By TIOL News Service

KOLKATA, NOV 06, 2015: THE issue is - Whether change in method of stock valuation can be denied merely on basis that it had resulted into losses for assessee company in year of such change in method of stock valuation. NO is the answer.

Facts of the case

The assessee is an investment and finance company. The return of income for the year under consideration was filed by it on 30.11.2006 declaring a loss. AO noticed that there were no purchase and sale of shares made by the assessee during the year under consideration and the loss was claimed by the assessee as a result of change in the method of valuation of closing stock of shares adopted by it. AO, therefore, required the assessee to offer its explanation in the matter. In reply, it was submitted on behalf of the assessee company that the valuation of stock all along was adopted at cost. However, the statutory auditors during the year under consideration pointed out that the valuation of stock in trade should be adopted at cost or market price whichever was lower. Since this opinion of the auditors was based on guidelines issued by the RBI for non-banking finance companies as well as accounting standard issued by the ICAI, the assessee changed the method of valuation of stock of shares from "at cost" to "cost or market price whichever is the lowest", which resulted into loss. This explanation offered by the assessee to justify the change in the method of valuation of stock by the assessee was not found acceptable by the AO. According to him, the method earlier followed by the assessee regularly could not be changed without any justifiable reason and the assessee could not be allowed to arbitrarily change such method to suit his purpose. AO therefore, rejected the change of method of valuation of stock adopted by the assessee and took the valuation of closing stock of shares at cost, which resulted in the disallowance of assessee’s claim for loss. The disallowance made by AO on account of its claim for loss due to change in the method of valuation of stock of shares was challenged by the assessee in the appeal filed before the CIT(A), who had deleted the addition made by the AO on this issue and allowed the claim of the assessee for loss.

Having heard the matter, the Tribunal held that,

++ it is a basic principle for accounting that the valuation of stock in trade has to be done "at cost or market price, whichever is lower" and the same is in consonance with other important accounting principle that anticipated loss is required to be considered, while drawing the final accounts. In the present case, the assessee however was earlier following the method of valuing the stock of shares at cost which, in my opinion, was not correct method followed by the assessee, as the shares represented its stock in trade. As per the advice of the statutory auditors, which was duly supported by the relevant guidelines issued by the RBI as well as Accounting Standard-2 issued by the ICAI, the assessee, therefore, changed the method of valuation of stock of shares from "at cost" to "either cost or market price whichever lower" and since the new method adopted by the assessee was more proper and correct and the same was consistently followed by the assessee in the subsequent years, I am of the opinion that there was no justification on the part of the AO to reject the same merely because it had resulted in loss. The CIT(A), on the other hand, has appreciated all the relevant facts of the case in proper perspective and allowed the claim of the assessee for loss as a result of change in the method of valuation of closing stock, which was fully justified. I therefore do not find any justifiable reason to interfere with the order of the CIT(A) giving relief to the assessee on this issue. Upholding the same, I dismiss this appeal of the Revenue. In the result, the appeal filed by the Revenue is dismissed.

(See 2015-TIOL-1789-ITAT-KOL)