 TTJ 561 (Mum)
6 ITA No.2071/Del/2008
8. The Ld. DR, on the other hand, has placed strong reliance on the
impugned order. It has been contended that the assessee has utterly
failed to controvert the Assessing Officer's finding to the effect that the
Guidelines of the ICAI do not justify the change in the method of
accounting adopted by the assessee; and that the assessee has, till
this stage, not given any other reason for changing the method of
valuation of closing stock.
9. We have heard the parties and have perused the material on
record. AS-II issued by the ICAI, it is seen, has been made mandatory
w.e.f. 01.04.1999, relevant to the year under consideration. It was this
mandate which prompted the assessee company to change its method
of valuation of closing stock from that of cost to that of lower of cost or
net realizable value. As correctly pointed out, Section 211 of the
Companies Act, 1956 enjoins upon the assessee to comply with the
Accounting Standards issued by the ICAI in preparing its financial
statements.
10. The basic decision with regard to the issue at hand is that of `CIT
vs. Corborandum Universal Ltd.' (supra), wherein the method of
valuation of stock was changed from that of total cost to that of direct
cost. It was held that the change was bona fide and was to be adopted
in future and that it was, therefore, justified. `Corborandum Universal
Ltd.' (supra) was considered in `CIT vs. Indo Rama Synthetics (I) Ltd.'
(supra). Therein, the Hon'ble High Court upheld the decision of the
Tribunal to the effect that change in method of valuation of inventory
was a result of recommendation in consonance with AS-II on valuation
of inventories and that the assessee had followed the changed method
consistently in the subsequent years. It is also noticed that in `Indo
Rama' (supra), it was taken note of that the SLP filed by the
7 ITA No.2071/Del/2008
Department against the decision in `Corboration Universal Ltd.' (supra)
was dismissed by the Hon'ble Supreme Court.
11. The issue is as to whether the change effected by the assessee
in its method of valuation of closing stock was bona fide. Indeed, once
the Companies Act, in Section 211 thereof, prescribes that the
assessee shall follow the Accounting Standards issued by the ICAI in
preparing its financial statements and AS-II, which was made
mandatory w.e.f. 01.04.1999, relevant to the year under consideration,
has been conformed to by the assessee by way of change in its
method of valuation of closing stock, it cannot be but said that the
action of the assessee in changing its method of valuation of closing
stock was bona fide. Moreover, undeniably, the changed method of
valuation of closing stock has consistently been followed by the
assessee in the years subsequent to the year under consideration. In
`Jackson Engineers (P) Ltd' (supra), `Hero Honda Motors Ltd.' (supra) `B.
Amrithlakshmi' (supra), `Jaipur Taj Enterprises Ltd.' (supra) and `Venus
Wire Industries Ltd.' (supra), amongst other decisions, it has been
repeatedly held that if there is a bona fide change in the method of
accounting which is consistently followed, no adverse inference can be
drawn against the assessee. Too, in `British Paints' (supra) and
`Chainrup Sampatram' (supra), the method of valuation of closing
stock at the lower of the cost or the market price has been legally
recognized. Then, change in method of valuation of closing stock in
conformity with AS-II has been held to be a bona fide change in, inter
alia, `Dalmia Cement' (supra) and `Finolex Pipes' (supra).
12. Therefore, we do not find ourselves ad idem with the observation
of the Ld. CIT (A) that the reason of the mandate of the Guidelines, i.e.,
AS-II, issued by the ICAI, is not a valid reason for the change adopted
by the assessee and it is not for the assessee's legitimate business
8 ITA No.2071/Del/2008
needs. Also, once the Companies Act mandates the following and
compliance of the Accounting Standards issued by the ICAI, the CIT
(A)'s observation that the ICAI Guidelines do not override the Income-
tax Act, causes no detriment to the case of the assessee and, as such,
the Ld. CIT (A) clearly erred in upholding the addition made by the
Assessing Officer.
13. In view of the above discussion, evidently, the reasons given by
the Assessing Officer as well as the Ld. CIT (A) are not good enough to
reject the change in method of valuation of closing stock, as adopted
by the assessee company, and we hold so. Hence, finding justification
in the grievance raised by the assessee through the grounds of appeal
taken, the same are accepted.
14. In the result, the appeal filed by the assessee is allowed.
The order pronounced in the open court on 12.04.2013.
Sd/- Sd/-
[T.S. KAPOOR] [A.D. JAIN]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 12.04.2013.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
By Order,
Deputy Registrar,
ITAT, Delhi Benches
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