STERLITE TECHNOLOGIES LTD vs. ADDL CIT LTU, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dt.1.3.13 of CIT-24 Mumbai the assessee has filed the present appeal raising two effective grounds of appeal. Assessee-company,engaged in the business of manufacturing and sales of optical fibre, copper telecom cable etc.,filed its return of income on 31.10.2007 declaring profit of Rs. 51.61 crores under MAT provisions.The Assessing Officer(AO)completed the assessment u/s.143(3) of the Act on 29.12.2009,determining the income of the assessee at Rs.54.58 crores under the normal provisions and at Rs.52.61 crores under section 115JB of the Act. 2.First Ground of appeal is about disallowance of Rs.3.10 lacs on account of change in method of valuation of stock.During the assessment proceedings the AO found that as per note 1 to cl-12(b) of the tax audit report there was decrease in profit due to change of method of valuation of inventory, that the aa had adopted weighted average method (WAM) during the year under appeal, that it was valuing inventory on the basis of first in first out (FIFO method).He directed the assessee to show cause as to why the decrease in profit due to change in method of valuation should not be added back to its profit.After considering the detailed submission of the assessee the AO allowed the change of method of accounting.However, he held that the resultant effect on the profit of the income of the assessee had to be taxed during the year under consideration,that because of change of method of valuation, the value of closing stock got reduced as compared to valuation carried out of the opening stock, that opening and closing stock have to be valued on same principles.Finally, he made an addition of Rs.3.10 lacs to the income of the assessee . 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA) who upheld the order of the AO. 2.2.Before us,the Authorised Representative (AR) contended that the FAA had dismissed the ground raised by the assessee without giving any independent reason. He relied upon the cases of Melmould Corporation(202 ITR789) and WMI Cranes Ltd.(326 ITR 523)of the

4734/13-Sterlite Technologies Hon’ble Bombay High Court. The Departmental Representative (DR) supported the order of the FAA. 2.4.We have heard the rival submissions and perused the material before us. We find that the assessee had changed the method of accounting from FIFO to WMA, that the AO had accepted the same method of accounting,that he made an addition of Rs.3.10 lacs to the income of the assessee,that he had not doubted the bonafide of the change in method,that the change of the method had been followed in the subsequent years and the method was not disputed by the AO.We find that in the case of Melmould Corporation (supra)the Hon’ble Jurisdictional High Court has discussed and deliberated upon the issue as under: “Under section 145 of the Income-tax Act, 1961, the assessee can adopt a method of valuation which is to be followed by it regularly. It is an accepted principle of accountancy that value of the stock can be determined at cost price or market price, whichever is lower. The two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus, clear that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change is bona fide and followed regularly thereafter. Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profits in the year in which the change takes place. But, if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted. The change has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If, instead, a procedure is adopted for changing the value of the opening stock also, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on.” Following the above judgment,we hold that if there was some distortion,same has to be ignored once the change was found to be genuine.

3.The second effective ground deals with disallowance of Rs.14,50,69,277/- made by the assessee u/s.80IB of the Act.During the assessment proceedings,the AO found that the assessee had claimed deduction u/s.80IB from power transmission division Rakoli, that carry forward losses under Chapter-VI-Awere more than the income of Rs.48.10 crores declared by the assessee before claiming above deduction, that the gross total income of the assessee was not positive.Referring to the decision of Synco industries Ltd.(299 ITR 444) of the Hon’ble Supreme Court, the AO asked the assessee as to why the deduction made u/s. 80IB should not be disallowed.after considering the submission of the assessee,the AO rejected the claim made by it. 3.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA . As per the FAA the assessee did not press the ground with regard to 80IB deduction,before him. He observed that business income under the normal provisions had been calculated at Rs.Nil in view of set off of brought forward business losses and unabsorbed depreciation,that even otherwise the claim made by the assessee was not tenable under law.Finally, he dismissed the grounds raised by the assessee with regard to claim made u/s.80IB of the Act. 3.2.Before us, the AR stated that the FAA had erred in observing that the assessee had not pressed the ground regarding deduction u/s. 80IB.He referred to page-42 of the paper book and stated that in the statement of facts the assesseehad specifically pressed the ground. He 2

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