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Facts
The assessee, a manufacturer, filed its return of income, which was subsequently scrutinized. The assessment led to two additions, one being for Modvat/Cenvat credit attributable to closing inventory under section 145A of the Act. The National Faceless Appeal Centre (NFAC) allowed the assessee's appeal, deleting this addition. The Revenue appealed this deletion, seeking to overturn it.
Held
The Tribunal upheld the action of the Assessing Officer (AO) in rejecting the assessee's valuation of closing inventory, concluding that the change in method was not tax-neutral. It approved the consequential addition made by increasing the value of closing inventory with taxes and duties to align it with the method of valuation adopted for opening inventories, citing various judicial precedents.
Key Issues
Whether a change in the method of valuation of closing inventory alone is permissible without recognizing the consequential impact in books for determination of taxable income, especially when the change is not tax-neutral and inconsistent with opening inventory valuation.
Sections Cited
250, 253(3), 143(3), 145A, 145, 44AB
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Income Tax Appellate Tribunal, PANAJI BENCH, PANAJI
Before: HON’BLE SHRI PAVANKUMAR GADALE & SHRI G. D. PADMAHSHALI
Assessment Year : 2012-13 Dy. Commissioner of Income Tax, Circle-1(1), Panaji, Goa. ................................................... Appellant V/s Esteem Industries Pvt. Ltd. 76-77, Pissurlem Industrial Estate, Pissurlem, Goa-403530. PAN : AAACE9474F ........................................................ Respondent Appearances Assessee by : Mr Mahendra Sanghvi [‘Ld. AR’] Revenue by : Capt. Pradeep Arya [‘Ld. DR’] Date of conclusive Hearing: 12/06/2025 Date of Pronouncement : 30/06/2025 ORDER PER G. D. PADMAHSHALI; By captioned appeal the appellant revenue challenges DIN & Order No 1067326563(1) dt. 05/08/2024 passed by National Faceless Appeal Centre, Delhi [‘Ld. NFAC’] u/s 250 of the Income-tax Act, 1961 [‘the Act’] anent to assessment year 2012-13 [‘AY’] which in turn arisen from order of assessment passed by Ld. Jt. Commissioner of Income Tax, Range-2, Panaji, Goa [‘Ld. AO’] ITAT-Panaji Page 1 of 20 AY: 2012-13 2. The grievance brought in this appeal seeks answer to a question ‘as to whether change in method of valuation of closing inventory alone is permissible without recognising consequential impact in books for determination of taxable income?’
The registry endorsed thirteen days delay in filing the present appeal by the Revenue. The rival parties however in complete agreement that, since the present appeal is filed within a period of two months from the end of the month in which the impugned order was passed, therefore by virtue of amended s/s (3) of section 253 of the Act which came into effect from 01/10/2024, the present appeal be treated as filed within the statutory time limit prescribed in law and thus requested to advance case on merits by condoning the delay considered if any. Delay (if considered) is condoned and advanced accordingly.
ITAT-Panaji Page 2 of 20 AY: 2012-13 4. Succinctly stated facts of the case are that; the assessee an incorporated company and engaged in manufacturing of surfactants & speciality chemicals. The assessee company filed its return of income on 27/09/2012 declaring total income of ₹4,46,98,838/- The said return of income selected for scrutiny and a consequential assessment vide order dt. 16/03/2015 was passed u/s 143(3) of the Act determining total income at ₹10,62,03,525/- owning to twin additions ₹4,21,90,816 viz; (i) addition of representing modvat/cenvat credit attributable to closing inventory u/s 145A of the Act and (ii) disallowance of capital expenditure of ₹1,94,57,703/- relating to technical know-how. Aggrieved by the first addition, the assessee filed an appeal which the Ld. NFAC allowed by reversing the alleged addition. Aggrieved thereby the Revenue came in this second appeal seeking to overturn former deletion. ITAT-Panaji Page 3 of 20 AY: 2012-13 5. We have heard rival party’s submission and subject to rule 18 of ITAT-Rules, 1963 perused material placed on record, and considered the facts in light of settled position of law which are forewarned to parties for their rebuttal.
We note that, the respondent assessee was maintaining its books of accounts solely under Companies Act [‘C-Act’] by following exclusive method of inventory valuation & accounting, whereby inventories and purchase/expenses etc., were accounted & valued at cost without Cenvat/Modvat, Sales Tax/VAT etc., attributable to such inventories, purchases/expenses. As no separate books for the Act were maintained, therefore the books so maintained under C-Act after necessary adjustments to comply with section 145A of the Act were subjected to tax audit u/s 44AB of the Act on regular basis.
ITAT-Panaji Page 4 of 20 AY: 2012-13 7. First time in AY 2012-13, the assessee claimed to have changed its method of inventory valuation & accounting to exclusive method whereby only cost attributable thereto were carried in books without including thereto corresponding amount of Cenvat/Modvat, Sales Tax/VAT etc. In the course of assessment, in addition to above change the Ld. AO observed further that, on such change though purchases & closing inventory were valued on exclusive method but no corresponding adjustment in opening inventory was made. On an opportunity when the assessee failed to justify; (i) need for change in the method of valuation & accounting and (ii) for not adjusting corresponding change in opening inventory, the Ld. AO placing reliance on ‘Harinagar Sugar Mills Ltd. Vs CIT’ [1993, 61 CCH 435 (Bom)] and ‘CIT Vs Hindustan Zinc’ [2007, 161 Taxman 162 (SC)], rejected the assessee’s closing inventory valuation. ITAT-Panaji Page 5 of 20 AY: 2012-13 8. In consequence thereof, an amount of Cenvat/Modvat Credit, Sales Tax/VAT Credit etc., attributable to such closing inventory as was identified & computed by the assessee was added to total income in terms of section 145A of the Act. The matter travelled in first appeal wherein Ld. NFAC overturned the rejection and deleted addition on the premise that, the Ld. AO failed to make out a case as to why exclusive method adopted was incorrect or how it was prejudicial to interest of Revenue. In view of the Ld. NFAC, the change in method of inventory valuation vis-à-vis accounting by the assessee was primarily to comply with mandatory exclusive method prescribed by Accounting Standard-2 [‘AS-2’] issued by ‘ICAI’ and such change being tax neutral, therefore cannot be faulted with in view of Apex Court’s decision in ‘CIT Vs Dynavision Ltd’ [2012, 252 CTR 351, 210 Taxman 239(SC)]. ITAT-Panaji Page 6 of 20 AY: 2012-13 9. From the records and rival party’s arguments it revealed that; (i) the assessee right from its inception for the purpose of C-Act & it’s compliance was in accordance with AS-2 following exclusive method of inventory valuation & accounting, and continued to do so in the year under consideration without any change. (ii) on the other hand for the purpose of the Act & determination of taxable income for all years upto AY 2011-12, the assessee was following inclusive method of inventory valuation vis-à-vis accounting in strict compliance of section 145A of the Act by adjusting book results of C-Act to include taxes, duties, cess etc. First-time in the year under consideration, the assessee however changed its method of accounting of purchases & inventory valuation to exclusive method so has to do away with making any adjustment to its books of accounts maintained under C-Act. (iii) While changing the ITAT-Panaji Page 7 of 20 AY: 2012-13 method of valuation & accounting to exclusive, for the purpose of Act assessee made no adjustment to the values of opening inventories so as to exclude corresponding Cenvat/Modvat credit, Sales Tax/VAT credit in line with treatment adopted for closing inventories. Even upon adopting exclusive method the accounting of purchases of goods/service were selectively varied wherein certain purchases were accounted with full cost i.e. inclusive of taxes, levies & duties where no input credit was available, unlike exclusive method applied in accounting purchases of inventories or consumable etc., where input credit was available for set-off. (iv) The change in method of valuation of closing inventory alone & cherry pick treatment in recording purchases per se and consequential book results for the purpose of taxation in wholesome did fail to ensure compliance with both AS-2 & the provision of section 145A of the Act. ITAT-Panaji Page 8 of 20 AY: 2012-13 10. Section 145A of the Act deals with valuation of ‘inventory’ and limiting it only to ‘closing inventory’, therefore disregarding the opening inventory, would be not in accordance with the plain meaning of the term ‘inventory’ used in the Section. Inventory will necessarily & must for the Act to include within its fold both opening as well as closing inventories. It therefore shall suffice state that, for the purpose of determining the income chargeable under the head Profits & Gains of Business or Profession [‘PGBP’] of every assessee the section 145A r.w.s. 145 of the Act mandatorily requires the valuation of purchase & sale of goods/services and of inventories are to be adjusted to include amount of taxes, duties, cess or fee etc., (by whatever name called) actually paid or incurred to bring such goods/services to the place of its location and condition as on the date of valuation. The explanation-1 thereto further ITAT-Panaji Page 9 of 20 AY: 2012-13 abundantly clarifies that, any taxes, duties, cess or fees (whatever name called) that necessarily be included in the value of purchases of goods/service and consequently in closing inventories in terms of section 145A of the Act shall not be varied be on the basis of any right (credit) arising as a consequence of such payment of taxes, duties, cess or fess etc.
In view of Hon’ble Apex Court’s judgement in ‘CoC (Import) Mumbai Vs Dilip Kumar & Co.’ [2018, 9 SCC 1 (SC)], going by clear provisions of the Act, it was mandatory for the assessee to follow inclusive method of inventory valuation vis-à-vis accounting whereby all purchases & sales of goods/service and inventories were required to be recognised & valued at cost plus all taxes, duties, cess or fees etc., notwithstanding any right (credit for set-off) arising on payment of such taxes, duties, cess or fees etc.
ITAT-Panaji Page 10 of 20 AY: 2012-13 12. For the purpose of the Act and taxation of income, the respondent was following this inclusive method right from its incorporation consistently, however such correct method varied in this year but without making corresponding adjustment to the values of opening inventories which were valued unlike closing inventories. Further not all purchases of goods/services of the year were accounted in terms of adopted/changed method of valuation. To demonstrate that the changed method of valuation was not at all tax neutral but adopted to lower tax burden the Ld. DR Capt. Arya meticulously taken us through audited financial statement, tax audit report, notes to accounts and most importantly auditor’s comment/report on change in method of accounting/valuation. It was reiterated that, as per clause 12(b) of Tax Audit Report [‘TAR’], Tax Auditor mandatorily required to answer & report ‘details of ITAT-Panaji Page 11 of 20 AY: 2012-13 deviation (if any) from the method of valuation prescribed u/s 145A of the Act and effect of such change on the profit or losses. From clause 12(b) Form 3CD with Statement-I (placed respectively on pg 100 & 106 of paper book) it was persuasively showcased to us that, the tax auditor M/s B Y & Associates, Mumbai not only mis-reported deviation followed for opening inventory but also their impact on reported profit.
It is a trite law as laid down by Hon’ble Supreme Court in case ‘Chandra Kishore Jha Vs Mahavir Prasad’ [1999, 8 SCC 266 (SC)], that ‘if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner’. By stricter application of former ratio, every assessee in view of section 145A of the Act is under obligation of deploy inclusive method of inventory ITAT-Panaji Page 12 of 20 AY: 2012-13 valuation vis-a-vis accounting of purchases & sales of goods/services. On the other hand for any reasons if the assessee varies the method and with a comparative computation proves to the satisfaction of tax authorities that, resorting to exclusive method of valuation/accounting over method prescribed by section 145A is completely tax neutral, then in our considered view there is much less bar in law in view position settled in ‘CIT Vs Dynavision Ltd.’ (supra).
Placing reliance & diving deeper into former judicial precedence (supra), we are mindful to state that, change in the method of valuation vis-à-vis accounting is not completely barred in law but permissible for a valid & sufficient cause/reason shown. Their acceptance by the Revenue however shall be subject to twin satisfaction that; (i) such change is completely tax-neutral for the year of change ITAT-Panaji Page 13 of 20 AY: 2012-13 and (ii) the impact (irrespective of positive, negative or zero) of such change on profit or loss has been clearly & separately disclosed in audited results as well as in computation of taxable income and thus in return of income filed for the year of change. Au contraire, in the present case, the respondent assessee did fail to bring on record any material, computation or reconciliation to showcase that change in the method of valuation vis-à-vis accounting was tax-neutral and was impact less on the profit shown by it.
In fortifying the change in method of valuation vis-à-vis accounting of purchases of goods/services is tax-neutral the respondent assessee and Ld. NFAC placed strong reliance on ‘CIT Vs Dynavision Ltd.’ (supra). The case before Hon’ble Apex Court was that, assessee valued it’s both opening & closing inventories on exclusive method unlike in this case ITAT-Panaji Page 14 of 20 AY: 2012-13 where the respondent assessee admittedly valued it’s opening inventories on the basis of inclusive method over closing inventories which was valued exclusive method. Furthermore purchases of goods/service were accounted based upon right to input credit. The former ratio (supra) goes to prove the case of the Revenue instead that, change in method is not tax neutral, as both the inventories valued differently. Therefore, the judicial precedence relied by the respondent assessee and Ld. NFAC is completely misplaced. The counter argument raised by the respondent assessee in support thereof being devoid of legal position therefore stands rejected.
A issue of acceptance of valuation of closing inventories which was valued inconsistent with opening inventories came for consideration before the Hon’ble jurisdictional High Court in ‘Melmould ITAT-Panaji Page 15 of 20 AY: 2012-13 Corporation Ltd. Vs CIT [1993, 202 ITR 789 (Bom)], wherein assessee changed method of closing inventory valuation to exclude taxes, duties, cess or fees etc., which was not thrusted upon, but voluntarily selected by assessee. There it was observed that, such a change adopted suo- motu definitely be different from one which is statutory inflicted, where an assessee per-se forced to make an adjustment to inventory. However, when on account of application of section 145A of the Act a change per-se is forced upon assessee, both opening & closing inventories are to be valued following equal treatment. Since closing inventory of preceding year becomes opening inventory for the year, the corresponding change, therefore, has to be effected for valuing closing inventory which will, in its turn, become value of opening inventory of next year.
ITAT-Panaji Page 16 of 20 AY: 2012-13 17. Quoting from the observation laid ‘CIT Vs Carborundum Universal Ltd.’ [1984, 491 ITR 759 (Mad)], their lordship also opined that, if, instead, a procedure is adopted for changing value of opening inventory, it will lead to a chain reaction of changes in the sense that the closing value of the inventory of the year preceding will also have to changed and correspondingly value of opening inventory of that year and it shall continue so on endlessly. Since valuation of opening inventory cannot be touched to avoid multiplicity of reverse reaction, a corresponding adjustment in the valuation of closing inventory must only be carried out to align with the method adopted for opening inventory and not vice-versa. For determination of taxable income u/h PGBP both inventories to be treated as like also finds support in ‘CIT Vs Mahavir Aluminium Ltd.’ [2008, 297 ITR 77 (Del)]. ITAT-Panaji Page 17 of 20 AY: 2012-13 18. Similarly in ‘Harinagar Sugar Mills Ltd. Vs CIT’ and ‘CIT Vs Hindustan Zinc’ (supra), the change in the method of valuation were rejected and action of the Revenue in resorting to earlier method of inventory valuation & consequential addition on such account was upheld. In former case, the the assessee was a sugar mill which in the year under consideration varied its closing inventory valuation into ‘levy sugar’ and ‘free sugar’ so as to able it to reduce it tax burden. Neither reason of such change nor pressing circumstances which constrained such bifurcation qua valuation were explained. In view thereof, the altered method of valuation of closing inventory was rejected and action of Revenue in resorting to previous method of valuation was upheld. In later case i.e. CIT Vs Hindustan Zinc’ (supra), the assessee company changed its valuation of closing inventory applying international rate particular when there was ITAT-Panaji Page 18 of 20 AY: 2012-13 much less export and wherein in past the assessee was valuing its closing inventory at domestic rates. The Hon’ble Apex Court rejected the change as baseless & not free from tax neutrality and upheld the action of the Revenue in resorting to erstwhile method followed by the assessee consistently year after year.
Coming to present case, in the complete absence of details of Cenvat/Modvat Credit, Sales Tax/VAT Credit included in the opening inventories and details of purchases of goods/services which were accounted both on gross inclusive method & exclusive method, the Ld. AO after rejecting the method/valuation of closing inventories was constrained to jack up the closing inventory with balance of Cenvat/Modvat Credit, Sales Tax/VAT attributable thereto so has to align its valuation at par with the method of valuation adopted for opening inventories. This action in our ITAT-Panaji Page 19 of 20 ratio laid down in ‘Melmould Corp. Vs CIT’ & ‘CIT Vs Dynavision Ltd.’ (supra).
In view of aforestated discussion and judicial precedents, we upheld the action of Ld. AO in rejecting the valuation of closing inventory as being not tax neutral and approve the consequential addition made by jacking up such value of closing inventory with taxes & duties etc., so as to bring closing inventory valuation par with method of opening inventory valuation. The solitary & effective ground of the appeal thus stands allowed.
The appeal in result stands allowed. U/r 34 of ITAT Rules, 1963 the order pronounced in the open court on date mentioned herein before.