ACIT, CENTRAL CIRCLE - 1(1), KOLKATA, KOLKATA vs. M/S. CITATION INFOWARES LIMITED, KOLKATA

The assessee is a company and is in the business of running a BPO call centre and also of providing software and IT enabled services. It had closing stock of work in progress (WIP) of software developed by it in house. The expenditure incurred by the assessee company towards development of software from year ending 31st March, 2006, is being disclosed as, the value of inventory under the category work-in-progress (WIP). During the year, the assessee reduced the value of inventory by Rs.43,25,000/-, based on an advise taken from “Data Infosys” which is a consultant. The Assessing Officer rejected this claim of the assessee as not maintainable, for the reason that, the expert “Data Infosys” has not given any comparable cases while giving its opinion, the basis which prompted the assessee Assessment Year: 2011-12 M/s. Citation Infowares Ltd in declaration of its inventories. He further stated that the assessee in its explanation in Note No. 15, to Notes to accounts, stated that, although the actual estimates of future anticipated revenues to qualify the realizable value, of the aforesaid WIP has not been ascertained in detail, the management is of the view that the company will be able to realize over and above the cost incurred in respect of the aforesaid work-in-progress in the future.

Aggrieved, the assessee carried the matter in appeal before the ld. First Appellate Authority. The ld. First Appellate Authority allowed this claim of the assessee by holding as follows:- “On careful consideration of the findings of fact and from perusal of documents on record, it, is found that the appellant had revalued the inventory of application software on account of obsolescence i.e change in value of software inventory on account of rapid change in technology, and was based upon reasonable consideration i.e expert advice after evaluating four comparable cases as per commercial practice, which is thus reasonable and bonafide. It is found that there is substance in the contention of the appellant's AIR that the A.O erred in rejecting the revaluation of software inventory by the, appellant company on the ground of its method adopted without giving any comparable case and/or basis which prompted the assessee for change of inventories, contrary to the inference drawn from material on record, whereby the appellant was found to have adopted the change in method of accounting as per accounting standard AS-5, which was regularly followed as per its auditedaccounts. A.O has failed to establish as to how the valuation incorrect and inviolation to system as propounded by AS-5 or defect in expert's opinion or anyto collusiveness in the opinion of expert. The A/R has also emphasized that the value of reduced closing stock was taken as opening stock in the next year's accounts. It is also well settled as heldby various Tribunals and High Courtsthat change in method of accounting is revenue neutral as addition to closingstock at end of one financial year would result in a corresponding increase invalue of carried-forward opening stock as on first day of the next financial year. In view of the above discussion and considering the ratio of the cited case laws in CIT Vs. British Paints India Ltd(supra) and CIT v. Atul Products Ltd..(supra), which are found to be applicable to the facts of the appellant's case, it is held that the A.O was not justified in making addition of the impugned amount of Rs 43,25,000/-, -on account of a bonafide change in method of accounting of inventory of closing stock, based on expert advice and as per method of accounting as per prescribed accounting standards. Accordingly, the A.O. is directed to delete the addition of Rs.43,25,000/-. Thus, grounds no. 1 & 2 are allowed.” 3.1. Aggrieved the revenue is in appeal before us on the following revised grounds of appeal:- “1) That on the fact & circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 43,25,000/ - on account of devaluation of WIP by not appreciating the fact that sudden devaluation in WIP without any valid and cogent reasons does not give the true and correct total profits of the business. 2) That on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 43,25,000/ - on account of devaluation of WIP by relying on the Assessment Year: 2011-12 M/s. Citation Infowares Ltd ratio of the decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. reported in 188 ITR 44(SC) which is in fact in favour of Revenue. 3) The Ld. CIT(A) has erred in law by failing to appreciate that in the case (supra) the Hon'ble Apex Court has held that the correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by reason of the fall of market value the goods below their original cost. In this case, the assessee has devalued its stock on the basis of a so-called expert advice which does not specify reasons behind such devaluation. 4) That the Ld. CIT(A) erred by failing to appreciate that Accounting Standard-S (AS-5) relatesto 'net profit or loss for the period' prior period and change in accounting policies' whereasthe case of the assessee is governed by AS-2 which provides for valuation of inventories. 5) That on the facts and circumstances of the case, the Ld. CIT(A) erred in accepting the fall inthe value of stock of software only on the basis of advice of software consultant to reducethe cost by 10.27% without making any sale during the year under consideration todetermine net realizable value as per AS-2. 6) That on the facts and circumstances of the case, the Ld. CIT(A) erred in accepting the pleaof the assessee about change in method of accounting of stock ignoring the fact that no suchmention was made in Tax Audit Report submitted by the assessee. 7) That the appellant craves leave to add to and/or alter, modify or rescind the grounds her in above before or hearing of this appeal.”

The ld. D/R, Mr. Sailen Samaddar, filed written submissions and submitted that the assessee has reduced the value of WIP without any documentation or reason and that the so called expert valuer cannot be relied upon as they have not given any comparative data in support of their report. He argued that the value of WIP has been reduced, though in the management report, the company admits that the amount incurred in the development of this software, will be recovered with profit. On the query from the Bench about the present position of the company and the realization of this software after the Assessment Year 2011-12, the ld. D/R submitted that this is not a relevant factor and what is to be looked into is the basis of valuation of the closing stock and the documentation furnished in support of the fall in value of the closing stock/WIP of the software. He vehemently contended that the so-called expert letter is an unilateral self serving document and that this documentation is done to avoid taxes in this year. The sum and substance of his submission is that the claim of the assessee is not supported by any evidence. He relied on the following case laws:-  Commissioner of Income Tax vs. British Paints India Ltd. 1991 AIR 1338 Assessment Year: 2011-12 M/s. Citation Infowares Ltd  Commissioner of Income Tax vs. Hindustan Zinc Ltd. in Civil Appeal No. 1179 of 2007 (Hon'ble Apex Court) 5. The ld. Counsel for the assessee, on the other hand submitted that closing stock of WIP, as a matter of consistency, is valued at cost or net realizable value, whichever is less. He pointed out to page 4 of the ld. CIT(A)'s order and submitted that WIP got accumulated from 31/03/2006 and as software industry has fast changes due to innovation and that the software developed at huge cost, 4 to 5 years ago, would not be having the same value on this date due to technological development. He submitted that the Assessing Officer is not an expert valuer of software and the assessee based on an expert opinion has determined that the net realizable value (NRV) of the W.I.P is Rs.3,77,95,565/-. He relied on the order of the ld. CIT(A) and submitted that, report per se is not disputed but what the Assessing Officer states is that, comparable data has not been given in support of this report. He supported the claim of the assessee.

After hearing rival contentions, perusing the papers on record, orders of the authorities below as well as the case-law cited, I hold as follows:- 6.1. The undisputed fact is that the WIP/Closing stock of the assessee is valued on cost or NRV, whichever is less. The software in question is in-house developed software since, 2006. The assessee had declared Rs.3,10,75,220/- as WIP on the software developed in-house as on 31/03/2006. Thereafter, after 31/03/2007 and 31/03/2008, expenditure of Rs.1,07,75,345/- and Rs.2,75,000/- has incurred for development of this software and had been added to the WIP. For the year ended, 2009 and 31/03/2010, no fresh expenditure has been incurred on the development of this in-house software. It cannot be denied out that the value of the closing stock of software developed in-house, would have got affected due to rapid change in technologies. The only issue is how to evaluate the NRV of this closing stock. The assessee relied on advice of "Data Infosys". A copy of this advice is at page 5 of the ld. CIT(A)'s orders. If the Assessing Officer, doubted this advice, he should have made enquiries with "Data Infosys". He cannot merely reject the advice of an expert on the ground that no comparables have been given.

In any event, we find that 'Data Infosys' has given an advices to discount the value of the software at approximately 10% due to recession in the U.S. market. At Assessment Year: 2011-12 M/s. Citation Infowares Ltd the same time, it also states that they have tried to do a comparative study of all the application software and found that the assessee software is superior than others. Thus, the ground on which the Assessing Officer objects to the advises is not factually correct. The Judgement of the Hon'ble Supreme Court in the case of British Paints India Ltd. (supra), states that the method of accounting should be followed consistently. It lays down at para 8 & 9 as follows:- 8. It is a well recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. [533G-H] Whimster& Co. v. The Commissioners of Inland Revenue, [191726] 12 Tax Cases, 813,823 referred to.

9. Where the market value has fallen before the date of valuation and at that date the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of goods. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee, but whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of a reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt any such computation as he deems appropriate for proper determination of the true income of the assessee. [534E-F] This is not only a right, but a duty that is placed on the Officer, in terms of the first proviso to section 145 which concerns a correct and complete account, but which in the opinion of the Officer does not disclose a true and proper income. [534G] B.S.C. Footwear v. Ridgway (Inspector of Taxes), [1971] 2 W .L.R. 1313, referred to.

The emphasis of the judgement is that the Officer is bound to accept the system of accounting regularly employed by the assessee. In view of the above discussion, we find no infirmity in the order of the ld. CIT(A) and we uphold the same.

In the result, the appeal of the revenue is dismissed.