ORDER
Shri T.R. Sood, A.M
In this appeal, assessee has taken the following three grounds:-
“1. That looking to the facts and in the circumstances of the case the learned CIT (A) has erred in holding that the proceedings under section 148 where validly initiated by the assessing officer, without taking into consideration the detailed arguments as well as High Court judgments submitted by the appellant, according to which the reassessment proceedings initiated by the assessing officer were without jurisdiction and hence invalid and illegal.
2. That looking to the facts and in the circumstances of the case the learned CIT (A) has erred in confirming the addition of Rs. 1,15,20,000 on account of change in the established method of valuation of closing stock which was bona fide, for genuine reasons and has been followed consistently in the subsequent years, without taking into consideration the various High Court Judgments submitted by the appellant.
3. That looking to the facts and in the circumstances of the case the learned CIT (A) has erred in confirming the charging of interest under sections 234B & 234C of the Income Tax Act, which was not according to the provisions of law and hence invalid and illegal.”
2. Ground No. 1. The brief facts of the case are that originally assessment was completed under section 143(3) on 8-3-1999. Later on, it was noticed that assessee had changed its method of valuation of closing stock during the previous year, which was detected from the Tax Audit Report dated 31-12-1997, which was filed along with the return. Auditors had commented that due to change in method of closing stock, the profits were understated by Rs. 115.20 lakhs approximately. On the basis of this information, assessing officer concluded that income has escaped tax within the meaning of section 147 and, therefore, a notice under section 148 was issued on 22-2-2001. The reassessment was completed by making addition of Rs. 1,15,20,000 on account of undervaluation of closing stock and Rs. 1,79,068 on account of depreciation on computer software which was allowed at 25% instead of 100% as claimed by the assessee.
3. Before us, Learned authorised representative referred to page 53 of the compilation which is copy of the tax audit report in which at items (ii) and (iii) it was clearly stated that method of valuation of sugar stock was changed during the year and because of this change profit has reduced by Rs. 115.21 lakhs. Then he referred to page 59 which is copy of the assessment order from which it becomes clear that such audit report was filed along with the return. He also referred to page 30 which is copy of main report of auditors in which it was clearly indicated at point II that during the year company had changed its policy for valuation of closing stock of sugar and the change has resulted in under-statement of profit and current assets by approximately Rs. 115.21 lakhs. He then referred to page 36 which is copy of reply of directors to the Statutory Auditors’ Report where it was mentioned that such change in method of accounting was effected only after obtaining approval from the Board of directors. He then referred to page 45 which is Schedule attached to the balance sheet and discloses significant accounting policy’, where again it was clarified that in case of sugar method of valuation of closing stock has been changed and it was also clarified that transportation expenses including rail freight reimbursable under the sugar equalisation fund administered by the Food Corpn. of India have been reduced and stock has been valued accordingly. He again referred to page 59 which is copy of the original assessment order and pointed out that in para 2, assessing officer had disallowed a sum of Rs. 86,963 on account of entertainment expenses on the basis of Tax Audit Report which means tax audit report was duly considered by the assessing officer before framing the assessment. As the issue regarding change in method of valuation of closing stock was fully disclosed by way of significant accounting policy as well as in Auditors’ main report and Tax Audit Report the assessing officer must have considered the same and satisfied himself and did not take any action against the assessee. This act of assessee also makes it clear that full and true disclosure regarding change in method of valuation of closing stock of sugar was made in the return. Later on, on the basis of same audit report it was concluded by assessing officer that income has escaped assessment within the meaning of section 147 and notice under section 148 was issued accordingly. Learned authorised representative vehemently argued that this amounts to change of opinion which is not permitted even in the amended law in respect of reassessment. He strongly relied on Full Bench decision of Hon’ble Delhi High Court in CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1. He particularly referred to page 19 where Hon’ble Court declined to entertain the contention of revenue that re-assessment was based on information derived from Tax Audit Report. The court observed that Tax Audit Report had already been submitted by the assessee and, therefore, information was already there which assessing officer must have considered. He contended that in the case before us audit report was already on record and from the fact of disallowance of entertainment expenses on the basis of same audit report it is clear that such audit report was duly considered by the assessing officer. Thus, it is a clear-cut case of only a change of opinion. He also referred to CBDT Circular No. 549 in 182 ITR (St.) 1. He referred to para 7.2 of the circular where it is clarified that Board had received number of representations against the omission of the words ‘reason to believe’ from section 147 and their substitution by the word ‘opinion’ of the assessing officer after considering these representations, the words ‘has reason to believe’ were again incorporated so as to remove the discretionary powers of the assessing officer. He also relied on Jindal Photo Film Ltd. v. Dy. CIT (1998) 234 ITR 170 (Del), Foramer v. CIT (2001) 247 ITR 436 (All.), CIT v. Forarner France (2003) 129 Taxman 72 (SC), Stnt. Laxmibai A. Wagle v. ITO (1999) 240 ITR 427 (Bom.), CITv. Corpn. Bank Ltd. (2002) 254 ITR 791 (SC) and CIT v. Maharashtra Sugar Mills Lid. (2003) 263 ITR 180 (Bom.).
4. On the other hand, Learned Departmental Representative submitted that it was not a case of change of opinion because assessing officer has not considered the issue of change in valuation of closing stock in his assessment order. He carried us through the original assessment order and pointed out that not even a single word has been mentioned regarding change in the method of valuation of closing stock of sugar. He further submitted that requirement of law under section 147 for reopening of assessment was only that when an item of income has escaped assessment the same can be reopened. He strongly relied on Raymond Woollen Mills Ltd. v. ITO (1994) 207 ITR 929 (Bom), Rajagiri Rubber & Produce Co. Ltd. v. State of Kerala ( 1996) 219 ITR 366 (Ker.) and Bawa Abhai Singh v. Dy. CIT (2002) 253 ITR 83 (Del).
5. We have considered the rival submissions carefully. We have also gone through the relevant material on record as well as judgments relied on by the parties. We are unable to agree with the submissions of Learned Departmental Representative. Even decision relied on by him are of no help. In Raymond Woollen Mills Ltd.’s case (supra). Hon’ble Bombay High Court upheld the reassessment proceedings because assessee had failed to disclose material facts necessary for assessment which is not the case before us. Though Hon’ble Kerala High Court in Rajagiri Rubber & Produce Co. Ltd.’s case (supra) held that re-assessment was valid even on the change of opinion but that judgment was rendered under Kerala Agricultural Income Tax Act, 1950 and we are not sure whether provision of Kerala Agricultural Income Tax Act, 1950 is similar to the provision of section 147 of Income Tax Act, 1961. In any case, majority of the High Courts have held that re-assessment on change of opinion in not valid. As far as decision of Bawa Abhai Singh’s case (supra) is concerned, same has been considered in Kelvinator of India Ltd.’s case (supra) by Full Bench of Delhi High Court and has been distinguished by observing that decision of Bawa Abhai Singh’s case (supra) is not an authority for the proposition that a mere change in the opinion would also confer jurisdiction upon the assessing officer to initiate proceedings under section 147 of the Act. In Kelvinator of India Ltd’s case (supra), Hon’ble Bull Bench of Delhi High Court has clearly held that mere change of opinion of assessing officer is not a valid ground for re-assessment. In that case assessee had incurred a sum of Rs. 3,33,926 (comprising of rent Rs. 1,76,000, expenses Rs. 91,485 and depreciation Rs. 66,44 1) towards guesthouse expenses and the same were not claimed in the original return. Later on, a revised return was filed along with a letter where sum of Rs. 1,76,000 towards rent of guest house and Rs. 66,441 towards depreciation of guest house was claimed under sections 30 & 32 of the Act on the basis of decision of Bombay High Court in CIT v. Chase Bright Steel Ltd. (No. 1) (1989) 177 ITR 124 (Bom). An order of assessment was passed where these two items were allowed. Later on, a notice under section 148 was issued in which inter alia it was alleged that Tax Audit Report depicted that items pertaining to guest house expenses were not allowable. Hon’ble Delhi High Court while rejecting the contention of revenue observed as under:-
“We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the sarne was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the assessing officer had received information from an audit report which was not before the Income Tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself.
We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons h ave not been recorded an analysis of the materials on the record by itself may justify the assessing officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said subsection (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. Itis well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed.
If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the assessing officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasijudicial function to take benefit of its own wrong.”
In this case only the Head Note is as under :-
“It is not in dispute that the assessing officer does not have anyjurisdiction to review his own order. His jurisdiction is confined only to rectification of mistakes as contained in section 154 of the Income Tax Act, 1961. The power of rectification of mistakes conferred upon the Income Tax Officer is circumscribed by the provisions of section 154 of the Act. The said power can be exercised when mistake is apparent. Even a mistake cannot be rectified where it may be a mere possible view or where the issues are debatable. The Income Tax Appellate Tribunal has limited jurisdiction under section 254(2) of the Act. It is a well-settled principle of law that what cannot be done directly cannot be done indirectly. if the Income Tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment. In a case of this nature the revenue is not without remedy. Section 263 of the Act empowers the CIT to review an order which is prejudicial to the revenue.”
6. We also find that in Circular No. 549, dated 31-10-1989 (182 ITR (St.) 1),
CBDT has stated in para 7.2 as under:-
“Amendment made by the Amending Act, 1989, to reintroduce the expression”reason to believe”in section 147.Anumberof representations were received against the omission of the words ‘reason to believe from section 147 and their substitution by the”opinion” of the assessing officer. It was pointed out that the meaning of the expression, ‘reason to believe” had been explained in a number of court rulings in the past and was wellsettled and its omission from section 147 would give arbitrary powers to the assessing officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression “has reason to believe” in the place of the words ‘for reason to be recorded by him in writing, is of the opinion”. Other provisions of the new section 147, however, remain the same.”
From this circular also, it becomes clear that words “reason to believe” were again introduced in section 147 so as to allay the fear of public that assessments would be reopened on mere change of opinion of assessing officer. Thus, it becomes clear that even CBDT does not want assessments to be reopened merely on the change of the opinion. Now in the case before us the admitted fact is that tax audit report was before the assessing officer. We reproduce the extract of page 1 of Form 3CD, a copy of which has been filed at page 53 of the compilation:
“(ii)
State whether there is any change in the method of valuation of the aforesaid items as compared to the method employed in the immediately preceding previous year.
No change, noticed except for valuation of sugar stock as noted in audit report para 2dII
(iii)
If the answer to to (ii) above is in the affirmative specify the amount by which the profit or loss for the year has been affected by such change.”
Profit have been reduced by Rs.115-21 lakhs due to above change.
We also find that information regarding change in method of closing stock was disclosed in the main audit report, a copy of which is available at page 30 and in the notes to the accounts which included significant accounting policies where the detailed regarding change of method of valuation of closing stock of sugar were depicted, a copy of which is placed on record at page 45. Both these documents were before assessing officer. We also find that from original assessment order, it becomes clear that assessing officer has duly considered the tax audit report and disallowance in respect of entertainment expenses amounting to Rs. 86,963 was made on the basis of this report. This clearly shows that assessing officer has definitely considered the tax audit report. in any case, as observed by Full Bench of Hon’ble Delhi High Court., that once an assessment is completed under section 143(3), a presumption can be raised that such an order has been passed on application of mind. Now in such circumstances, if assessing officer chooses not to consider the effect of change in method of valuation of closing stock, then he cannot take advantage of his own wrong and support reassessment proceedings. In these circumstances, we are of the considered view that it is merely a case of change in opinion which is not permitted under the law. In these circumstances we set aside the order of learned CIT (A) and allow the ground raised by the assessee. However, we would like to examine the issue on merit also as raised in ground No. 2
7. Ground No. 2. Learned authorised representative submitted that a sum of Rs. 1, 15,20,000 on account of low valuation of closing stock on the basis of comment in the auditors’ report that profits of the company were understated to that extent was added to the income. Assessing Officer has ignored all the explanations and submissions given by the assessee. He further contended that it is well-settled principle of law that assessee has a right to change the method of accounting including valuation of closing stock if the same was bona fide and for genuine reasons and the same method was followed in subsequent years consistently. He submitted that assessee was purchasing levy sugar against the quota allotted to the State Govt. by the Govt. of India as per scheme of supply of levy sugar at uniform price all over India. In excess of sale realisation over economic cost was to be refunded to FCI for which monthly statements were required to be prepared and handed over to the FCI through State Govt. along with demand draft for such excess realisation. If there was any deficit of realisation over the economic cost then such deficit was reimbursed by FCI after scrutinising monthly statements. The economic cost was being worked out after including cost such as freight, hammali etc. to the cost of purchase fixed by the Govt. He submitted that Corpn. was earlier valuing its stock on cost of purchase + hammali + Rly. freight etc. Since these expenses ivere to be reimbursed by FCI Corpn. decided to value its stock without including the element of Hammah and Rly. Freight in accordance with the accounting standard A. S. II issued by the Institute of C.As. of India. A copy of standard is filed as pages 114 to 116. He then referred to standard particularly to paras 5.1 – 6.4 and 17. He emphasised that other cost like cost of freight etc. was to be included in inventory but in the present case such costs were being reimbursed by the FCI and there was no point including the same in the closing stock. He also referred to pages 95 to 107 which gives details of working of economic cost as well as formula regarding reimbursement of expenses by FCI. He also referred to page 107 which is copy of the letter from Min. of Food & Consumer Affairs, Deptt. of Sugar and Edible Oil, G.O.I. whereby margin payable to wholesaler and retailer of levy sugar in M.P. were revised with effect from 1-4-1995. He then referred to the certificate issued by Statutory Auditors of the Corpn. where it has been explained that expenses incurred on transportation and Rly. freight were reimbursed to the Corpn. by FCI through Sugar Equalisation Fund. He submitted that such reimbursements have already been credited to the books of account and there was no purpose including the same in the value of closing stock. He also submitted that no purpose would be achieved if enhancement was made in the closing stock for this year because same has to be allowed as a credit in the next year’s opening stock by way of adjustment. He also relied on P. Balakrishnan, CIT v. Travancore Cochin Chemicals Ltd. (2000) 243 ITR 284 (Ker.), CIT v. Haryana Minerals Ltd. (2000) 242 ITR 704 (Punj. & Har.), CIT v. Atul Products Ltd. (2002) 255 ITR 85 (Guj.), CIT v. Andhra Pradesh Industrial Infrastructure Corpn. (1999) 236 ITR 648 (AP).Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC) and CIT v. Corpn. Bank Ltd. (1988) 174 ITR 616 (Karn).
8. On the other hand, Learned Departmental Representative strongly supported the order of CIT (A). He also relied on Mahendra Mills Ltd. v. Assa. CIT (1975) 99 ITR 135 (SC), CIT v. Doom Dooma India Ltd. (1993) 200 ITR 496 (Gau) and Smt. Radha Devi v. CIT (1998) 150 CTR (All.) 55.
9. We have considered the rival submissions carefully and have gone through the relevant material on record as well as judgments cited by the parties. It is settled principle of law that if a bona lide change in method of accounting is made and such method of accounting is followed in subsequent years continuously then such change is valid.
In case before us, it has been established before us that change in method of valuation of closing stock of sugar was bona fide because there was no purpose of including Hammali and cost of freight etc. in the value of closing stock because same was being reimbursed by FCI. The change was effected after obtaining approval of Board of directors and was duly incorporated in the significant accounting policies as note to the accounts. However, before us there is no evidence that all such expenses have actually been received by the assessee and duly credited in profit and loss account except a certificate from Statutory Auditors but which is filed before us for the first time, therefore, in the interest of justice, we set aside this matter to the file of assessing officer for examination whether reimbursement of Hammali, freight charges and other charges have been duly received and credited to the profit and loss account or not after providing adequate opportunity to the assessee.
10. Since we have already allowed ground No. 1 raised by the assessee on legal basis, the result of second ground would become academic only.
11. Ground No. 3. This ground is of consequential nature and assessing officer is directed to charge interest as per the provisions of the Act.
12. In the result, appeal is partly allowed.