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Change in method of valuation of closing stock under section

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Court :
ITAI MUMBAI

Brief :
When on account of application of section 145A a change is per se forced upon the assessee in the valuation of its closing stock, a corresponding adjustment in opening stock has to be carried out for consistency

Citation :
DCIT v. Beck India Ltd.

We have heard the rival contentions and perused the orders carefully. AO, relying on Section 145A of the Act, added back to the closing stock value CENVAT credit of Rs. 14,18,294/-. For taking this view, AO also found support in the decision of the jurisdictional High Court in the case of Melmould Corporation referred supra. Section 145A mandates that in valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of the business or profession", adjustment has to be made for any tax, duty, cess or fee actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Undisputedly the assessee was following exclusive method of accounting where MODVAT account was shown separately and the stock and purchases shown in the Profit and Loss Account excluding the Excise duty Assessee had also given a work-out whereby it had asserted that the net impact of adjustments if carried out on all the items, viz. for purchase and sale of goods and inventory, would be Nil. From a bare reading of Section 145A, it is clear that adjustment has to be carried out for tax, duty, cess or fee on purchases and sale of goods and inventory for the purposes of determining income under the head "Profits and gains of business or profession". Thus, if the AO applied Section 145A to include MODVAT credit in the closing inventory, he was, in our view, duty bound to make corresponding increases in the purchase, sale of goods and opening inventory as well. It is to be noted that the Section mentions inventory and limiting it only to 'closing inventory' disregarding the 'opening inventory' will be not in accordance with the plain meaning of the term 'inventory' used in the section. Inventory will necessarily include within its fold both opening as well as closing. In the case of Melmould Corporation (supra), the jurisdictional High Court was not dealing with the issue regarding application of Section 145A of the Act. Issue there was change in method of valuation and how the effect thereof has to be given. Hon'ble Court was not dealing with an issue where it was called to interpret the application of Section 145A of the Act. In Melmould Corporation case, assessee had made a change in the method of valuation, which was not thrusted upon the assessee but voluntarily elected by it. Such a change suo-motu done would definitely be different from one, which is statutorily inflicted where an assessee per se is forced to make an adjustment to value of its inventory. Here, in the case before us, assessee was following exclusive method for accounting duty and was forced to adopt an increased valuation in its closing stock on account of application of Section 145A. In our opinion, when such a change is thrusted upon the assessee due to application of a statutory provision, then the effect thereof has to be given in full. Section 145A already mentioned by us, mandates that the changes on account of adjustments mentioned therein has to be given effect on purchase, sale of goods and inventory Therefore, in our opinion, the decision of the Hon'ble Delhi High Court in the case of Mahavir Alluminium Ltd. (supra) would be squarely applicable on the facts The Hon'ble Delhi High Court was dealing with application of Section 145A and clearly held that when on account of application of that Section a change is perse t£ forced upon the assessee in the valuation of its closing stock, a corresponding adjustment in opening stock has to be carried out for consistency Therefore, following the decision of the Hon'ble Delhi High Court, we are of the opinion that the learned CIT(A) was justified in directing the AO to make corresponding adjustments in the opening inventory held so. Appeal of the revenue on Ground No.2 therefore stands dismissed.
 

CA Pawan Goswami
on 17 November 2008
Published in Income Tax
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