IT: Regular method followed by assessee for valuation of closing stock, and accepted by department in earlier years cannot be changed in subsequent assessment year without giving any reason for same
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[2013] 38 taxmann.com 343 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
The Kisan Cooperative Sugar Factory Ltd., Pilibhit*
RAJIV SHARMA, AND DR. SATISH CHANDRA, JJ.
IT APPEAL NO. 1 OF 2004†
SEPTEMBER 3, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock [Change in method of valuation] - Assessment year 1987-88 - Assessee was engaged in manufacture and sale of sugar - It had to supply 55 per cent of its production to Government as levy sugar at rate fixed by Government - It was valuing its closing stock by bifurcating same as levy sugar and free sale sugar at cost or market price whichever is lower - In case of levy sugar, market value was lower than cost and, hence, such stocks were valued at market price, while free sale sugar was valued at cost because market price of free sale sugar was higher than cost - Assessing Officer rejected assessee's method of valuation of closing stock and taking levy sugar and free sugar at same price made certain addition - Whether in view of regular method adopted by assessee which had been accepted by department in earlier years, method of valuation could not be changed in relevant assessment year - Held, yes [Paras 9 & 10] [In favour of assessee]
D.D. Chopra and Prashant Kumar for the Appellant. R.A. Shankhdhar for the Respondent.
JUDGMENT
1. Present appeal has been filed by the department under Section 260-A of the Income Tax Act, 1961, against the judgment and order dated 22.08.2003, passed by the Income-tax Appellate Tribunal, Lucknow in I.T.A.No.452/All./97, for the assessment year 1987-88.
2. On 16.01.2004, a coordinate Bench of this Court has admitted the appeal on the following substantial question of law:—
"Whether the Income Tax Appellate Tribunal was justified in confirming the deletion of Rs.75,84,346/- on account of low valuation of closing stock made by the CIT (Appeals) specially when the matter is covered by the decision of Apex Court in the case of CIT v. British Paints India Ltd.[1991] 188 ITR 44/54 Taxman 499 in favour of the appellant."
3. The brief facts of the case are that the assessee is a cooperative society, who is engaged in the manufacturing and sale of sugar in its factory at Majhola in District Pilibhit. The assessee has filed the loss return subject to carry forward of unabsorbed losses and depreciation of earlier years. But the A.O. has passed an order under Section 143(3), where he made the addition pertaining to the valuation of the closing stock. The assessee has shown the value of the closing stock of sugar at Rs.6,62,61,378/-. But the A.O. found its too low. So, he rejected the assessee's method of valuation of closing stock and took the levy sugar and free sugar at the same price and made the addition of Rs.75,69,142/-. But the same was deleted by the first appellate authority as well as by the Tribunal vide its impugned order. Being aggrieved, the department has filed the present appeal.
4. With this background, Sri Sidharth Dhaon, learned counsel for the department has justified the A.O's order. He submits that the assessee has valued its closing stock of sugar by bifurcating the closing stock of sugar as levy sugar and free sale sugar. The Government had earmarked 55% of this year's production to be supplied to the Government as levy sugar @ Rs.422/- per qtl. and the balance 45% production was allowed to be sold in the open market as free sale sugar. Absolutely, there is no difference in the quality of free sale sugar and levy sugar and the cost of production comes to Rs.524.94 per qtl. He further submits that the procurement price fixed by the Government for levy sugar does not constitute market price. The market price should be adopted on the basis of selling rate as prevailing in the open market.
5. On specific enquiry, learned counsel accepts that the assessee has to supply the quota of levy sugar below its cost price and this affect the trading result of the assessee but such loss is simultaneously compensated by release of free sale sugar which is permitted to be sold at higher price in the open market. The levy sugar and free sale sugar both should be valued by uniform method of either the cost price or the market price, which ever is lower but valuation as adopted by the assessee leads to incorrect results. For rejecting the earlier method of accounting, learned counsel relied on the ratio laid down in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC), where it was observed that estoppel is not applicable in the taxation matter and every assessment year is independent assessment year.
6. Learned counsel also took an example of M/s L.H. Sugar Factory Ltd. where the closing stock of levy sugar as well as free sale sugar was equally considered on cost basis. So, he submits that the value of sugar of the assessee can be taken as on equal basis @ Rs.550 per qtl. But the assessee has shown the cost to Rs.531.66 per qtl. Lastly, he justified the addition made by the A.O.
7. On the other hand, learned counsel for the assessee justified the impugned order passed by the Tribunal. He further submits that in the earlier years, the same method was consistently followed by the assessee. The matter need not to be disturbed when the accounts were properly audited. There is no dispute regarding the cost of production for sale price in the levy sugar. There is no dispute regarding quantity of the free sale sugar and levy sugar out of the current production. The assessee in the past was valuing the closing stock of free sale sugar and levy sugar according to the market price or cost price whichever was low.
8. We have heard learned counsel for the parties at length and gone through the material available on record.
9. So far as the levy sugar is concerned, the quota is fixed by the Government every year and sales are made accordingly. Since there is no loss in the present year as well as in the subsequent year, there will be no impact of any change method of the book result. In view of the regular method adopted by the assessee in the past and accepted by the department, the method of valuation can not be changed during the assessment year under consideration. No reason has been given by the A.O. for changing the said method. The identical addition in the earlier year was deleted.
10. By considering the totality of the facts and circumstances of the case, it may be mentioned that the method valuation of closing stock is cost or market value whichever is lower. In case of levy sugar, the market value is lower than the cost. Hence, such stocks are valued as market price while the free sale sugar is valued at cost because market price of the free sale sugar was higher than the cost. When it is so, then the assessee is entitled to value its closing stock at cost price of market price which ever is lower. Moreover, in this regard, there is a concurrent finding of both the appellate authorities and in the peculiar facts and circumstances, the same is not required to be disturbed. Hence, we find no reason to interfere with the impugned order passed by the appellate authorities and the same is hereby sustained along with the reasons mentioned therein.
11. The answer to the substantial question of law is in favour of the assessee and against the department.
12. In the result, appeal filed by the department is dismissed.
Regards
Prarthana Jalan
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