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Sandvik Asia Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)14ITD35(Mum.)
AppellantSandvik Asia Ltd.
Respondentincome-tax Officer
Excerpt:
1. this is the assessee's appeal preferred against the order of the commissioner (appeals). though the assessee has raised as many as 22 grounds, in fact there are only three grounds as under: 2. that the assessee challenges the validity and legality of the assessment. 3. disallowance of surtax liability and the expenses disallowed under section 40a(5) of the income-tax act, 1961 ('the act').2. the assessee-company manufactures various tungsten carbide products such as tips, dyes, nibs, drill steels, cutters, etc. the assessee-company follows previous year ending 31st december as accounting year.in the profit and loss account for the year under consideration, note 18 is relevant in which it was mentioned that last in first out method (lifo) was adopted for computing direct cost and that.....
Judgment:
1. This is the assessee's appeal preferred against the order of the Commissioner (Appeals). Though the assessee has raised as many as 22 grounds, in fact there are only three grounds as under: 2. That the assessee challenges the validity and legality of the assessment.

3. Disallowance of surtax liability and the expenses disallowed under Section 40A(5) of the Income-tax Act, 1961 ('the Act').

2. The assessee-company manufactures various tungsten carbide products such as tips, dyes, nibs, drill steels, cutters, etc. The assessee-company follows previous year ending 31st December as accounting year.

In the profit and loss account for the year under consideration, note 18 is relevant in which it was mentioned that last in first out method (LIFO) was adopted for computing direct cost and that on the basis of method which was used in the earlier years the cost as on 31-12-1975 was Rs. 48,659,804.

It was the assessee's contention that because of the rising prices the assessee found it proper to adopt a correction method. The directors in their report in paragraph No. 10 explained to the shareholders that LIFO method was more realistic.

3. The assessee's business was that of manufacture of cutting tools, tungsten ore and tools for steel which was sort of a continuous process for 8 to 10 months and as such it was difficult to have specific identification of different consignments of new materials. (It must be clarified that the assessee was getting ore and steel from abroad and had to pay customs duty to the concerned authorities). The Commissioner (Appeals)'s observation was that identity was possible as the assessee received consignments from abroad. The assessee's stand was that the method adopted by it was more realistic and that notional profits could not be taxed. Before the Commissioner (Appeals), the assessee relied on Vallambrosa Rubber Co. Ltd, v. Farmer (Suveyor of Taxes) [1910] 5 TC 529 which laid the ratio that revenue expenditure has to be allowed in the year in which it is incurred. According to the assessee, the cost price was on the increase and that the assessee could not change price for its products at different times. In other words, the assessee had to adopt a particular price throughout the assessment year.

4. The Commissioner (Appeals) in paragraph No. 9 of his order gave a chart giving cost of goods, stocks in hand, etc., and in paragraph No.10 observed that the IAC (who was the assessing authority) added Rs. 58,46,535 to the assessee's income and that the IAC had resorted to Section 145(1) of the Act. The Commissioner (Appeals) quoted the observation of the IAC that the change from first in first out method (FIFO) to LIFO could not be said to be bona fide and that the assessee's intention was to understate the profits for tax purpose.

[Paragraph No. 13 of the Commissioner (Appeals)'s order important (sic)]. However, the assessee contended before the Commissioner (Appeals) that LIFO method was adopted by the assessee for the subsequent years and for the year under consideration.

5. The Commissioner (Appeals) framed certain issues in paragraph No. 17 of his order and practically decided all the issues against the assessee in paragraph Nos. 18 to 22.

In paragraph No. 25 of his order, the Commissioner (Appeals) dealt with the assessee's contention regarding the jurisdiction of the I AC making the assessment. The Commissioner (Appeals) referred to Sections 125, 125(2) (a)(i), 144B and 153 of the Act and held that the IAC had jurisdiction to make the assessment.

On the point of deduction on account of surtax liability the Commissioner (Appeals) held against the assessee. The assessee's claim for deduction of Rs. 52,225 was rejected by the Commissioner (Appeals) under Section 37(2B) of the Act. On the assessee's ground regarding allowance of Rs. 96,750 the Commissioner (Appeals) gave relief of Rs. 1,250 only.

7. In order to understand the manufacturing process of the assessee-company, it was desirable that a visit to the company would be beneficial to arrive at correct decision. Accordingly, we, the Members of the Tribunal along with the departmental representatives and the assessee's learned representative and officials, visited the factory premises of the assessee-company and saw the working procedure. The first point of the manufacturing process was that the bulk of manganese ore was poured in a very huge tank and there was some chemical process as a result of which in another tank there was acid. It must be stressed, however, that it is not the final product which has come out from the manganese ore as it contains manganese ore of nearly 80 per cent. The chemical procedure goes on and thereafter at certain stages different chemicals are poured, out of which, by further process, some different products are produced. However, the finished product comes out of the factory after a period of nearly 8 to 10 months. This is a clear indication that the chemical process of manufacture goes on for about 8 to 10 months and, therefore, it is humanely impossible to say as to what product has come out of the first manganese ore that was put in the first tank. It may be further stated that there are _as many as more than 500 items and even to keep quantity-wise tanks of everything is not possible. It is no doubt true that the assessee gets manganese ore and other steel in its raw form, i.e., in the form of rods, etc., by importing and has to pay customs duty therefor. However, as already stated, because the process is such an elaborate and time consuming one, it is impossible to identify a product as to from which it has come out of the consignment. The finding and observation of the Commissioner (Appeals) in that regard is absolutely baseless and erroneous. We wonder as to what prevented the ITO or the Commissioner (Appeals) to visit the premises of the assessee-company. After all the taxing authority have to tax the real product or the real income and to get correct idea of the assessee's business and as such it was really desirable that the authorities below should have paid a visit to the assessee-company and should have also collected certain information or data from the officials concerned.

8. We now come to the point of so-called change of method. In fact Shri Pophale insisted that it was not a change of method but it was correction of method and he drew our attention to note 18 of profit and loss account which is as under : Note No. 18 to the profit and loss account was given by the auditors as under : 'The company has been following the practice of valuation of inventories at the lower the direct cost or net realisable value thereof. The formula used for computing the 'direct cost' was actual cost or weighted annual average cost. In computing the direct cost of inventories as on 31-12-1975 the periodic last in first out formula of assigning the cost has been used. On the basis of the formula previously used, the value of inventories as on 31-12-1975 would have been about Rs. 486 lakhs, i.e., Rs. 58 lakhs higher. In view of this, the related consumption figures, etc., are also not strictly comparable'.

It was also stressed by Shri Pophale that since the cost price of the raw material was on the increase, at a short period it was not possible for the assessee to make the change in its sale price but it has to adopt a particular cost of the raw material and for which it adopted correction method which is known as LIFO. Even for adoption of this method Shri Pophale drew our attention to pages 3 and 4 of his compilation which is as under : The 'Perpetual' and the 'Periodic' are the two types of LIFO formulae which are widely used. In the case of perpetual LIFO, the rate per unit is calculated at the time of every receipt. In case of periodic LIFO, the rate is calculated taking into account the average of the costs prevailing during a particular period. The company has adopted the periodic LIFO formula covering the financial year as the period, for the following reasons : (a) It is closer to the weighted annual average method previously followed by the company.

(b) The average cycle time from the consumption of ore to the completion of the final product is about 10 months which is closer to the period adopted.

The company has adopted the periodic LIFO method as it is more stable and the income figure is not affected by short-term fluctuations in prices of raw material.

What is the precise effect of the correction in method of valuation applied by the company in 1975 The company had adopted a certain basis over the period 1970-74 for ascribing cost to stocks consumed and on hand. Let us describe it by an illustration as it will also help one to ascertain the precise correction it made at the end of 1975.Description Units CostOpening stocks 20 100(unabsorbed cost)Purchases made 30 170 -------- --------Consumption charged 40 at the rate of average 216(absorbed cost)Closing stock 10 54(Unabsorbed cost) It will thus be seen that the average 5.4 was ascertained during 1970-74 period on the basis of unabsorbed cost of opening stock brought forward plus purchase cost (on 'direct cost' basis) laid out during the year. Out of this, cost of stock consumed was set off against sale proceeds of that year and only the remaining unabsorbed cost was ascribed to the stocks on hand at the end of the year for being carried forward. This basis gives a fairly accurate figure of the year's trading-profit or loss-if there are no wide fluctuations in prices of raw materials, consumable stores, etc.

It will be seen from the above table that if by any chance the closing stock of 10 units happens to come out of the opening stock of 20, then its value is taken at 54 as against its actual cost of 50 brought forward. But it is a cardinal principle of tax that unrealised profit shall not be taxed though as a sole exception, that part of cost incurred and which remains unabsorbed and has become irrecoverable, can be written off instead of being carried forward.

This basis that was adopted since 1970 gave a fairly accurate figure of the year's profit, but its inherent defect becomes more prominently revealed if the cost of raw material goes on rising continually. This is exactly what has happened in the company's case and more particularly in the year 1975. The average landed cost per kg. of W03 in ore went up from 46.96 in 1973 to 69.51 in 1974 and to 138.15 in January-June 1975. Hence, the basis adopted over 1970-74 called for its correction having regard to this primary factor. Its continued adoption in 1975 would have given a very distorted picture of the year's true profits ; for the receipts would be set off by cost on average basis in a rising market so that the net difference would give a large profit figure (because of low cost set off) while the higher cost actually incurred would remain unabsorbed in that very year. Let this be illustrated by another example : In 1975 there had been consumption larger than purchases and, hence, the cost incurred in the year itself had been set off instead of the average cost (based on opening stock plus purchases) of 8.4 per unit, i.e., 336, and carrying forward 50 attributable to opening stock instead of 84 on average cost basis. The change made in 1975 from 1974 is, therefore, this : instead of taking the cost of stock consumed on the average of opening stock plus purchases, the cost of it is taken as its actual cost and the balance remaining (420-370) in that account is automatically carried forward against stock on hand at the end of 1975.

This has been briefly described as 'periodic LIFO formula' in the company's annual report for 1975.

If the company had continued the basis of 1974, then the cost of stocks consumed on average basis would be 40 multiplied by 8.4, i.e., 336 and the cost to be ascribed to stock on hand being the difference (420-336) would be 84 instead of 50. Thus, the difference of 34 (84- 50), due to rise in price of raw material, would be brought to tax in the year 1975 itself when it remained unrealised by consumption. Even Lord Clyde's rule in the Whimster & Co. v. IRC [1925] 12 TC 813 does not contemplate it.

On the other hand, the new formula gives effect to the principle of the Vallambrosa Rubber Co. Ltd.'s case (supra), 'the expense lies where it falls, i.e., in the year in which it is incurred'. In 1975 the company incurred expenditure of 320 and it is set off in that year as part of 370. If the whole purchases of the year were not consumed in that very year and a part of it has to be carried forward to the following year as unabsorbed, it will be so carried forward against year's purchases remaining on hand. Depending on the facts of a given case, some averaging may be called for.

Shri Pophale argued that this LIFO method was the most suitable method of accounting as far as the assessee's business was concerned and that though the assessee so to say departed from the method adopted for the earlier years, this year it had to adopt this method which is as under : If we had persisted with the earlier formula of stock valuation, it would have meant that reported profit before tax would have increased by a further Rs. 58 lakhs to Rs. 455 lakhs, i.e., from 28 per cent of sales and other income in 1974 to 31 per cent in 1975.

This increase in reported profits in spite of the substantial increase in cost of raw materials is notional and arises out of unrealised profits on holding inventories.

Shri Pophale stated that this LIFO method was adopted by the assessee-company for the subsequent years even to this day and it is not that the assessee wanted to dupe the Government by adopting LIFO method only for one year and to show lesser profit. It may further be stated that the assessee was very careful in filing the estimates of returns of income on the basis of earlier method that was used prior to 1975 but this was by way of precaution and, therefore, we find substance in what Shri Pophale stated before us.

9. The learned departmental representative had heavily relied upon the judgment of the Privy Council in Minister of National Revenue v.Anaconda American Brass Ltd. [1956] 30 ITR 84 and urged that the assessee's case is fully covered by the decision of the Privy Council.

We are unable to accept the contention of the departmental representative for the simple reason that the decision in Anaconda American Brass Ltd.'s case (supra) is clearly distinguishable on fact and, therefore, the ratio of the judgment of the Privy Council cannot be used against the assessee.

10. We produce the following cases for basic differences- :Anaconda American Brass Ltd.'s Assessee's casecase (supra)1. Under the LIFO system, adopt- In our case, while applying theed by the company in 1947 for correction to the valuation oftax purposes, the company brought inventories at the end of 1975, thein inventories to account the values unabsorbed cost of inventoriesof 1936 to 1946, i.e., over 10 years.

relating to the year 1974 (opening(p. 95) inventories of 1975) was taken at the figure which was accepted by2. The company's processing of The Company's processing takesgoods was about eight weeks, (pp.

about 11 months.93-94)3. The Privy Council explained the The prices of the company'sfact that the prices which the com- products are not increased auto-pany charged for its products were matically every time the prices ofclosely related to prices paid by raw materials, etc., increase. (Seeit to replace the metals used in manu- paper book p.84)facturing its products and when the4. An expert witness called for the This not so in our case.company observed that he did not5. Large purchases of metals were This is not true in the case of themade during the last months of assessee for the relevant year 1975,1947. (p. 96) because the purchases of ore and drill steel rods had to be made in6. The Privy Council accepted that In the case of the assessee thethe LIFO method was an accep- compution of a year's profits istable method of accounting which governed by Section 145 but itmay be appropriate for the corpo- does not permit taxation of poten-rate purposes of a company (pp.

tial or unrealised profits. [See Sir95-96 and 98) but held that it did Kikabhai Premchand v. CIT [1953]not conform to the prescription of 24 ITR 506 (SC)].the income-tax law since that law 11. It may be stated that in Canada the LIFO method is not appreciated.

However, J. Batty, author of the book Management Accountancy, Fourth edn., has stated that LIFO method is not totally banned or discarded.

The departmental representative relied upon the commentary on the Act by Sampath lyengar in Law of Income-tax, Seventh edn., that LIFO method is not acceptable. However, this can be said to be an author's view but there is nothing in the Act that LIFO method is totally banned. J.Batty has observed as under :--------------------------------------------------------------------------------Method of pricing Brief definition Base of Likely--------------------------------------------------------------------------------Last In, First Items received As for When pricesOut (LIFO) last are assumed FIFO are rising to be issued first, profit is are used.

turnover is rapid the--------------------------------------------------------------------------------Acceptance by Inland Revenue Remarks--------------------------------------------------------------------------------Apparently not acceptable (Minister of National The need toRevenue v. Anaconda American Brass Ltd. [1956] maintain capital30 ITR 84 (PC).

It is not clear what would be intact in realdecided by the Courts if the stock held had been terms in a periodrecently acquired.

The Courts take the view of inflation hasthat the method employed should 'as tended to makenearly as possible accord with the accountantsfacts'.

stress the value of LIFO. (p. 679) Vallambrosa Rubber Co. Ltd.'s case (supra) states that the expense lies where it falls. The assessee's case is not comparable to WIDIA (India) Ltd., as the turnover of the business of WIDIA Co. is on a small scale.

Therefore, considering the ratio in the case of Vallambrosa Rubber Co.

Ltd. (supra), we cannot say that this method is not approved in accountancy. It was argued by the departmental representative that if the LIFO method is accepted, then the assessee because of this particular mode of accounting may build secret reserves. We have gone through the judgment of the Supreme Court in CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 wherein it is clearly laid down by the Supreme Court that the assessee can so arrange his affairs to minimise the tax effect. Therefore, we hold that the Commissioner (Appeals) erred in making addition of Rs. 58 lakhs and odd. Accordingly, we hold that the assessee succeeds on that point.

12. Shri Pophale attacked the order of the Commissioner (Appeals) challenging the validity and legality of the assessment made. This aspect of the matter has been dealt with in paragraph No. 25 of his order by the Commissioner (Appeals). Before him it was urged that the IAC was not justified in passing assessment order in December 1977 and should have been contended to adopt a draft assessment order or to give a direction on every issues to the ITO holding concurrent jurisdiction with him.

The Commissioner (Appeals) has mentioned that the grievance of the assessee was not clear to him and this he has already stated referring to Sections 125, 125(2)(a)(0, 144B and 153. In concluding portion of paragraph No. 25, the Commissioner (Appeals) observed "the IAC was justified in invoking his powers under Section 144A, prior to being vested that jurisdiction under Section 125 . the IAC's action in making the assessment is hereby confirmed." 13. According to Shri Pophale, the additions exceeded Rs. 1 lakh and the ITO was under an obligation to make a draft order and send it to the assessee which he did. The ITO invited objections from the assessee, if any, but the assessee did not raise any objection.

According to Shri Pophale, the ITO was rather confused and he did not know what to do and as such he sent draft order (as directed by him) to the IAC. According to Shri Pophale, before the IAC the assessee challenged the very authority of the IAC acting as assessing authority.

Further, Shri Pophale drew our attention to certain correspondence between the assessee and the income-tax authorities and the assessee wanted to know whether the IAC was allotted to do the assessment of this assessee and the date of allocation, if any. Shri Popjiale made a grievance that no intimation was given by the Commissioner (Appeals) to the assessee in that regard and, therefore, the assessee did not know whom to approach, i.e., whether the I AC was an assessing authority or the ITO who had jurisdiction to assess the assessee.

14. Shri Pophale then stressed that all the provisions in the Act will be overridden by Section 144B because of the words 'notwithstanding anything contained in this Act'. According to Shri Pophale, it is obligatory on the part of the ITO to send draft to the assessee (when the income exceeds Rs. 1 lakh) and the ITO has to complete the assessment order on the basis of the draft order. In the present case, the ITO forwarded draft to the IAC and the IAC's jurisdiction is to confine to the objection raised by the assessee. Directions, if any, given by the IAC are binding on the ITO and not on the assessee. Shri Pophale made a point that Section 144B(7) is also relevant because the IAC has to exercise power to pass an order under Section 144B. Shri Pophale drew our attention to Section 11 of the Act and stated that when the income from property is held for charitable or religious purposes, there are certain conditions or a framework within which the ITO has to pass an order whereas as far as Section 144B is concerned, there is an obligation on the IAC to pass an order making suggestion to the ITO. It was stressed that once the matter went to the IAC he has to pass the order under Section 144B and under such circumstances Section 125A or 144B of the Act lose their significance.

Shri Pophale drew our attention to Explanation l(iv) to Section 153 and stated that the section also shows as to how Section 144B operates, i.e., the section operates independently. According to Shri Pophale, jurisdiction means power to make an assessment. Shri Pophale made a grievance that when the points are not disputed in the draft order to make a new case when all the material was on record. Why one should take hypothetically. The ITO has power to correct the order under Section 144A or 144B of the Act as circumstances may warrant. Once again Shri Pophale urged that the assessee must know as to who was going to assess the assessee. According to Shri Pophale, complete authority is vested in the IAC and that the allocation to Section 125A is mandatory. Shri Pophale also stressed that Section 144B overrides Section 144A.15. We have given due consideration to the rival submissions and we agree entirely with Shri Pophale that the IAC should have passed an order in accordance with the provisions of Section 144B and that the said section has overriding power. Therefore, on that point also the assessee succeeds.

16. The next ground is that the assessing officer erred in refusing to allow surtax liability. Before the Commissioner (Appeals) it was stated that in the assessee's case for the years 1971-72 to 1973-74 the Tribunal had held that surtax liability is deductible under the Act on the ground that it was a business liability. However, the Commissioner (Appeals) rejected the assessee's contention by relying on the order of the Special Bench of the Tribunal in the case of Amar Dye-Chem. Ltd. v.ITO [1983] 3 SOT 384 (Bom.), wherein such a claim of an assessee was rejected. The Commissioner (Appeals) held that surtax liability was not a business expenditure which was allowable under Section 37 or as a loss to be allowed under Section 28 of the Act. The Commissioner (Appeals) further held that the assessee's case was covered by Section 4Q(a)(ii) which .prohibits deduction of any sum paid on account of any rate or tax levied on the profits or gains of any business/profession.

The learned counsel for the assessee urged that only true profits were assessable under Section 28 and, therefore, it could be allowed as a deduction. In view of the Special Bench order in Amar Dye-Chem. Ltd.'s case (supra), we turn down the assessee's claim.

17. The assessee-company claimed deduction on account of superannuation fund contribution. The AAC (acting as assessing officer) added back contribution of Rs. 80,995 as the superannuation fund was not recognised and he allowed deduction of Rs. 52,303 as was originally claimed by the assessee. The assessee-company filed before the Commissioner (Appeals) details of the contributions for the years 1971 to 1975 which amounted to Rs. 89,507 and stated that the said fund was approved by the Commissioner, Pune, by his order dated 4-3-1972. The IAC acting as the ITO allowed only 80 per cent of the contribution.

Before the Commissioner (Appeals) it was claimed that the assessee was entitled to a further deduction of Rs. 19,304 besides Rs. 52,303. The Commissioner (Appeals) accepted the contention of the assessee-company.

The assessee further challenged the deduction at the rate of 20 per cent following the CBDT's Circular No. SO 3433 dated 21-10-1965. The Tribunal, Bombay Bench 'D', in the case of Mahendra & Mahendra Ltd. held that circular was ultra vires. Therefore, having regard to the aforesaid order, we hold that the assessee is entitled to the deduction of entire contribution of Rs. 89,507 as against Rs. 71,607 allowed by the Commissioner (Appeals).

18. The last ground before the Tribunal was that the assessee-company paid Rs. 94,500 to Mahavir Prasad (liaison officer at New Delhi) on termination of his services during the year under account was equal to 18 months' salary. Shri Mahavir Prasad, who was in the employment of the company since 1-9-1962 and at the time of his leaving the company services, was paid salary of Rs. 5,250 per month plus Rs. 1,200 per month perquisite. He served for 5 months during the year under account.

The IAC acting as the ITO noted that there was no agreement of the company with Mahavir Prasad and that in another case an employee was paid 12 months' salary and held that Rs. 94,500 was paid as ex gratia to Mahavir Prasad and that under Section 40A(5) Rs. 2,250 was disallowable being in excess of ceiling of Rs. 5,000 per month and Rs. 1,000 per month which was perquisite. In all Rs. 96^750 were disallowed.

19. The Commissioner (Appeals) considered the assessee's contention that it was retirement gratuity. He held that there was no evidence of services rendered by Mahavir Prasad as liaison officer. He, therefore, confirmed the disallowance of Rs. 94,500. The Commissioner (Appeals) partly accepted the assessee's contention that ceiling under Section 40A(5)(c)(i) should be applied for the whole year and not on monthly basis in the case of ex-employee. He, therefore, deleted Rs. 1,250 out of Rs. 2,250.

20. It was contended before us that Rs. 94,500 was business expenditure and should be allowed in full and even if the revenue's contention regarding applicability of Section 40A(5) was accepted, then deduction of Rs. 60,000 should be allowed as against Rs. 31,250 allowed by the lower authorities. Accordingly, we accept this contention of the assessee and further give reduction of Rs. 28,750. The alternative contention of the assessee's counsel is not acceptable to us.

1. The order of my learned brother (Judicial Member) dated 25-11-1980 has been placed before me on my return from leave on 12-1-1981. I have given it very careful consideration. I, however, find myself unable to agree with my learned brother. 1. accordingly, proceed to write a dissenting order.

2. The assessee-company manufactures various tungsten carbide products such as tips, dyes, nibs, drill steels, cutters, scrappers, etc It follows previous year ending 31st December.

3. The company's first grievance is against the addition of Rs. 58,46,535 on account of valuation of closing stock.

4. The IAC (later referred to as assessing officer) noted that the company's auditors in note 18 to profit and loss account had observed that the company had so far followed the practice of valuation of inventories at the lower of direct cost or net realisable value and that the direct cost was worked out on the basis of actual cost or weighted annual average cost, but in calendar year 1975, the company had valued the closing stock by periodic (yearly)/LIFO formula according to which the closing stock was valued at an amount lesser than Rs. 58,46,535 as compared to the valuation if the earlier method had been followed. The assessing officer further noted that in the manufacture of tungsten carbide products, tungsten ore was one of the most important raw materials which was imported and its international price which stood at Rs. 31 per kg. in July 1972 and at Rs. 37 in June 1974, shot up to Rs. 82.76 in December 1974 and that in the calendar year under consideration (1975) the prices varied between Rs. 98 in February 1975 to Rs. 93 in December 1975, which showed that there was no abrupt rise in the year under consideration. The assessee's next contention before assessing officer was that 8-10 months was required to offer the end product for sale since the receipt of the basic material, that unrealised profits should not be taxed and that basis adopted from 1970, namely, FIFO method, gave accurate profits up to 1974 but had inherent defects when the cost of raw material goes on rising continually without being truly reflected in the sale price of finished products, that neither LIFO nor FIFO had any relation to actual consumption and merely prescribed a formula to ascribe costs to the stock consumed and stocks remaining unconsumed and that the switch over to LIFO was justified by abnormal rise in raw material cost coupled with want of corresponding rise in the price of finished product, period of one year to get the end product (sic) that in inflationary period LIFO prevents taking credit for unrealised profits and the company merely corrected the aberration already set in during the earlier years. When the assessing officer relied on the Privy Council decision in Anaconda American Brass Ltd. ''s case (supra), the assessee claimed that its case was distinguishable and that the assessee had adopted FIFO method all along, with some refinement in 1970. The assessing officer thereafter in his order gave break up of Rs. 58.47 lakhs by giving valuation of different items by LIFO and FIFO methods. He observed that in tungsten ore, there was no continuous spiral in prices except in December 1974 and that the change-over by the assessee was motivated by desire to understate profits for tax purposes and the Privy Council in Aniconda American Brass Ltd.'s case (supra) had observed that LIFO had never been recognised as an acceptable method in Canada and the same was the position in India and the assessee's case was comparable inasmuch as while in Anaconda American Brass Ltd.'s case (supra) 1936 values were proposed for 1947 values, in the assessee's case 1974 values would be substituted for the values of stock prevailing many years later. He, therefore, made an addition of Rs. 58,46,535 5. The Commissioner (Appeals) upheld the addition after noting that the board of directors of the assessee-company in paragraph No. 10 of their report dated 25-6-1976 had opted for change in method of valuation from LIFO to FIFO and that even on 15-12-1975 company appeared to have estimated its income at Rs. 4.75 crores on the old method of valuation and the same was changed to the new method only in the return filed on 30-6-1976 declaring income of Rs. 3.72 crores. He further noted the increase in prices of hollow steel and tungsten (two raw materials of the assessee-company) from July 1972 to October 1976 and that the assessee-company had also been increasing its sale price from 1-1-1973 to 1-10-1974 which it had almost doubled for Tips C. 16 and increased one and half times in drill steel 714 and there was no increase in prices from 1-11-1974 to 1-12-1976 and that LIFO method was adopted in the meeting of board of directors held on 1-5-1976. The Commissioner (Appeals) observed that if the period of production of the assessee was one year, then the effect of inflationary increase in raw materials should be felt in the cost of production of goods sold in the next year and the assessee may be justified in correcting its method of valuation in 1976 rather than in 1975 and the resolution dated 1-5-1976 of the board of directors should also be operative in 1976, that the parent company of the assessee (Sandvik AB, Sweden) had not made any change in the method of valuation of its stock and the assessee's main Indian competitor, WIDIA (India) Ltd. Bangalore, had also not made any change in the method of valuation and that the assessee had not shown that inflation in drill steel prices was worldwide. The Commissioner (Appeals), therefore, upheld the said addition.

6. At the hearing before us, the learned counsel for the assessee submitted that the profit unless realised cannot be taxed, relying on Sir Kikabhai Premchand's case (supra) and considering the inflation in the cost of raw materials (tungsten and hollow steel bars) the assessee changed to LIFO and that the assessee was entitled to make correction in his method of valuation and the assessee's motives had no relevance nor the fact how his competitor valued his stock and the only question was whether by the method followed by the assessee, profits had been correctly reflected for the purpose of income-tax, the Commissioner (Appeals)'s observation that the change in method should be in 1976, the assessee urged that if the change of method was justified in 1976, there was no reason why it could not be adopted in 1975. My learned brother in his order has exhaustively given the assessee's submissions, so I am not repeating them.

7. The learned departmental representative drew our attention to pages 38 and 39 of the assessee's paper book I and page 4 of the departmental representative's paper book where the valuation of stock on the basis of old and new methods was illustrated. He submitted that LIFO method assumed that part of the opening stock was not consumed and that the last receipts of stock had been consumed. His submission was that in case of inability to identify raw material which has gone into production, proper method is to estimate closing stock in proportion to raw material consumed and that the normal course of things was that stocks/purchases which came first would be used first, but as no material to show the contrary practice had been furnished by the assessee, average basis was the only proper basis which the assessee had been following in earlier years and in the absence of supporting material, any other method would not give correct picture of profits.

He stated that the average basis was the proper method and in LIFO assumptions have to be made, which if not made on facts would not give correct picture.

8. The learned departmental representative relied on the observations in Sampath lyengar on Law of Income-tax, Seventh edn., Vol. 4 at p.

3439 under the heading '(Systems of Valuation' that LIFO and 'Base stock method' have been rejected by the Courts as not reflective of the true profits. Similarly, on page 3446 it was observed relying on Anaconda American Brass Ltd.'s case (supra) that LIFO method even as an estimate was irrational and afforded no basis for arriving at true income and does not reflect the true profit for the purposes of income-tax. Our attention was also drawn to Whiteman & Wheatcroft on Income-tax and Surtax 1971 edn. at p. 366 in paragraph No. 9.31 where the learned author noticed the Privy Council decision in Anaconda American Brass Lid's case (supra) that LIFO method is inappropriate for tax purposes as it clearly disregarded the facts of the case in question and as a general rule FIFO must be regarded as the appropriate assumption to make. ...

9. The learned departmental representative urged that in the absence of identification of the closing stock with the units purchased during the year or relatable to opening stock, the method of valuing the closing stock by taking the average of the cost of opening stock and purchases during the year was the correct method which the assessee had been following in the past. In support of the averaging method, reliance was placed on CIT v. Girdhardas & Co. (P.) Ltd. [1967] 63 ITR 300 where the Supreme Court applied the average method in respect of payments by the company to the shareholders for the purpose of ascertaining whether the said payments were out of the accumulated profits or was the return of capital to the shareholders. Similarly, for ascertaining the value of bonus shares issued to the shareholders, the Supreme Court had approved of averaging the cost of original shares and the bonus shares, in CIT v. Gold Co. Ltd. [1970] 78 ITR 16 which the Bombay High Court had followed in D.M. Dahanukar v. CIT [1973] 88 ITR 454.

10. The learned departmental representative urged that to test the assessee's claim that whether the change in method of valuation to LIFO was only a correction, we have to examine whether this method helps in ascertaining the true profits of the year. The Supreme Court in Sir Kikabhai Premchand's case (supra) had observed that in revenue matters regard must be had to the substance of the matter and not to the form.

The departmental representative questions the assessee's proposition that the department wanted to assess unrealised profits He urged that the assessee having made sales had already realised the profits and by adopting LIFO method, the assessee wanted to convert the realised profits into secret reserves, e.g., one unit in stock may be valued at Rs. 5 for 10 years when the cost or market price of the said unit may have gone up to say Rs. 50 in the said span of time. The departmental representative questioned the necessity of change-over by the assessee to LIFO method in year under consideration (1975). He drew our attention to the assessee's justification for the change-over (as per page 2 of paper book II) as also to pages 50-51 of the assessee's paper book I. It was shown that while there was a jump in 1974 in the" price of tungsten ore (per kg.), e.g., when in December 1974 it jumped to Rs. 83.76 from Rs. 36.74 as in June 1974, there was a downward trend in 1975 (year under consideration) where from Rs. 98.22 in February 1975, the prices had shown a downward trend and stood at Rs. 93.65 in December 1975. Similarly, the prices of drill steel bars did not show much fluctuation, as the prices increased marginally to Rs. 9.08 per kg. in June 1975, as against Rs. 8.93 in February 1975. Thereafter, the prices jumped to Rs. 11.55 in July 1975 and were steady in the next five months and had stood at Rs. 11.21 in December 1975. It was also submitted that the assessee's reliance on the observation of an author, Joel Dean of Graduate School of Business, Columbia University (USA) in Managerial Economics was misplaced because the said author only talked of accountancy principles and that too in USA. However, the said method (LIFO) had been rejected by the Privy Council in Anaconda American Brass Ltd.'s case (supra) where the Privy Council noted that LIFO method had been accepted in America, where many statutory conditions had been laid down for the application of the said method. The departmental representative drew our attention to page 95 of the said judgment where the Privy Council had given the break up of the closing stock in 1946 by LIFO method according to which, the valuating of 1946 closing stock valuation was equated to purchase price in 1936. The Privy Council observed that what was to be valued at the beginning and end of the accounting period for tax purpose was the actual stock so far as it could be ascertained and that the profits of a business was surplus by which the receipts exceeded the expenditure incurred necessarily for the purpose of earning those receipts and that no assumption need be made unless the facts could not be ascertained and that there was no room for theories as to flow of costs, nor is it legitimate to regard the closing inventory as an unabsorbed residue of costs rather than as a concrete stock of metals awaiting the day of process and that new theories of accountancy though accepted for business purposes might not necessarily determine income for tax purposes.

11. The departmental representative next urged that on the method of valuation of closing stock, the only decision available was Anaconda American Brass Ltd.'s case (supra) rendered by the Privy Council and as the English law and the Indian law on the principle of valuation of stock was the same, due weight should be given to the aforesaid decision which had stood the test of time for 25 years (having been delivered in 1955) and even if a different view might be possible, the aforesaid view should be accepted as it had stood the test of time and it was necessary that there should be uniformity in law. Reliance was placed on CIT v. Balkrishna Malhotra [1971] 81 ITR 759 (SC) and on CIT v. Smt. Godavaridevi Saral [1978] 113 ITR 589 (Bom.).

12. It was claimed that the test for ascertaining]whether the assessee was entitled to change method of valuation was whether the true profits can be deduced after the change in method of valuation and if the true profits cannot be ascertained, then the new method should be rejected.

It was emphasised that the assessee during the year under consideration (calendar year 1975) had itself followed the old method of valuation as was clear from the advance tax estimate dated 15-12-1975 of Rs. 4.75 crores and the payment of advance tax instalments accordingly and that it was only in the next year (May 1976) that the directors decided to change the method of valuation. Therefore, the said decision of 1976 should not govern and upset the method of valuation followed by the assessee in 1975. Our attention was also drawn to the fact that the assessee's principal competitor WIDIA (India) Ltd. did not change the method of valuation nor did the assessee's holding company Sandvik AB, Sweden. There was no evidence that the commercial practice in India had changed in favour of LIFO method.

13. Our attention was also drawn to the report of Royal Commission on Taxation of Profit and Income (June 1955) which in Chapter 18'Stock and the computation of profits' referred to FIFO in paragraph No. 461 which was the method adopted in UK. The inland revenue suggested that FIFO should be made compulsory, but the Royal Commission rejected the said recommendation and observe that the assessee could adopt any other method subject to the conditions that the method should be acceptable and should disclose to the real cost and not the artificial cost and the method should be calculated to disclose the real profits of each year. The departmental representative urged that the assessee's method LIFO does not satisfy either of the above tests as the assessee had valued the closing stock by arbitrary and fictitious method and if this method is followed over a period of years, it would not disclose true profits. This proposition was highlighted by giving example of a gold merchant who had bought some gold in 1950 at the rate of Rs. 100 per tola and though the same was sold out, he continued to value the stock in hand at the said price though the present prices were more than 15 times the said purchase price of 1950.

14. Reliance was placed on CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 where the Privy Council observed that it is an incorrect view that the ITO is to accept the profits shown by the assessee's accounts where there is a method of accounting regularly employed by the assessee and that it is the duty of the ITO to consider whether the income can be properly deduced therefrom and to proceed according to his judgment on the question. The Madras High Court in Asher Textiles Ltd. v. CIT [1952] 22 ITR 125-129, held "that the cost price of closing stock should be taken as meaning 'original cost price' and not a notional cost price.

15. I have carefully considered the submissions of both the parties. It is obvious that there is only one decision available on the controversy in hand and that decision is of the Privy Council in Anaconda American Brass Ltd.'s case (supra). Though the said decision having been rendered on 13-12-1955 is not binding on us, but it is entitled to very high respect. More so, when there is no contrary decision of any Court in India. As the said decision had stood the test of time for 25 years, I am inclined to follow the said judgment. Even otherwise, the observations of the Privy Council in that case commend themselves to me. In the said case, the company who was carrying on business of purchasing metals and manufacturing them into sheets, rods and tubes had shifted to LIFO method in 1947 on the ground that there were large increases in the prices of the metals purchased by the company. Thus, the company attributed higher cost to the metals processed and lower cost to those retained in the stock. The Privy Council rejected this method and held that FIFO method must be adopted, i.e., metal first purchased was the metal first used by it on the assumption that metal used in the year were those which had been longest in the inventory.

The company had urged that as per modern accounting practice, the replacement cost and not the actual cost of metal used should be regarded as expenditure incurred in manufacturing the products sold in the year. LIFO was, thus, an estimate of replacement of cost of the metals and the closing stock under this method represented the unabsorbed residue of cost. The result of adopting LIFO was that higher cost was attributed to the metal processed and the lower cost to that retained in stock and the company was able to show lower profits than if it had followed the accustomed or traditional method of valuation.

The Privy Council posed the question whether the new method was permissible for income-tax purposes. The Privy Council accepted the revenue's submission that LIFO method, however, appropriate for corporate purposes of the company, did not truly reflect company's profits for income-tax purposes and referred to observations of Lord Clyde in Whimster & Co.'s case (supra) that the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts and that the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting and in conformity with the rules of the Act. They further observed that so far as tax law is concerned, it was a novel and even revolutionary proposal that the physical facts should, even where they can wholly or partly be ascertained, be disregarded for the purpose of opening and closing inventory and a theoretical assumption made which is based on a supposed 'flow of cost' and an 'unabsorbed residue of cost'. They noted that by applying LIFO, the company could value its closing inventory in 1947 on the basis of 1936 costs and that even in 1987 closing inventory would carry stock with 1936 cost ascribed. Noting the respondent's argument that in dealing with homogeneous material, the actual user test would lead to capricious and illogical results, the Privy Council observed that average cost method could properly be adopted (which the assessee before us has been adopting till 1974 and it has shifted to LIFO only in the year under appeal, i.e., 1975). The Privy Council further observed that under LIFO method when a business continues and stock is carried forward, substantial purchases will never come into the profit account at all and that the hidden reserve is thus created which may be useful for corporate purposes or from accountancy point of view, but was certainly against the income-tax principles because in computing the income for the year 1947 under the Act, the revenue was not concerned with the year 1948 or 1949. The Privy Council noted that LIFO method which originated in the USA was permitted to be adopted for tax purposes in 1938 and that in 1939 amendments were made and the method was now permitted subject to statutory conditions. They observed that new theories of accountancy, though they may be accepted and put into practice by businessmen, did not finally determine a trading company's income for tax purposes and referred with approval to observations of Brandeis, J. while dealing with 'base stock method' which, according to their Lordships, applied equally to LIFO method, viz., that by this method income was understated and reserves were created.

16. In view of the very lucid and convincing reasons given by the Privy Council for rejecting the LIFO method while computing the taxable income of the assessee, I hold that the assessee is not entitled to changeover to LIFO method and the lower authorities were right in rejecting the assessee's claim. I am not impressed by the distinctions sought to be made by the assessee before us with Anaconda American Brass Ltd.'s case (supra). The said distinctions, I may say, are without any difference and do not displace the applicability of the basic proposition laid down by the Privy Council.

17. J. Batty in Management Accountancy, Fourth edn., at p. 679 (as reproduced in paragraph No. 11 of Judicial Member's order) has only pointed out that LIFO was not accepted by inland revenue (UK) and that in a period of inflation the accountants stressed the value of LIFO for purpose of maintaining capital intact in real term. Thus, the views of the said author on accountancy have no bearing on the question of determination of profits for income-tax purposes. Views of Sampath lyengar in Law of Income-tax, Seventh edn., Vol. 2, at pp. 3439 and 3446 (referred in paragraph No. 8^ as also that of Kanga and Palkhivala's Law and Practice of Income-tax, Vol. 1, on pages 869, 879 and 881 are relevant insofar as they summarise the law laid down by the Courts. Even otherwise, the views of such distinguished commentators are entitled to some weight. The decision in Vallambrosa Rubber Co.

Ltd. 's case (supra) is only regarding the expense lying where it falls and this has to be considered along with Anaconda American Brass Ltd.'s case (supra) and 12 TC 1017, 1027 (sic). The fact that the assessee's competitor WIDIA (India) Ltd. was smaller than the assessee is not very material. We have to consider the question of finding out the profits for income-tax purposes and the inflation in price of raw material would affect both the competitors. The Supreme Court's observations in Calcutta Discount Co. Ltd.'s case (supra) are not relevant for the consideration of the problem before us because in that case the said company had transferred certain shares to its subsidiary company at less than market price and the Supreme Court held that the taxing authorities cannot take into account the market price of the goods, ignoring the real price fetched. In our case the question is valuation of stock and which is the proper method for correct ascertainment of profits. Our visit to the assessee's factory was useful in giving us a broad picture of this capital intensive industry, but in the absence of our being able to examine any records kept at different stages of production, the visit had only a limited advantage and actually it did not have any direct bearing for resolving the problem before us.

18. The assessee's next grievance is against the validity of assessment by the IAC. The relevant facts are that the ITO was holding jurisdiction over the assessee's case and by his letter dated 18-6-1977 to the assessee, he mentioned that as the variation between the income returned by the assessee and the income proposed to be assessed by the ITO, was more than Rs. 1 lakh, therefore, under Section 144B(1) he was forwarding to the assessee the draft of the proposed order of assessment. The assessee by its letter dated 21-6-1977 acknowledged receipt of the draft assessment order and stated that the contents of the same had been noted and 'this is without prejudice to our rights under the Income-tax Act, 1961'. The ITO, therefore, by his letter dated 5-7-1977 forwarded to the IAC the draft assessment order and the assessee's objections for action under Section 144B(4), under which provision the IAC is to issue directions for the guidance of the ITO to enable him to complete the assessment. Thereafter, the IAC on 7-7-1977 wrote to the ITO that he proposed to issue notice under Section 144A to the assessee and, therefore, the ITO should not pass the assessment order and await further instructions. The IAC on 13-7-1977 wrote to the assessee regarding the change of method or valuation of stock from FIFO to LIFO on which point he proposed to issue directions to the ITO under Section 144A and asked the assessee to state its objections on or before 22-7-1977. The assessee appeared before the IAC on 22-7-1977 and filed a detailed reply. On 27-7-1977 the Commissioner passed order under Section 125A(1) of the Act vesting concurrent jurisdiction in the IAC, along with the ITO with effect from 1-8-1977. On 23-9-1977, the said IAC wrote -to the assessee referring to hearing already given by the ITO culminating in the draft order and further hearing under Section 144B and the fact that the assessment jurisdiction had been assigned to the said IAC under Section 125A, he offered to the assessee further opportunity under proviso to Section 129 of the Act and asked it to clarify a number of points. The assessee by its letter dated 24-1-1977 claimed that the assessment proceedings had terminated with the issue of draft assessment order by the ITO which the assessee claimed to have accepted and, therefore, under Section 144B(3) it remained for the I AC to have the assessment order issued on the basis of the draft order and as no assessment proceedings were pending, the question of the assessee availing of opportunity under Section 129 did not arise. Thereafter, without prejudice to the assessee's lights, the assessee furnished information required by the IAC in respect of the year under consideration (the assessment year 1976-77).

19. On these facts, the assessee contends that the IAC did not have any jurisdiction to make the addition mentioned above of Rs. 58,46,535 in respect of the change of method of valuation of stock and that the draft assessment order sent to the assessee had become final and the IAC had only to sign on the doited line. It was claimed that the procedure laid down by Section 144B(1) had overriding force in view of the non obstante clause in the said sub-section and, therefore, Section 144A as well as Section 125A had to be ignored. A subsidiary objection was also raised that as there was no allocation of jurisdiction between the I AC and the ITO, therefore, the assessment order by the IAC was illegal.

20. The learned departmental representative urged that the assessee had not accepted the draft assessment order and the ITO had forwarded the said draft assessment order to the IAC along with the assessee's objections by his letter dated 5-7-1977 and, therefore, the assessee was incorrect in claiming that the assessment should be completed on the basis of the draft assessment order. Our attention was also drawn to the language of the assessee's letter dated 21-6-1977 in which the assessee only claimed that the contents of the ITO's draft assessment order had been noted and that this was without prejudice to the assessee's rights under the Act. It was urged that if the assessee had accepted the draft order, then there was nothing easier than the assessee to say so in clear terms and the fact that the assessee was reserving its rights under the Act unmistakably showed that the assessee proposed to go in appeal and this was confirmed by the assessee's action in agitating in appeal the additions sought to be made by the ITO in the draft order in respect of surtax liability as well as superannuation fund. It was, therefore, claimed that the assessment was open, as the assessee had not accepted the draft assessment order and at this stage the IAC was legally competent to take action under Section 144A by calling for and examining the records of any proceeding of which the assessment was pending and he could issue directions to the ITO as the matter was open and when the IAC acted under Section 144A on 13-7-1977, the assessee did not raise any objections. He urged that the Commissioner's order under Section 125A validly vested concurrent jurisdiction in the IAC and the IAC was, therefore, within his rights in going over the whole assessment and in making the addition in question of Rs. 58,46,535. It was urged that Section 144B(7) clearly laid down that where the jurisdiction had been vested in the IAC by an order under Section 125A, Section 144B had no application. Even otherwise to insist that the IAC should pass order as drafted by the ITO made nonsense of the fact that IAC had to pass a judicial order and was not supposed to sign on the dotted line the draft assessment order proposed by the ITO as it would make meaningless the transfer of jurisdiction to the IAC. The learned departmental representative claimed that even the ITO could pass assessment order different from the draft order sent by him to the assessee. He highlighted this proposition by posing the question that if within seven days of the sending of the draft assessment order to the assessee, the assessee filed a revised return or within the said period a binding decision of a High Court or the Supreme Court was received, then the ITO could not be expected to still stick to the draft assessment order. It was claimed that there was nothing sacrosanct in the draft assessment order as its purpose was only to cut down litigation. Therefore, during the pendency of the assessment before the ITO the IAC could issue directions to the ITO under Section 144A and that non obstanle clause in Section 144B(1) only operated to override the other provisions of the Act insofar as it directed that in the case of variation (between the income returned and proposed to be assessed) of Rs. 1 lakh, the ITO should not proceed to complete the assessment but should send a draft assessment order to the assessee. Insofar as this procedure was at variance with other provisions of the Act, this procedure had overriding force. However, the said non obstante clause in Section 144B(1) did not cut the operation of Section 144A regarding the IAC's power to issue instructions nor it operated to cut the operation of Section 125A which authorised the Commissioner to confer concurrent jurisdiction on the IAC. It was claimed that proviso to Section 144B(4) envisaged the widening of the controversy insofar as the IAC could travel outside the points raised in the draft order and the only limitation on the IAC's power was of hearing the assessee.

Reliance was placed on Balkrishna Malhotra's case (supra) to claim that the assessment was not completed, by merely computing the income, but for the assessment to be completed, it was necessary to determine the tax payable by the assessee, and, therefore, the draft assessment order could not be equated with completion of assessment. It was urged that Sections 144A and 144B were introduced by the Taxation Laws (Amendment) Act, 1975, and they were not mutually exclusive and it was a common practice that both the said sections were resorted to simultaneously and as both these sections had been introduced by the same Amendment Act, the Legislature, if it intended that Section 144A should not be operative where Section 144B was in operation, could have said so. It was urged that both the sections should be harmoniously construed and interpretation which conferred jurisdiction should be preferred.

(Legislation and Interpretation by Jagdish Swarup, 1974 edn., p. 418).

It was also urged that the assessee's ground of appeal challenging the IAC's jurisdiction was incompetent as the question of jurisdiction was not appealable, relying on Law and Practice of Income-tax by Kanga & Palkhivala, Seventh end., p. 789 'Appeal and Reference'. Regarding the allocation of jurisdiction between the IAC and the ITO, the departmental representative claimed that the allocation had been made vide the IAC's order dated 16-11-1977. The original order was shown to us as also to the assessee's counsel.

21. I have carefully considered the submission of both the parties and I am unable to accept the assessee's contentions. Regarding the lack of jurisdiction of the IAC, the assessee never accepted the proposed draft assessment order which was clear by the assessee's reserving its rights under the Act. The matter was, therefore, open as the ITO had forwarded the assessee's objections to the IAC along with the draft assessment order and the IAC was, therefore, within his rights in proposing to exercise jurisdiction under Section 144A. Thereafter, the Commissioner had passed order under Section 125A by vesting concurrent jurisdiction in the IAC and, therefore, the IAC thereafter had jurisdiction and he passed the order after giving the assessee a hearing. It may be noted that the IAC after the submission to him of the draft assessment order and the assessee's objections had issued a letter dated 13-7-1977 to the assessee, exercising powers under Section 144A, regarding the closing stock valuation and the assessee was heard on 22-7-1977 when the assessee did not object to the exercise of jurisdiction by the IAC under Section 144A and it is only at the fag end of the assessment that on 24-10-1977 the assessee came out with its limited objections that the IAC should complete the assessment in terms of the draft assessment order.

22. I would, therefore, hold that the assessee has no case for claiming that the assessment had to be completed in terms of the draft assessment order sent to it by the ITO. I, therefore, hold that the assessment by the IAC was legally made. I, accordingly, uphold the order of the Commissioner (Appeals) on this point.

23. I agree with my learned brother regarding refusal of surtax liability, reduction of Rs. 17,900 for superannuation fund contribution and of Rs. 28,750 in respect of remuneration to Mahavir Prasad. (Dealt in paragraph Nos. 16 to 20 of the Judicial Member's order).

1. As we have differed on the following points, the case may be referred to the President under Section 255(4) of the Act to nominate a Third Member to decide this appeal : 1. Whether, on the facts and in the circumstances of the case, the LIFO method adopted by the assessee is justified 2. Whether, on the facts and in the circumstances of the case, the IAC had jurisdiction to make an assessment on the assessee as an assessing officer? 1. The assessee-company manufactures various tungsten carbide products like tips, dyes, nibs, drill steels, cutters, etc. The company followed the previous year ended on 31st December. It also followed the practice of valuing inventories at the lower of direct cost or net realisable value from year to year. The direct cost was worked out on the basis of actual cost or weighted annual average cost. During the year relevant to the assessment year under appeal, the company changed its method of valuing closing stock. This was indicated by note 18 appended to the profit and loss account by the company's auditors running as under : The company has been following the practice of valuation of inventories at the 'lower of the direct cost or net realisable value' thereof. The formula used for computing the 'direct cost' was 'actual cost' or 'weighted annual average cost'. In computing the direct cost of inventories as on December 31, 1975, the periodic last in first out (LIFO) formula of assigning the cost has been used. On the basis of the formula previously used the value of inventories as on December 31, 1975, would have been Rs. 4,86,58,904, viz., Rs. 58,46,535 higher. In view of this the related consumption figures, etc., are also not strictly comparable.

The directors referred to the same in item No. 10 of their report as under : In their report, auditors have referred to note No. 18 on the profit and loss account, which deals with the valuation of inventories. In accordance with accepted accounting convention, inventory valuations are generally at cost, which is not in excess of market. In determining the cost of inventories as at the end of the year, the company has adopted the formula known as 'the Last in First out (LIFO). This formula has produced a more realistic statement of earnings, by bringing current costs and current revenues into closer alignment. The LIFO formula is considered sound and conservative particularly in times of spiralling inflation. The international accounting standards recognises this formula, which is followed by large corporations particularly in the United States of America.

2. The revaluation of the closing stock resulted in a reduction of closing stock of Rs. 58,46,535 compared to the figure of closing stock if the earlier method had been followed. The assessing officer in this case, the IAC, noted that in the manufacture of tungsten carbide products, tungsten ore was one of the most important raw materials and it was imported. In July 1972 the international price of this raw material stood at Rs. 31 per kg. In June 1974 it came to Rs. 37 and in December 1974 it shot up to Rs. 82.76 per kg. In the calendar year 1975 the price varied between Rs. 98 in February 1975 and Rs. 93 in December 1975, thus, showing that there was no abrupt increase in the price during the year. He took into account the assessee's claim that the inflation and the accompanying price fluctuations necessitated a change-over to the new method of stock valuation which was bona fide adopted by the assessee. Not accepting the claim of the assessee, however, he added the sum of Rs. 58,46,535 to the total income.

3. The Commissioner (Appeals) upheld the addition. He noted the fluctuation in price of raw materials and also found that the assessee-company had also been increasing its sale price from 1973 to 1974. According to him, the period taken for production did not justify the change-over. Neither the parent company in Sweden nor the other Indian competitors had made any change in the method of valuation if that was absolutely necessary for the particular manufacture. The assessee did not show even the inflation in drill steel prices was worldwide. The assessee appealed to the Tribunal against the order of the Commissioner (Appeals).

4. Hearing the appeal the learned Judicial Member and the Accountant Member passed differing orders the learned Judicial Member holding that the addition of Rs. 58,46,535 was not justified. He held that the changed method could not be said to have been not 'approved in accountancy'. Dealing with the argument on behalf of the department that if the LIFO method is accepted, then the assessee because of its particular mode of accounting may build up secret reserves, the learned Judicial Member referred to the Supreme Court decision in the case of Calcutta Discount Co. Ltd. (supra) to emphasise that the assessee could so arrange its affairs to minimise the tax effect. The learned Accountant Member on the contrary held that the assessee was not entitled to change over to LIFO method and the authorities below were right in rejecting the assessee's claim. In his view, the Supreme Court's observations in the case of Calcutta Discount Co. Ltd. (supra) were not relevant to the problem before the Tribunal. The question here was one of valuation of stock and what was the proper method for the correct ascertainment of profits. Though the learned Accountant Member did not give any finding in his order as to his upholding the addition of Rs. 58,46,535, his decision on the change-over to the LIFO method, it would appear, leads to the inevitable corollary of sustaining the addition. The assessee challenged the jurisdiction of the IAC to make the assessment on the assessee as an assessing officer. The learned Judicial Member, for the reasons stated in paragraph Nos. 12 to 15 of his order, accepted the assessee's claim that the IAC should have passed an order in accordance with the provisions of Section 144B and that section had an overriding power. The assessee's claim was thus accepted by him. The learned Accountant Member on the contrary, held that the assessment by the IAC was properly made for the reasons set out in paragraph Nos. 18 to 22 of his order.

5. The two Members thus having differed, the following points are referred to the President for my decision as a Third Member : 1. Whether, on the facts and in the circumstances of the case, the LIFO method adopted by the assessee is justified 2. Whether, on the facts and in the circumstances of the case, the Inspecting Assistant Commissioner had jurisdiction to make an assessment on the assessee as an assessing officer 6. Consequent to a miscellaneous petition filed by the ITO, the Tribunal by their order in Miscellaneous Application No. 25 (Pune) of 1982 dated 26-10-1982 altered the questions to be referred to the following : 1. Whether, on the facts and in the circumstances of the case, the addition of Rs. 58,46,535 made by the IAC in determining the assessee's income by rejecting the LIFO method as adopted by the assessee in valuing its closing stock is correctly made 2. Whether, on the facts and in the circumstances of the case, the IAC while making the assessment on the assessee as an assessing officer, had jurisdiction to make addition or alteration to the total income proposed by the ITO in the draft order 7. The learned counsel for the assessee has pointed out that the assessee was following a consistent system of valuing closing stock for the purpose of arriving at its profit from year to year. The important raw material involved in the manufacture being imported and subject to the world fluctuation in prices the uncontrolled inflation substantially affected the assessee's business and profit structure.

The increase in the price of the raw material was as much as 3 times in 1973, double in 1974 and substantially higher during the year under appeal. In order to take into account the correct profit of the business, the assessee had, therefore, no alternative but to follow a more logical and realistic method of valuing closing stock which could upset the uncontrolled inflation and other effects which were beyond the assessee's control. The LIFO method was evolved in United States and other advanced countries in the 1930s and has been followed in a large number of countries in the world to give an accurate method for obtaining the profit of manufacturing enterprises. It is both a scientific method as well as a well recognised method. To support his stand the learned counsel has referred to several authorities. The Indian edition 1976 of Managerial Economics by Joel Dean of Graduate School of Business, Columbia University, gives the following : Last in First out (LIFO) inventory accounting can, in periods of inflation, help approximate contemporary dollar earnings. It is now widely used and can qualify as a legitimate method of costing materials for income-tax purposes. By the LIFO method, the last materials purchased are the first charged to cost of goods sold, and when the inventory turnover is slow, business income is measured on the basis of more recent prices of materials than under the First in First out (FIFO) method. When prices are rising, LIFO produced a lower income than FIFO (since stated material costs are higher) and when prices are falling it shows a higher income. LIFO, thus, tends to wash out the paper profits that result from comparing a closing inventory with an equal opening inventory stated at different prices. (p. 22) The learned counsel referred to the following from the Studies in Accounting Theory, Second edn., by W.T. Baxter, Professor of Accounting, University of London : Inventories are seldom held more than a year or so and this means that in this area relatively current dollars of cost are deducted from current dollars of revenue. Moreover, through the use of the LIFO procedure was authorised by the Congress some years ago the process of matching current revenues with current costs is facilitated for owners of inventoriable assets. Under this procedure, the taxpayer is permitted to measure the cost of goods sold in terms of the costs most recently incurred, and thus serious overstatement of income is usually avoided. The LIFO treatment rests on the view that a taxpayer is not making any money to the extent that receipts from customers are absorbed in replacing the stock of goods he started with ; he isn't earning anything simply by holding his own. (p. 282) and paragraph No. 26 from International Accounting Standards (IAS 2) on valuation and presentation of inventories in the context of the historical cost system ; The LIFO or base stock formulas may be used provided that there is disclosure of the difference between the amount of the inventories as shown in the balance sheet and either (a) the lower of the amount arrived at in accordance with paragraph 24 and net realisable value or (b) the lower of current costs at the balance sheet date and net realisable value.

Nearer at home Accounting Standard 2 on valuation of inventories issued by the Institute of Chartered Accountants of India in June, 1881 also refers to LIFO method as a normal and standard method of valuation of stock at paragraph No. 26.1 : The historical cost of inventories should normally be determined by using 'FIFO', 'average cost, or 'LIFO' formulae.

8. On the strength of these and other authorities the learned counsel has emphasised that the LIFO method is not only a well recognised scientific method for valuing closing stock but, in his view, would be the most fitted to adopt in circumstances like that of the assessee where without the possibility of immediately increasing the sale price the assessee has to face abrupt and phenominal increases in the prices of raw materials in an uncontrolled atmosphere of inflation. The assessing officer could not, therefore, deny the assessee right of adopting this method.

9. The learned counsel has also pointed out that under Section 145 of the Act a taxpayer is entitled to adopt the best method which he considers suitable for his business. There is no restriction at all under the Act in such selection of the method. Apart from the fact that the assessee's choice in this regard is unrestricted, the learned counsel has pointed out that the method of working out the income could not also be rejected in the present case on the ground that the correct profit could not be ascertained. In the first place the method is a scientific and well accepted one. Secondly, after the change the assessee had followed it for all years succeeding. Thirdly, and more important, over the years the same profit would be exposed to taxation and be available to the assessee. This ensures that this method regularly followed would give the correct profit. The assessee is particularly obliged to adopt this method, since it could not substantially increase its selling price a fact which has been accepted by the income-tax authorities.

10. It is also pointed out that apart from its legal entitlement under Section 145, the assessee had made a bona fide change in the method of valuation which it is entitled to do. Though the authorities have referred to reduction in tax or in income, since the assessee has made the change necessitated as it is by inflation increasing cost of raw materials and also the example of this method being followed all over the world, the change is clearly a bona fide one made for the purpose of improving the account and working out the correct profit.

11. The assessee-company could not increase its selling price simultaneously or even within a short time of the increase in the cost of raw materials. As found even by the departmental authorities, the manufacture takes nearly 8 to 10 months for completion and during this period there is a substantial rise in the price of raw materials which remains uncovered by the selling price. The cost of raw materials constituted nearly 30 per cent of the total cost. This, according to the assessee, would indicate the extent to which non-adoption of this more scientific method would affect its profit. With mathematical illustrations, the learned counsel has pointed out how this system brings out the real profit for tax purposes. The extra liability by way of cost of raw materials already having been incurred during the year, certainly there is no inequity in considering it in working out the profit The LIFO method, therefore, is more realistic. It is also emphasised that over the period the correct profit being the same, whatever be the method followed there cannot be any loss to the revenue. It is an important principle both of accountancy as well as income-tax that unrealised appreciation in the value of inventories should not be brought to charge. This principle applies both to the manufacturing as well as trading concerns.

12. Referring to the decision in Anaconda American Brass Ltd.'s case (supra), on which reliance has been placed by the department and which has been referred to in the two orders of the Tribunal, the learned counsel has pointed out that an application of this decision to the Indian circumstances was prima facie not justified. There was nothing in the Canadian law corresponding to Section 145. Apparently, the Canadian taxpayer has no option to choose the method of accounting. The law has progressed very much and, according to the learned counsel, if the same case was now to go before the Courts in Canada today, the decision might not be the same. In the present case, the assessee has exercised its option to follow this method of accounting and stock valuation. This method comes to a closer determination of the true profit of the business.

13. It is also pointed out that the change does not make any difference. There is no double tax or avoidance of tax. Whatever may be less in due year would automatically come up for taxation in another year ; in fact this might even entail the assessee paying more tax in a subsequent year. That the assessee has followed the same method of stock valuation after 1975 for all years is also not disputed by the department. The learned counsel stressed the point that the opening stock of one year must be the closing stock of the last year and since the assessee has changed the method of accounting continuously for all years, this criterion would be available for the subsequent years. In support of the assessee's case the decisions in Ramswarup Bengalimal v.CIT [1957] 25 ITR 17 (All.), 6 ITR 733 (sic) and Ram Luxman Sugar Mills v. CIT [1967] 63 ITR 51 (All.) are referred to.

14. For the department it is pointed out that the proviso to Section 145 would apply to the case where proper profit cannot be ascertained.

The assessee having changed the method of stock valuation, the true profit cannot be ascertained for the year. Even if, therefore, the assessee has the right to choose its method of accounting under Section 145, unless the method of accounting chosen is correct, the correct profit cannot be ascertained.

15. According to the learned counsel, the question to be asked in the first instance was whether the LIFO method was an acceptable and scientific method at all for the income-tax purposes. That this is not so, is clear not only from the decision of the Privy Council in Anaconda American Brass Lid's case (supra), but also the discussion of the method in several standard works on accountancy and management.

Reference is made in this connection to Spicer and Peglor Accountancy, Seventeenth edn., pp. 297 to 301 and Pickles Accountancy, Fourth edn., paragraph Nos. 0532, 0533 and 0535. Stress is also laid on certain observations in Batly's Management Accountancy, Fourth edn., at p. 678 and the Works on Income-tax Whiteman and Whitcroft Income-tax, Second edn., pp. 444 to 447 and Sampath lyengar's Law of Income-tax, Fifth edn., Vol. HI, p. 1711 and Sixth edn., Vol. II, p. 1519. According to the learned counsel, even in UK the adoption of the LIFO method has been put on the basis of a special position. All these clearly go to show that the LIFO method has not acquired any acceptability as a scientific method of valuation.

16. Apart from the above, the learned counsel has pointed out that essentially the assessee who has been following one method of accounting has suddenly changed its method which distorts the entire profit picture. Even if over a long period the overall profit given up for taxation could be the same, the profit for the current year cannot be said to have been correctly computed when the methods of valuation of the opening and the closing stock are different. Valuation of stock as such, according to the learned counsel, does not by itself specify a method of accounting. Mere adoption of a form of valuation of closing stock or a change in the method does not, therefore, cover the concept of method of accounting. The assessee cannot, therefore, be said to have even any option in this regard under Section 145. Even though the assessee follows the same method of valuation for the subsequent years as far as the present year is concerned, according to the learned counsel for the department, the profit is not correctly computed and the assessee's action leads to unjustified reduction of tax. The assessee has not justified this.

17. Though on the above-mentioned point, the point of difference was originally referred to me as to whether the LIFO method adopted by the assessee is justified after the miscellaneous petition this has been altered to refer to the objection against the addition of Rs. 58,46,535 to the total income of the assessee for the year under appeal. The authorities below and even the learned Members on whose difference the matter was referred to me have concentrated to some extent on the justification for the assesses adopting the LIFO method. Much of the discussion in the two orders and even those before me by the representatives of the parties related to the correctness or otherwise of this method and its application. In my view, for the purposes of ascertaining the profit of a business, one has to fall back on certain particular modes of computing the income. Different methods could be prescribed and advantages and disadvantages could be found for every one of the methods. It would be impossible to see a single method of accounting which could be said to be perfect and has all the advantages and no disadvantages. Choosing of a method of accounting, therefore, is ultimately a matter of individual preference of the asses-see. When once the method is chosen the advantages and disadvantages pertaining to it go with it. Attached to every method of working out the profit and a method of maintaining accounts are certain necessary corollaries like making entries in special cases, valuation of closing stock inventories, etc. Each one of these particular processes themselves are subject to a selection and even in a case where a person broadly claims to maintain cash or mercantile or any other system of accounting ordinarily known, it would be open to him to vary or adopt one or other practice in respect of the independent components going to make up a method of accounting. Thus, even under the mercantile system of accounting both accountancy and law have prescribed different modes of valuing closing stock. A stock may be valued at cost, at market price, at market or cost, whichever is lower, at an average cost or in variation of or from these.

18. Extracts from the income-tax books of Kanga and Palkhivala, Sampath Iyengar and other authorities on Managerial Economics, Studies in Accounting Theory, International Accounting Standards, Reports of the Institute of Chartered Accountants of India, etc., have been referred to before me by the parties. The assessee trying to support its case for adopting the LIFO method and the department challenging the efficiency and validity of this method. It is neither necessary nor possible to say with any amount of finality whether a method like the LIFO for stock valuation is the best one or a perfect one. As regards the methods, these varies and each school subscribes to one method or other, but ultimately all are intellectual approaches against the background of the best available facts to ascertain the profit. Often the theory embedded in any method is absolutely unsupported by the factual details. Thus, the very valuation of closing stock implies something like realisation of value for the stock. A trader very well knows if he could have sold all the stock on that day, the very question of stock valuation would not arise. Theories of this type are only attempts to study the reality against well known principles and practices. It would be futile, thus, to brand one or other systems as wrong based on its mere distance from reality.

19. While the final word as to whether the LIFO method would be better than the system followed by the assessee, thus, cannot be said, there is nothing in accountancy or in income-tax law which prohibits the assessee from adopting a method different from what he was following.

The asses-see may genuinely feel that a change is necessary being convinced of the superiority of the new method. The assessee may make the change as an experimental measure or even for the purposes of mere variety. As far as I can see, neither the revenue nor the ITO can object to this so long as this does not affect the tax liability or lead to fraud, etc. In this context the assessee's claim that a change is bona fide is also not of much consequence, because in choosing methods like those of accounting as in matters like believing in theories regarding any subject the personal choice of a person would be the final thing to be considered. If for any reason, including a valid belief that the earlier method is defective, the assessee wants to change its method of closing stock valuation both under the provisions of Section 145 as well as under its general rights, it can do so. The only Question would be whether this would affect the computation of profit correctly for one year or more years. Only if this latter happens, it would be open to the ITO to recompute correctly the profit for that year, but certainly he cannot object to the assessee's change of method.

20. There are certain well established principles which go both with the method of accounting as well as the particular incidents comprising it. These have to be followed if the correct profit is to be ascertained. One such principle is that in the case of a trader who maintains books of account, draws out a trading account, etc., the same system of accounting should be followed from year to year and the same system of valuation of closing stock should be followed. Thus, if the opening stock is valued at cost, the closing stock also should be valued at cost to give the correct profit for the year. If the opening stock is valued at market price, the closing stock also should be valued at the market price. If the opening stock is valued at a cost or market price, whichever is lower the closing stock also should be valued at cost or market price, whichever is lower. If the methods of valuation of the opening stock and the closing stock are not the same, it would not be possible to find out the correct profit of the year. In other words the consistent method of following the same principle of valuing stock from year to year is that for every year both the opening and the closing stock are valued on the same method. If there is a change in the method of valuing the stock, for instance, cost being adopted for the opening stock and market for the closing stock, the correct profit of the year cannot be ascertained.

21. Another equally valid principle in arriving at the profit is that no tradesman" should take into account the unrealised profit embedded in his stock. Under the mercantile and other allied systems of accountancy the profit of the year is accounted for not by the actual cash received on sale but also by taking into account the value of the stock. Unless the stock is sold, the full sale price and the profit are not realised. Between the holding of the stock and realisation of money by selling it, there is much of a slip so that if the stock cannot be sold at all, the value of the goods embedded in the stock becomes an outright loss. If the stock is sold for an amount lesser than what it is accounted for in the closing stock, then also there is a loss. A prudent businessman cannot, therefore take the risk of valuing stock at a level which anticipates the realisation of a profit before the goods are sold and the profit is physically realised. A necessary concomitant of this principle is that where the market price of a commodity has substantially increased over its cost, the prudent businessman does not value the stock at market price but values it at the cost. The assumption is that so long as the goods are with him and the market price is higher, he can always sell the goods and realise the price equal to its cost. If on the contrary the market price goes down, even if the trader were to find purchasers for all the goods the realisation being less than the cost, he would suffer a loss. It is on account of the above facts that businessman adopt the market value or cost, whichever is lower, for arriving at the profit in any particular year.

In other words, if one is concerned with the profit of only one year, no business being done in the earlier year and no business in the subsequent year the best method would be the cost or market rate, whichever is lower. To put it more correctly the question of not taking into account unrealised profit-the quality of the prudent businessman-arises only when the profit of one year alone is to be considered.

22. There is no principle especially where the profit of each year considered as a separate period is to be brought to tax that the overall profit over a period should be taken or considered. The principle is for taxation purposes each year is a separate period and there cannot be any settlement of accounts between the taxpayer and the revenue on the ground that for a period of years the total profit earned by the taxpayer remains the same.

23. Another principle equally well recognised is that under the income-tax law the assessee is entitled to choose its method of accounting. Section 145 gives I this choice to the assessee. Only in a case where the method of accounting adopted by it does not give correct profit can the ITO reject the books of account and recompute the income. This principle takes into account two aspects of the matter, viz., (1) the choice of the method of accounting, and (2) the determination of the profit. There may be a case where the choice of the method of accounting is scientific and correct and has been bona fide made but even so the method cannot give the correct figure of profit. This would arise where one or other components of the method of accounting distorts the computation of profit. For instance, even in the case where a person regularly maintaining accounts on the same basis from year to year, disturbs any one of the components like closing stock valuation he could upset the computation of profit and it would be open to the ITO to reject the book results even without rejecting the method of accounting.

24. I have detailed above some of the well known principles of accountancy and income-tax, because both in the orders of the authorities below and the learned Members, whose difference of opinion is referred to me, and also in the arguments of the learned counsels on both sides, one or other of these principles have been referred to. In my opinion, while each one of these principles independently and studied as such may be accurate, while combining one or more of these principles, caution has to be taken to adopt the manner of such combination. If this is not done, it might entirely distort the picture of the assessee's business both from the point of view of income'-tax as well as accountancy. Thus, while an assessee is entitled to follow any method of accounting under the option given to him by Section 145 since there is the principle that the opening and closing stock should be valued on the same method for a particular year, if the profit of that year is to be correctly computed, he cannot go on varying the method of valuing the closing stock without distorting the profit of the year where he makes the change. The two principles involved in this process are to some extent contradictory and have to be reconciled if the correct profit of the year is to be ascertained. Thus, even while the assessee chooses his method of accounting while computing the profit of every successive year, he cannot correctly do so unless the same method of valuing stock is followed for all the years. If for one year he changes the method of stock valuation, the profit of that year has to be recomputed by either revaluing the closing stock adopting the same method as the opening stock or revaluing the opening stock by following the same method as valuing the closing stock. If this is not done, the profit of that year cannot be ascertained. This incongruency cannot be explained away by saying that over the years the total profit would be the same if subsequent to a change the same changed method of closing stock valuation is continued. The profits up to the year prior to the change for each year would be correctly determined. The profit for the years subsequent to the change of the year could also be determined correctly. But the profit of the year where a change in valuation of closing stock is made cannot be determined. I have, therefore, no doubt that in applying various principles as above, they have to be properly reconciled with each other for the purpose of arriving at the profit of the current year. So done, the profit for the year of change has to be adjusted by the difference between the closing stock valuations involved in the change of method.

25. For the year under appeal, the opening stock was valued by following a particular method. The closing stock has to be valued on the same method if the correct profit of the year has to be worked out.

If that is not done, to that extent the profit of the year goes down or up. In the present case, the ITO has found, relying on note 18 of the auditors that the change in method of closing stock valuation has reduced the profit for the year by Rs. 58,46,535. The assessee, it is true, has followed the same method for the subsequent years. The profit from year to year, therefore, in these subsequent years would be indicated by the book valuation. That would not, however, show the correct profit for the year under appeal as made out by the assessee's books. It is in this context that the principle regarding the consistency in the method followed has to be seen. When the assessee followed the same method of valuation of closing stock till the year of appeal, its profit was computed in a particular manner. The change in the method of valuation has altered the closing stock for the current year while retaining the opening stock as the same. One of the principles, admitted as relevant by both the parties, is that the closing stock of one year and the opening stock of the next year should be the same. This condition will not be satisfied if the accounts for the year are not adjusted. While, therefore, no exception can be taken to the assessee's right to change his method of stock valuation in this or any other year, the difference has to be adjusted by adding it or subtracting it from the total income in the year of the change. The addition of Rs. 58,46,535 has, therefore, to be sustained.

26. The cases cited do not help the assessee. These, at best, authorises the assessee to make a change of stock valuation if he considers it necessary. In the case of Ram Luxman Sugar Mills (supra), the Allahabad High Court referred to the two principles earlier settled by the same Court in the case of Ramswarup Bengalimal (supra), viz. : ... (1) that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and (2) that the value of closing stock must be the value of opening stock in the succeeding year, that is, an assessee cannot close his accounts and value his stock at a particular figure and the next morning on the first day of the next year he cannot value it at a different figure. (p. 54) In the case of Ram Luxman Sugar Mills (supra) though the addition made was deleted, the issue really was one of justifying a valuation at cost or market price, whichever is lower. This as starting point was accepted by the Court. In the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 also this principle of valuing at market price or cost price, whichever is lower, was recognised by the Supreme Court. After discussing the case law their Lordships held : This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. (p. 55) This decision also' lays emphasis on not taking into account unrealised profit. None of these decisions can be regarded as an authority for the proposition that suddenly the method of stock valuation can be altered even if it involves some amounts of income altogether escaping the tax.

The emphasis has also been laid in these cases where the market price is lower than the cost. If the assessee's contentions were accepted, the asses-see having the right to value the stock and also follow a method of accounting of his choice, he can bona fide change the method almost every year if it suits him. If on all these occasions some income escapes assessment on account of the change in method, no objection to that could be tolerated. Certainly this cannot be regarded as a proper much less equitable rule. The principle of choosing a method of accounting carries with it the subsidiary principle of following it from year to year. Even if a bona fide change is necessary, the change can be made but should not by itself result in some taxable income not getting taxed altogether.

27. One question which would arise is whether this addition should be treated as a closing stock valuation and on that score the opening stock of the next year increased to this extent with the result that the profit of the next year goes down. If in a continuing account the stock valuation were to be disturbed for one year and the necessary adjustment is not made in every subsequent year, the profit in every succeeding year cannot be properly computed. In the present case, for all the years prior to the year under appeal and all the years subsequent to the year of appeal it is the assessee's case that the same method has been followed for stock valuation. There is a change only for the year under appeal. The adjustment is only for the year under appeal, the addition being confined to the computation of profit for this year only. For the subsequent years, the opening and closing stocks will continue to be valued on the same basis. Even though, therefore, the reason for the addition has its basis on stock valuation, it does not result from the stock valuation but from the change in the method of valuation. It is interesting to recall the observations of the Supreme Court in Chainrup Sampatrants case (supra) to the effect that it is a misconception to think that the profit 'arises out of the valuation of the closing stock' though this observation was made in the context of the place of accrual of profit.

The addition, therefore, cannot go to swell the opening stock valuation of the next year or decrease the profit for that year.

Incidentally, this answers another question also, viz., if the profit of the year is to be computed why not value the opening stock of the current year on the new basis. This, if done, violates the principle stressed even by the assessee and the decisions that the opening stock of a year should be the same as the closing stock of the preceding year. If the opening stock is disturbed for this year, the closing stock of the preceding year remaining the same, the evil we are trying to avoid, viz., allow some taxable income to go untaxed will be perpetrated not in this year but in the earlier year or years. If adjustment is made of the closing stock, except for this solitary adjustment, the assessee's stock figures for all years will remain.

I agree with the learned Accountant Member that Rs. 58,46,535 should be added for this year and no reduction of a similar amount should be made from the profit of the next year.

28. The assessee challenged the order of the Commissioner (Appeals) also on the question of the validity and the legality of the assessment made. The ITO by his letter dated 18-6-1977 intimated the assessee that under Section 144B(1) he was forwarding the draft of a proposed assessment order. The assessee by its letter dated 21-6-1977 acknowledged the receipt of the order and noted the contents but 'without prejudice to our rights under the Income-tax Act, 1961'. The ITO forwarded the draft assessment order to the IAC on 5-7-1977. On 7-7-1977 the I AC wrote to the ITO that he proposed to issue a notice under Section 144A to the assessee. On 13-7-1977 the IAC wrote to the assessee to state its objections against the modifications in the valuation of stock he proposed to make. On 22-7-1977 the assessee appeared before the IAC and filed a detailed reply. With effect from 1-8-1977 under Section 125A(1) the concurrent jurisdiction over the assessee's case along with that of the ITO was vested in the IAC. On 24-10-1977 the assessee claimed that the assessment proceedings having been terminated with the issue of the draft assessment order by the ITO, the IAC was to issue the necessary instructions only in conformity to which the assessment had to be completed. On the basis of the above facts the jurisdiction of the IAC to make the addition of Rs. 58,46,535 in pursuance of the alleged action he took under Section 144A(1) was challenged. This point having been decided in favour of the revenue, the matter came before the Tribunal on further appeal. The learned Judicial Member held in favour of the assessee holding that the IAC should have passed an order in conformity with Section 144B. The learned Accountant Member, however, held that the assessment was properly made by the IAC. The second point of difference arises out of the above facts.

29. After hearing the parties at length, I agree with the reasoning and conclusion of the learned Accountant Member. Apart from the fact that the objection itself was raised very late in the proceedings, the IAC having a concurrent jurisdiction legally vested in him, he had the power to pass the order he made.

30. The matter will go back now to the original Bench which heard the appeal for final disposal.

1. The learned Members of the Pune Bench of the Tribunal had differed on the following points : 1. Whether, on the facts and in the circumstances of the case, the LIFO method adopted by the assessee is justified 2. Whether, on the facts and in the circumstances of the case, the IAC had jurisdiction to make an assessment on the assessee as an assessing officer Because of differing on these two points, they were referred to the President of the Tribunal, Bombay under Section 255(4) to nominate a Third Member to decide this appeal. The President of the Tribunal nominated the Third Member and the learned Third Member decided the appeal by his order dated 23-9-1983.

2. The then learned Judicial Member held in favour of the assessee that the IAC should have passed the order in conformity with Section 144B.The learned Accountant Member held that the assessment was properly made by the IAC. The IAC made assessment by issuing notice under Section 144A and made an addition of Rs. 58,46,535. On the first point the learned Judicial Member has held that the LIFO method adopted and the change effected by the assessee is justified and the learned Third Member has agreed with the said view. The learned Third Member has also agreed with the learned Accountant Member that the IAC was justified to make an assessment on the assessee as an assessing officer and upheld the addition made by the IAC.3. The learned Members of the Pune Bench of the Tribunal have given detailed reasons for holding their view in their orders. The learned Third Member has also given detailed reasons for agreeing with the Judicial Member on the point of adopting LIFO method of accounts and on the point of jurisdiction of the IAC to make the assessment on the assessee as an assessing officer and for upholding the addition made by the IAC.4. The assessment is held valid and the addition is upheld. The LIFO method of accounting was adopted by the assessee during the accounting year. Due to this the change in the valuations was effected. The learned Third Member has held that LIFO method of accounting is correct and it is recognised by the rules of accountancy. In spite of holding that the LIFO method of accounting and change effected in the accounts during the accounting years is correct, the learned Third Member has accepted the addition made by the IAC.5. In this view of the matter, the Tribunal has to pass the final order on the basis of the decision of the learned Third Member. When this appeal was fixed for passing final order, both the learned counsel for the assessee and the learned departmental representative have argued to a great length and contended that certain paragraphs from the order of the learned Third Member should be reproduced while passing the final order. It is ununderstandable that as to why certain paragraphs or observations are to be reproduced at the time of passing the final order. The observations are already on record in the orders of the learned Members of the Pune Bench of the Tribunal and the learned Third Member who has heard the appeal on the differed points.

6. As it is held that the IAC has a jurisdiction to make an assessment on the assessee as an assessing officer and as the additions made by him are further upheld by the learned Third Member and, therefore, the appeal requires to be dismissed according to law. Hence, we have considered it just and proper not to reproduce any observations made by the learned Members of the Pune Bench of the Tribunal as well as the learned Third Member.


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