October 2008
Valuation of closing stock : Change in method of valuation as per AS 2 : Resultant variation in income : Not taxable.
By K. B. Bhujle, Advocate
Reading Time 2 mins
New Page 2
11 Valuation of closing stock : A.Y.
2001-02 : Change in the method of valuation as per Accounting Standard 2, which
is mandatory : Resultant variation in income : Not taxable.
[CIT v. George Oakes Ltd., 303 ITR 357 (Mad.)]
For the A.Y. 2001-02, the Assessing Officer made an addition
representing the reduction of profit due to change in the method of valuing the
closing stock. In the relevant year the closing stock was valued in accordance
with the Accounting Standard 2, which is mandatory. The Tribunal deleted the
addition on the ground that that the change of accounting method was bona
fide.
On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal and held as under :
“(i) When the change of accounting method is bona fide
and is recognised in accounting principles, the resultant variation in income
cannot be forced to be taxed upon the assessee.
(ii) Being compulsory, the company had adopted the
Accounting Standard (AS-2) as per the guidelines prescribed by the ICAI. There
was a specific finding that the assessee valued its opening stock in one way
and the closing stock in another method, during the relevant year when the
Accounting Standard (AS-2) had come into effect in the earlier year. The
change in the accounting method had not been found to have been made with a
mala fide intention. Such a change in the method of accounting was bona
fide and was made mandatory by the ICAI to be followed in the preparation
of financial accounts. Under such circumstances, in the year of change, some
discrepancy was bound to happen in the profitability of the company as
compared to the previous year. However, in succeeding years, there would not
be any discrepancy on this account.
(iii) The reasons given by the Tribunal were based on valid materials and evidence, and did not warrant any interference.”
