COMMISSIONER OF INCOME-TAX VS ANDHRA PRABHA LTD.
1999 P T D 3720
[231 I T R 81]
[Madras High Court (India)]
Before K. A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
ANDHRA PRABHA LTD.
Tax Case No. 892 of 1984 (Reference No.788 of 1984), decided on 09/07/1996.
(a) Income-tax---
----Accounting---Method of accounting---Change, in method ---Assessee entitled to change method for better or more convenient method except that change of method should not interfere in finding true profit.
(b) Income-tax---
Accounting---Method of accounting---Change in method---Valuation of closing, stock ---Assessee engaged in business of printing and publishing newspapers---Special type of alloy used for making types for printing Alloy sent from store room to press room irretrievably lost after use---Alloy so received in press room could not be quantified or evaluated-- Determination of value of closing stock of metal and types---Method of valuation of closing stock changed to exclude value of such alloy in press room from valuation---Change in method of accounting in respect of valuation of closing stock of alloy valid.
The assessee-company was engaged in the business of printing and publishing newspapers. In arriving at the value of the closing stock of metal and types, the assessee used to estimate the value of such metal and types on an ad hoc basis. Since the assessee used a special type of alloy for making types for printing and the alloy so received in the press room could not be easily quantified or evaluated, the assessee chose to change its method of valuation from the previous year relevant to the assessment year 1975-76 onwards so as to exclude the value of such alloy in the press room from the valuation. According to the assessee, the issue of such metal from the store room to the press room was treated as consumption on the ground that the alloy had no other commercial use and had also a short life. The Income-tax Officer did not accept this change and accordingly he valued the alloy as furnished by the assessee at Rs.2,54,705 and added it to the total income of the assessee. On appeal, the Appellate Assistant Commissioner found that the type metal in molten form could be treated as loose tools and, therefore, the treatment of such metal as had been done for the purpose of accounting justified. On further appeal, the Tribunal confirmed the order of the appellate Assistant Commissioner on the grounds that the change in the method of accounting was bona fide and was not intended merely to reduce he tax liability that the change could not he characterised as arbitrary and that it was not uncommon to write off such issues in the case of manufacturing concerns when it was difficult to evaluate the metal after issue from the store room. The Tribunal, therefore, deleted the addition relating to the value of the alloy sent to the press room. On a reference:
Held, affirming the decision of the Tribunal, that it is always open to an assessee to change his method of accounting for a better or more convenient method except that such change in the method of accounting should not interfere in the process of finding out the true profits of the year under consideration. The Tribunal came to the conclusion that there were no mala fides in the change in the method of accounting adopted by the assessee in not valuing the closing stock in the press room and the molten stage in the vat, that in adopting this process there could not be any reduction in tax liability and that once the alloy was sent from the store room to the press room, it was irretrievably lost after use. Therefore the Tribunal was right to deleting the addition of Rs'.2,54,705 being the value of types in molten stage in the vat which was not taken into account while valuing the stock.
Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC); CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC); CIT v. Carborandurn Universal Ltd. (1984) 149 ITR 759 (Mad.) and Indo-Commercial Bank Ltd v. CIT (1962) 44 ITR 22 (Mad.) ref.
C. V..Rajan for the Commissioner.
T. N. Seetharaman for the Assessee.
JUDGMENT
K. A. THANIKKACHALAM, J.----In pursuance of the direction given by this Court on March 7, 1983 the Tribunal referred the following two questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act")
(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition of Rs.2,54,705 being the value of types in molten stage, in the vat which was not taken into account while valuing the stock?
(2) Whether the Appellate Tribunal's finding that the change in the method of accounting is bona fide, is based on valid and relevant materials and is sustainable in law?"
The assessee is a company engaged in the business of printing and publishing newspapers. In arriving at the value of the closing stock of metal and types, the assessee used to estimate the value of such metal and types on an ad hoc basis. Since the assessee used a special type of alloy for making types for printing and the alloy so received in the press room could not be easily quantified or evaluated, the assessee chose to change its method of valuation from the previous year, relevant to the assessment year 1975-76 onwards so as to exclude the value of such alloy in the press room from the valuation. According to the assessee, the issue of such metal from the store room to the press room was treated as consumption on the ground that the alloy had no other commercial use and had also a short life. However, the Income-tax Officer did not accept this change and accordingly he valued the alloy as furnished by the assessee at Rs.2,54,705 and added it to the total income.
On appeal, the Appellate Assistant Commissioner considered that the type metal to molten form could be treated as loose tools and, therefore, the treatment of such metal as had been done for the purpose of accounting was justified. Aggrieved, the Revenue filed a second appeal before the Appellate Tribunal. The Appellate Tribunal accepted the assessee's case that the change in the method of accounting was bona fide and was not intended merely to reduce the tax liability. The Tribunal found that the change could not be characterised as arbitrary and it was not uncommon to write off such issues in the case of manufacturing concerns, when it was difficult to evaluate the metal after issue from the store room. Since the reason given for the change was found to be correct and was also in accordance with the recognised practice in the trade and there being no suggestion of the change being mala fide, the Appellate Tribunal accepted the view taken by the Appellate Assistant Commissioner and confirmed his order
Learned standing counsel appearing for the Department submitted that the assessee has not consistently followed a uniform method. If the molten metal in the vat had no value, the assessee would not have resorted to estimate such value to the past. According to learned standing counsel the addition was justified so as to bring it on par with the real income for the year. Otherwise, the result for this year would be a distorted one. Even on the analogy of loose tools, learned standing counsel submitted, that in view of the text book of accountancy, the loose tools have to be valued both on the opening and closing day to arrive at the annual income. Therefore, according of learned standing counsel in order to arrive at the real profit at the end of lithe year the assessee ought to have estimated the value of the lead, which is under the process of printing the newspaper as alloy in molten form in the vat. In order to support his contention, learned standing counsel relied upon the decision in CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC). On the other hand, learned counsel appearing for the assessee submitted that the assessee used a special type of alloy for making types in printing. This alloy is used either in a lump form or in the form of types. Such alloy is sent to the press room when required for purposes of making types out of such alloy. The alloy that is so received in the press room is in the form of molten stage in a vat. The method of accounting in respect of valuation of the alloy was not only to consider the alloy in the store room, but also to reckon the alloy in molten form in the vat by getting a report from the manager of the section. This was the method that was followed in the past. The assessee later found that there was an element of arbitrary valuation involved and that it would be proper to ignore the alloy, which is in molten form, since the expectation of life for such metal was very limited and that it would not be quite scientific to take the value of such alloy as part of the closing stock. It was stated that every time it is used, the composition of the alloy changes and it loses its utility after some time. It was considered that the amount could be written off once it is issued from the store room. The adoption of the new method was treated as a change in the method of accounting regularly employed by the assessee and distorting the profits of the year. It was further submitted that the method followed by the assessee is justified in respect of the loose tools. For these reasons, it was submitted that Tribunal was correct in accepting the order passed by the Appellate Assistant Commissioner in deleting the addition relating to the value of the alloy sent to the press room.
We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. The point for consideration is, whether the deletion of disallowance of Rs.2,54,705 added by the Income-tax Officer on account of alleged omission to take into account the value of closing stock of materials and types in the press room is in order. We have already set out the facts on which the assessee claimed its relief. According to learned standing counsel, the assessee is not entitled to change the method of accounting so as to interfere with ascertaining the true profits, attributable to the year under consideration. The assessee has hitherto followed a method under which the 'alloy sent to press room was valued as part of the closing stock and the alloy in the press room, which is in a molten state in a vat as part of the closing stock on the basis of the report from the manager of that section. This method was followed in the past. In the assessment year under consideration, the assessee thought that the alloy sent to the press room was considered to be consumed and fully utilised in processing the newspaper, and therefore, nothing remains after it was fully used. In other words, what would be left over would have no significant value. Hence, according to the assessee, the assessee can show only the closing stock value of the alloy in the store room and not alloy which is in the press room in the form of molten state in a vat.
It is always open to an assessee to change his method of accounting for a better or more convenient method. We are not for a moment saying that the assessee is not entitled to change his method of accounting. The assessee is entitled to have his own method of accounting, which is convenient and suitable for his business. The point for consideration is, that such kind of change of method of accounting should not interfere in the process of finding out the true profit of the year under consideration. The addition was made in the present case to neutralise distortion arising in the adjustment. If the change in the method of accounting as in a stock valuation, is bona fide and it is not adopted merely to reduce the tax liability, the change in the method of accounting is always acceptable. We have got to ascertain whether the change is bona fide and whether the new method can be considered to be a reasonable method or better method or a normal method generally considered as appropriate. In so far as loose tools are concerned, the consumption of loose tools could be valued only with, reference to the valuation placed on such-loose tools at the beginning and at the end of the accounting year. In the present case, the analogy between the molten metal in the vat in the press room and the loose tools in the factory may not be quite apt. According to the assessee when once the alloy is sent to the press room, and after the alloy was used repeatedly in the process of news printing, ultimately the alloy would lose all its character, since there is loss of quality and other ingredients of the metal. Therefore, after use, the alloy would become useless and the value of it would be negligible. Therefore, the assessee does not want to include the value of the closing stock of the alloy sent to the press room. This is also because, it was pointed out that in the matter of evaluation of such alloy in the molten stage in the vat, it is almost arbitrary. These are all the reasons for which the Tribunal accepted the, view taken by the Appellate Assistant Commissioner in deleting the disallowance made under this head.
In CIT v. Carborandum Universal Ltd. (1984) 149 ITR 759 (Mad.), this Court, while considering the valuation of stock, method of valuation and change in the method of valuing closing stock from the total cost to direct cost, held thus, (page 770):
"Thus, the adoption of 'direct cost' method by the assessee cannot be questioned by the Revenue as it has been found by the Tribunal that the adoption of this method is bona fide and is a permanent arrangement. The Revenue's only contention is that it was shown to be prejudicial to the 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 the new method adopted by the assessee was detrimental to the Revenue, that alone can never be the basis for denying the right to change the method. Further, even though the change of the method has resulted in a detriment to the Revenue in the year in question, since the method is to-be followed consistently year after year in future, this apparent detriment to the Revenue will get adjusted and disappear. Therefore, 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. So long as the method of valuation adopted by the assessee gets recognition from the practising accountants and the commercial world for valuation of stock-in-trade, the adoption of that method cannot be questioned by the Revenue unless the adoption of that method is found to be not bona fide or restricted for a particular year. "
So also in Indo-Commercial Bank Ltd. v. CIT (1962) 44 ITR 22 (Mad) this Court, while considering the provisions of sections 13 and 15C (1) and (4) Indian Income-tax Act, 1922, held that the method an assessee adopted for valuing his closing stock was a "method of accounting" within the meaning of section 13 of the Indian Income-tax Act, 1922. At any rate, it was an integral part of the mercantile system of accounting. It was further held as under (headnote):
... That in deciding whether the changed method of valuation of closing stock attracted the proviso to section 13, it was not a correct approach to see whether 'the losses of previous years would also enter into the claim made by the assessee for the accounting year. An actual loss sustained by the sale of securities below the cost price could not be disallowed on such a ground. A notional or anticipatory loss resulting from a valuation of the closing stock, which an assessee was permitted to take into account in ascertaining his trading profits, stood on no different footing. It was a concession given to the assessee based on the well-recognised usage of the trade, and the principle underlying that concession was in no way violated when the assessee changed his method of valuation from cost to market value, if the latter was less than the cost price. If the revised basis of valuation was continued thereafter the profits and losses thereafter would be correctly computed. "
In CIT v. British Paints India Ltd., (1991) 188 ITR 44, the Supreme Court, while considering the valuation of stock held thus (headnote):
"Where the market value has fallen before the date of valuation and, at that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value, and thus, anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee."
On the facts, we have already seen that the Tribunal came to the conclusion that there are no mala fides in the method of accounting by way of change adopted by the assessee in not valuing the closing stock in the press room and the molten stage in the vat. The Tribunal also pointed out that in adopting this process, there cannot be any reduction in tax liability. On the facts, the Tribunal came to the conclusion that if once the alloy is sent from the store room to the press room, it would be irretrievably lost after use. Under these circumstances, we consider that there is no infirmity in the order passed by the Tribunal, accepting the method of accounting adopted by the assessee as genuine and bona fide and thereby deleting the disallowance made by the Income-tax Officer. Accordingly, we answer the questions referred to us in the affirmative and against the Department. No costs.
M.B.A./3182/FC Reference answered.