R.C Lahoti, J.:— This common order shall govern the disposal of ITC Nos. 40, 48 and 57 of 1995, being three applications under section 256(2) of the Income-tax Act, 1961, filed by the Revenue and seeking mandamus to the Tribunal, for drawing up statements of cases seeking opinion of the High Court on the following questions of law:
ITC No. 40 of 1995 (assessment year 1976-77):
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the change in the method of valuation of closing stock as adopted by the assessee-company for the assessment year 1981-82 should be allowed to have retrospective effect right from the assessment year 1976-77 onwards ignoring the material fact that the assessee-company had already followed certain consistent method of valuation of closing stock from the assessment year 1976-77 up to the assessment year 1979-80, before seeking change in the method of valuation of closing stock for the first time in the assessment year 1980-81 and later on in the assessment year 1981-82?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the learned Commissioner of Income-tax (Appeals) was entitled to entertain this additional ground of appeal while hearing the appeal filed by the assessee for the assessment year 1976-77?”
ITC No. 48 of 1995 (assessment year 1981-82):
“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the guarantee commission paid to the bank was a revenue expenditure?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the change in the method of valuation of closing stock as adopted by the assessee-company for the assessment year 1981-82 should be allowed to have retrospective effect right from the assessment year 1976-77 onwards ignoring the material facts that the assessee-company had already followed certain consistent method of valuation of closing stock from the assessment year 1976-77 to the assessment year 1979-80 before seeking change in the method of valuation of closing stock for the first time in the assessment year 1980-81 and later on in the assessment year 1981-82?”
ITC No. 57 of 1995 (assessment year 1981-82):
“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in confirming the decision of the Commissioner of Income-tax (Appeals) for admitting fresh ground regarding the claim of special excise duty, in contravention of rule 46A?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in directing the Assessing Officer to value the opening stock on direct cost basis and accordingly the closing stock of the earlier year be adopted as opening stock on direct cost basis?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that for the purpose of applying rule 6D a disallowance should have been made by aggregating expenditure incurred on various tours undertaken by an employee in a year?”
2. The assessee is a public limited company engaged in the manufacturing of automobile tyres and tubes. For the assessment year 1976-77 for which the previous year ended on October 31, 1975, a loss return at Rs. 14,62,16,780 had originally been filed by the assessee which was revised to Rs. 14,79,22,110. Assessment was completed, vide order dated September 25, 1980, by virtue of which net loss was computed at Rs. 80,34,236. The provisions of section 144B regarding forwarding of the draft assessment order and consideration of the objections by the assessee were forwarded. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) wherein it succeeded in part. The aggrieved Revenue filed an appeal before the Income-tax Appellate Tribunal. Cross-objections were filed by the assessee. Though very many contentions were advanced before the Income-tax Appellate Tribunal, we may note only the relevant ones and the facts relating thereto. The main controversy centres around change of method of valuation of closing stock. The assessee-company had followed a consistent method of valuation of closing stock up to the assessment year 1979-80, as under:
A. Raw material, stores and spares—at cost, actual or weighted average;
B. Goods in process—at cost;
C. Finished goods—at realisable value.
3. The assessee-company changed this method of valuation of closing stock of finished goods during the period relevant to the assessment year 1980-81 by shifting to the lower of cost or realisable value (as against— at realisable value), followed up to the assessment year 1979-80. This change effected by the assessee in the method of valuation was rejected by the Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed the appeal of the assessee against which the Department went in appeal to the Income-tax Appellate Tribunal.
4. For the assessment year-1981-82, the assessee effected yet another change in the method of valuation of the closing stock which is as under:
A. Raw material, stores and spares—cost, periodic LIFO basis, (LIFO last in first out).
B. Goods in process—direct cost.
C. Finished goods—direct cost.
5. This change in the method of valuation of closing stock was also rejected by the Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed the change against which order again an appeal was pending before the Income-tax Appellate Tribunal.
6. The year 1976-77 is the first year of assessment. Against the order of assessment passed in this year, the appeal was pending before the Commissioner of Income-tax (Appeals) and therein the assessed raised an additional ground seeking leave to adopt a method of valuation as adopted for the year 1981-82. For the assessment year 1976-77, the Commissioner of Income-tax (Appeals) allowed the change. The aggrieved Revenue went in appeal to the Income-tax Appellate Tribunal.
7. The objection of the Department against the allowance of change in the method of valuation of closing stock by the Commissioner of Income-tax (Appeals) was that the method sought to be adopted by the assessee did not give the true picture of assessable profits. According to the Department, the Assessing Officer had the power to reject the method adopted by the assessee if it did not give a true picture of the profits earned by the assessee in the business.
8. On behalf of the assessee, it was contended that the change in the method of valuation of closing stock was warranted by the facts and circumstances of the case.
9. The Tribunal found in favour of the assessee and overruled the objection of the Department. The Tribunal formed an opinion that it was a well-settled proposition of law that a taxpayer was free to employ, for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade in accordance with established method of stock valuation. A method of accounting adopted by the trader consistently and regularly could not be discarded by the Assessing Officer. It could be discarded if in his opinion the income of the trade could not be properly deduced therefrom. Reliance was placed on the decision of the Supreme Court in Investment Ltd. v. The Commissioner Of Income Tax, Calcutta, [1970] 77 ITR 533. The Tribunal also opined that it was permissible to the assessee to change the method of accounting as well as the method of valuation of closing stock from time to time subject to the condition that the Assessing Officer was satisfied that the change was bona fide and introduced to meet the changed situation and changed circumstances and the change was provided for regular adoption. The Tribunal also found that the method adopted by the assessee and allowed by the Commissioner of Income-tax (Appeals) was in accordance with the accounting standard valuation of inventories published by the Institute of Chartered Accountants of India, copy whereof was made available for the perusal of the Tribunal by the assessee.
10. The Tribunal also considered whether the method adopted by the assessee was proper. The Tribunal arrived at the following finding (vide paragraph 38 of its order):
“Thus, it is seen that the method adopted by the assessee for valuation of closing stock is one of the recommended methods by the Institute of Chartered Accountants of India, New Delhi. The assessment year before us is the first accounting year of the business of the assessee, i.e, assessment year 1976-77. If the system of accounting is regularly followed in the subsequent assessment years there would not, in our view, be any loss to the Revenue. Once a uniform system of accounting is adopted the determination of the correct profit by such method would be fair and reasonable. Since the appeals for subsequent years are also pending at one stage or the other, we approve the method of accounting adopted by the assessee so that the method is consistently followed in the subsequent assessment years. We, therefore, confirm the decision of the Commissioner of Income-tax (Appeals) in allowing the change in the method of accounting sought by the assessee.”
11. By order dated August 12, 1992, the Tribunal dismissed the appeal of the Department as well as the cross-objection by the assessee for the assessment year 1976-77.
12. The Income-tax Appellate Tribunal took note of the judgment dated August 12, 1992, relevant to the assessment year 1976-77 in the appeal filed by the Department relevant to the assessment year 1981-82 and allowed the assessee's appeal in part vide its order dated January 25, 1993. The Tribunal held:
“The issue concerning the method of valuation of closing stock on direct cost basis holding that the change from total cost was for bona fide reasons and in holding that the direct cost method of valuation of inventory was proper, was the last of the series of objections raised by the Revenue. The method of valuation on direct cost, the bona fides of switch over from total cost, were all examined in the assessment year 1976-77 by the Tribunal and it was concluded that the change was for bona fide reason, the direct cost method was a proper method and the switch over from total cost to direct cost was permitted. We do not see any reason to take a different view without any material compelling us to do so. We accordingly uphold the order of the Commissioner of Income-tax (Appeals) on this issue.”
13. The reference applications filed by the Department have been rejected forming an opinion that no referable question of law arose from the orders of the Tribunal.
14. We have heard learned counsel for the parties at length. The principal controversy centres around the method of accounting provided by section 145 of the Act. The provision as it stood at the relevant time provided that income chargeable under the head “Profits and gains” of business or profession or “Income from other sources” shall be computed in accordance with the method of accounting regularly employed by the assessee. Where the Assessing Officer was satisfied about the correctness or the completeness of the accounts but was of the opinion that the method employed did not permit the income being properly deduced therefrom, then the computation of income could be made on such basis and in such manner as he may determine.
15. Learned senior standing counsel for the Revenue submitted that the Tribunal was not justified in permitting a change in the method of accounting with retrospective effect. On the other hand, learned senior counsel for the assessee submitted that there was no change effected retrospectively; in reality it was prospective. It was further submitted by learned counsel for the assessee that it was a misnomer to use the terms like retrospectivity and “change in the accounting method”. In fact the accounting method remained the same; what was sought to be changed was the mode of valuing the closing stock so as to bring it in conformity with a recognised method of valuation which was more scientific in nature and having been allowed for the basic year 1976-77, it was allowed for the succeeding years as well so as to make it consistent, inasmuch as, what would be the closing stock for any year, would be the opening stock for the succeeding year and, therefore, the change was effected for all the succeeding years leading up to the years. 1981-82, but it would be prospective merely.
16. Learned counsel for the Department cited a number of decisions taking the view that the accounts—closed or settled—cannot be allowed by the Assessing Officer to be reopened at the instance of the assessee, nor can a change in the method of accounting be permitted. Without burdening this judgment by dealing with all the authorities cited by learned counsel for the Department suffice it to observe that they were the cases where the mercantile system of accounting was sought to be changed to the cash basis system resulting into shifting the date of relevant entries of income or expenditure from one assessment year to the other year or having a material bearing on the income or profits of the assessee. Such is not the case here.
17. Out of the several decisions cited by learned counsel for the Department, we may refer only to a decision rendered by the Bombay High Court in Melmould Corporation v. CIT, [1993] 202 ITR 789. Having referred to most of the decisions which have been cited before us also, the Division Bench has held (page 795):
“Whenever there is a change in the method of valuation, there is bound to be some distortion in the calculation of profit in the year in which the change takes place. But if the change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted.”
18. It is well-settled that the scope of powers of the Appellate Assistant Commissioner is co-extensive with that of the Income-tax Officer and he can do what the Income-tax Officer could have done and can also direct to do what the Income-tax Officer has failed to do. (see CIT v. Kanpur Coal Syndicate, [1964] 53 ITR 225 (SC)). The Income-tax Officer could have permitted the change in the mode of valuation of stock; the Commissioner (Appeals) could also have permitted the same. The Tribunal has found that the method adopted by the assessee was a recognised and scientific method and having been allowed for the assessment year 1976-77, followed regularly for the subsequent years, was not going to cause any loss to the Revenue. These are all findings of fact and none is under challenge by the Department. In our opinion, the Tribunal was, therefore, right in refusing to refer the questions as question of law, so far as they are referable to the controversy relating to the mode of valuation.
19. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities the income of the trade cannot be properly deduced therefrom. Valuation of the stock at cost is one of the recognised methods: Investment Ltd. v. The Commissioner Of Income Tax, Calcutta, [1970] 77 ITR 533 (SC). Whether income, profits and gains can or cannot be properly deduced from the method of accounting regularly adopted by the assessee, is a question of fact (Chhabildas Tribhuvandas Shah v. CIT, [1966] 59 ITR 733 (SC); India Machinery Stores (P.) Ltd. v. CIT, [1970] 78 ITR 50 (SC)). To permit a change was not without jurisdiction or illegal; it was a matter of discretion.
20. We are, therefore, of the opinion that question No. 1 in ITC No. 40 of 1995 (assessment year 1976-77), question No. 2 in ITC No. 48 of 1995 (assessment year 1981-82) and question No. 2 in ITC No. 57 of 1995 (assessment year 1981-82) do not arise as questions of law from the order of the Tribunal and no mandamus can, therefore, issue to the Tribunal for drawing up a statement of case as to those questions.
21. As to question No. 2—ITC No. 40 of 1995 (assessment year 1976-77) and question No. 1—ITC No. 57 of 1995 (assessment year 1981-82) the orders of the Tribunal show that the same were not pressed by the Revenue. These questions, therefore, need not be answered.
22. As to question No. 1 in ITC No. 48 of 1995 (assessment year 1981-82) the same stands concluded by the law laid down by the Supreme Court in Asst. CIT v. Akkamamba Textiles Ltd., [1997] 227 ITR 464 and CIT v. Sivakami Mills Ltd., [1997] 227 ITR 465 (SC), affirming the decision of the Andhra Pradesh High Court in CIT (Addl.) v. Akkamba Textiles Ltd., [1979] 117 ITR 294. It has been held that guarantee commission paid by the assessee to the banker and the insurance company for ensuring deferred payment of the purchase consideration of machinery was an admissible deduction under section 37(1) of the Income-tax Act, 1961. As the law is settled by the Supreme Court no answer is called for. As to question No. 2 (ITC No. 57 of 1995—assessment year 1981-82) it is certainly a question of law arising from the order of the Tribunal. Such is the view taken by two Division Bench decisions of this court, (see Commissioner Of Income-Tax v. Modipon Ltd. (No. 2). (No. 1), [1995] 212 ITR 656 and CIT v. Modi Rubber Ltd. (No. 1) ITC No. 55 of 1995 decided on September 16, 1997 ([1998] 230 ITR 817).
23. For all the foregoing reasons, ITC No. 57 of 1995 is allowed in part. The Tribunal is directed to draw up a statement of the case and refer the following question for the opinion of the High Court arising out of assessment year 1981-82:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that for the purpose of applying rule 6D a disallowance should have been made by aggregating expenditure incurred on various tours undertaken by an employee in a year.”
24. I.T.C No. 57 of 1995 to the extent of questions Nos. 1 and 2 and ITC No. 48 of 1995 and ITC No. 40 of 1995 are dismissed.
25. In the facts and circumstances of the case there will be no order as to the costs.