Commissioner of Income Tax vs H.P. State Civil Supplies Corporation Ltd.

Deepak Gupta, J.—This appeal by the Revenue has been admitted on the following questions of law:

(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the change in the method of valuation of closing stock by the assessee from FIFO method to average cost method was justified ?

(ii) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 17,33,319 made on account of change in the method of valuation of closing stock ?

The undisputed facts of the case are that the assessee, i.e., H. P. State Civil Supplies Corporation prior to the assessment year 1992-93 was following the "first in first out" (FIFO) method for evaluating the costs of its inventories. In the assessment year in question, the assessee changed the system and started following the system of "average cost valuation". The Assessing Officer came to the conclusion that the assessee could not change this method and rejected the plea of the assessee justifying its action of changing the method. On this basis, an amount of Rs. 17,33,319 was added to the income of the assessee. The assessee filed an appeal and it was urged that the assessee had as many as 250 separate depots functioning under it through the State of Himachal Pradesh and, therefore, it was difficult to apply the FIFO method and as such, the assessee had changed the method of working out the cost of stock to the "average cost valuation" method. The Commissioner, Income Tax held that the assessee had failed to show any resolution of the board of directors permitting it to change the method of accounting. He also held that no permission has been sought from the Income Tax authorities for changing the accounting method. According to him, the assessee had been following the FIFO method for many years and should not have changed the same and as such rejected the appeal.

Aggrieved by the order of the Commissioner, Income Tax, the assessee approached the Income Tax Appellate Tribunal (for short "the ITAT") in appeal. The Income Tax Appellate Tribunal accepted the plea of the assessee and came to the conclusion that it was the right of the assessee to change the method of valuation of the stock due to practical difficulties faced by it. Both the methods were well accepted methods and both the methods were recognized by the Institute of Chartered Accountants of India. The Income Tax Appellate Tribunal accepted the explanation of the assessee that it faced practical difficulty in segregating the stock because the stocks were kept in more than 250 different locations throughout the State of H. P. The appeal was allowed and now the Revenue has challenged this order in this appeal before this Court.

Shri Vinay Kuthiala, learned Counsel for the Revenue, has relied upon the judgment of the apex court in the Calcutta High Court in Commissioner of Income Tax Vs. National and Grindlays Bank Limited, . In this case, the Calcutta High Court held that the change in the method of valuation of closing stocks if done bona fide and consistently followed in subsequent years cannot be disallowed. Shri Kuthiala also relied upon the judgments of the apex court in Commissioner of Income Tax Vs. Kikabhai Premchand, , Mizar Krishna Annappa Pai and Co. Vs. Commissioner of Income Tax, Mysore, .

We have carefully gone through the aforesaid judgments. None of the judgments is applicable to the facts of the present case. All that said is that a regular system of accounting should be followed. These authorities do not deal with the question as to whether an assessee can change the accounting system or not. Shri Vinay Kuthiala has failed to show us any provision of law which may show that there is a legal bar for changing the accounting method. No requirement of law has been pointed out to show that such change cannot be effected without seeking the permission of the Income Tax authorities.

It is true that the assessee cannot keep changing the system of accounting very frequently so as to avoid payment of tax. In this case, the assessee has given reasonable grounds for changing the method of valuating its stock. The Karnataka High Court in Karnataka State Forest Industries Corporation Ltd. Vs. Commissioner of Income Tax, , clearly held that the assessee has the right to change the method of valuating the stock. It was further held that the Income Tax Officer cannot reject the change only on the ground that the statutory auditor had not agreed to the said system.

Similarly, the Bombay High Court in Melmould Corporation Vs. Commissioner of Income Tax, , held that u/s 145 of the Income Tax Act, 1961, the assessee can adopt a method of valuation which is to be followed by it regularly. It also laid down that the assessee can change the method of valuation. Whenever there is a change in the method of valuation, there may be some distortion or discrepancy in the calculations of profits in the year in which the change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted.

In the present case, we find that the assessee was valuating its stock on the basis of FIFO method. It found that this method was not suitable since the stock was spread out over 250 locations and it would not be easy to valuate the same on the FIFO basis. Therefore, they decided to shift to the average cost basis. Assuming for the sake of argument that by applying this cost method, the income of the assessee got depressed in the relevant assessment year but this deduction in the income would be made over in the subsequent year since the valuation of the remaining stock on an average cost basis would be higher in the subsequent years. Therefore, there was no justification to reject the change in accounting practice of the assessee. Accordingly, both the questions are answered against the Revenue and in favour of the assessee.

We find no merit in this appeal which is accordingly rejected.