ORDER
Pramod Kumar, Accountant Member
1. These two appeals pertain to the same assessee, involve common issues and were heard together. As a matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order.
2. We will first take up assessee’s appeal for the assessment year 1992-93 i.e. IT A No. 6410/Mum./96. The appeal is directed against Commissioner (Appeals)’s order dated 31-7-1996 in the matter of assessment under Section 143(3) of B the Income Tax Act, 1961, for the assessment year 1992-93.
3. In the first ground of appeal, the assessee is aggrieved of Commissioner (Appeals)’s confirming the disallowance of Rs. 40,000 under Section 37(2A) of the Act.
4. Having heard the rival contentions on the issue and having perused the material on record, we find that the disallowance has been made on the basis of accepted past history of the case and in the absence of details. However, in the past, 10% ad hoc disallowance has been confirmed by the C Commissioner (Appeals) and accepted by the assessee. We see no reasons to take any other view of the matter. Accordingly, the matter is remitted to the file of the assessing officer for restricting the disallowance to 10% of the canteen expenses. The assessee will get the relief, if any, accordingly.
5. Ground No. 1 is thus allowed for statistical purposes.
6. In ground No. 2, the assessee is aggrieved of the Commissioner (Appeals)’s upholding the disallowance of Rs. 51,097 under Rule 6D. The assessee, however, fairly D that this grievance is to be decided against the assessee in the light of Hon’ble jurisdictional High Court’s judgment in the case of CIT v. Arrow India Ltd. ).
7. Ground No. 2 is, therefore, dismissed.
8. As regards ground Nos. 4 cind 5, the same are not piressed by the assessee. These grounds are, accordingly, dismissed as not pressed.
9. The main grievance of the assessee is set out in ground of appeal number 3 which is as follows :
(a) The Commissioner (Appeals) erred in rejecting the method of valuation of stock adopted by the assessee under Section 145(1) of the Act.
(b) The Commissioner (Appeals) erred in directing the assessing officer to determine the value of closing stock by means of continuous determination of weighted average during the year.F
10. So far as this grievance of the assessee is concerned, the material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has changed his method of valuation of closing stock in the relevant previous year. The valuation method fol lowed by the assessee was at lower of cost or net realizable value at yearly weighted average method, as against First In First Out (FIFO) method followed earlier. The assessing officer also noted that as a result of this change in valuation of stock, the profits of the assessee are understated by Rs. 43,90,180. The assessing officer did not accept the assessee’s contention that the change of method was bona fide, that the new method followed by the assessee is one of the accepted and recognized stock valuation method, and that the new method has been consistently followed by the assessee. The assessing officer rejected these and other contentions of the assessee by observing as follows :
For the purpose of reflecting the correct net profit, the closing stock of the relevant previous year should have also been valued on the same basis on which the closing stock has been valued. But in the instant case, the assessee-company has valued the opening stock on first in first out method. Therefore, the change in method adopted by the assessee has resulted in not reflecting the real profits and losses, but has reduced the profits of the company.
The assessing officer then concluded that since the assessee-company has not adopted the same method of valuation of opening and the closing stock and since the profits of the assessee stand understated due to change in the method of valuation of stock, an addition of Rs. 43,90,180 is made to the total income being on account of undervaluation of closing stock. Aggrieved by the stand of the assessing officer, the assessee carried the matter in appeal before the Commissioner (Appeals) but without any success. In a rather scholarly discussions on the accounting theories, the Commissioner (Appeals) came to the conclusion that whatever be the method of determining the value of closing stock even if it is a recognized method and is followed consistently, if such a method does not disclose the actual cost of the stock. “It becomes the duty of the assessing officer, under proviso to Section 145(1), to make such corrections, as necessary, to arrive at the actual cost of the closing stock of goods, so as to determine the correct profits of the business”. The Commissioner (Appeals) then further held that “the ‘yearly weighted average’ method of valuation of stock adopted by the assessee-company does not determine the corrected weighted purchase price of goods in all possible situations and also in the facts and circumstances leading to the year under consideration”. The Commissioner (Appeals) thus rejected the method of accounting followed by the assessee, but held that the assessing officer is required to determine the value of stock on the basis of ‘continuous determination of weighted average’ (i.e. after each purchase or receipt of stocks) and compute the profits on that basis. The assessee is not satisfied and is in appeal before us.
11. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
12. In the light of the decision of the Commissioner (Appeals), which has not been challenged in appeal by the revenue, the short issue before us is whether the ‘yearly weighted method’ is to be followed for computation of value of ‘closing stock’ or the ‘continuous weighted average method’ is to be followed for A the said purpose. The sole reasoning for this method is set out in the following observations by the Commissioner (Appeals) :
Evidently, the method of valuation adopted by the appellant-company, in an inflationary economy, would produce a comparatively low valuation of the opening stock at the beginning of the year and a comparatively low valuation of the closing stock at the end of the year, and therefore a comparatively low difference between the two. g In the period of rising turnover and the rising prices difference is an element of profit and by keeping down the difference the system diminishes the assessment of taxable profit for the year. Thi^s over a series of years, this produces a continuous deferment of tax liability.
These observations, taken from the House of Lords decision in the case of BSC Footwear Limited, and quoted by our Hon’ble Supreme Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 441, were made in the context of a case in which stock valuations were ‘seriously and substantially incorrect’ and in the light of the question before Their Lordships which dealt with non-inclusion of certain cost components in the valuation of stock. In the present case, the only dispute is as to on what basis the cost of stock is to be computed. As far as this aspect of the matter is concerned, there cannot be any dispute that as long as all the material costs are taken into account, it is open to the assessee to adopt any d recognized method of accounting as long as it is bona fide and consistent. Merely because a method results in lower valuation of stock and the resultant incidental tax advantage, cannot be a ground for rejecting the method of accounting followed by the assessee. Whether- the valuation is on yearly weighted average method or continuous average method, these methods show the cost of the goods by one set of the recognized parameters. During the course of arguments before us also, learned departmental Representative vehemently argued that the method cho- E, sen by the assessee is not the most appropriate method of stock valuation as the assessee is a large trader whereas the method adopted by him is suitable only for the small units. We are, however, not inclined to sit in judgment over which method of accounting is most suitable method for the assessee. As long as the method of accounting chosen by the assessee includes all components of relevant historical costs as cost of the stock, which admittedly is the situation before us, and as long as method of p accounting chosen by the assessee is a recognized method of accounting, we see no reasons to reject the method of accounting adopted by the assessee. This is so held by the Hon’ble jurisdictional High Court in the case of Melmould Corpn. v. CIT (1993) 202 ITR 7892 (Bom.) As regards the reliance placed on Hon’ble Siupreme Court’s judgment in the case of British Paints India Ltd. (supra), we are of the considered view that as long as all components of historical costs, whether direct or indirect, are included in the cost taken by the assessee, it cannot be open to the assessing officer to reject the valuation of stock by the assessee on the ground that such valuation understates the value of stock. Keeping all these factors in mind, as also entirety of the case, we deem it fit and proper to direct the assessing officer to accept the method of accounting for valuation of stock as adopted by the assessee. The assessee gets the relief accordingly.
13. Ground No. 3 is thus allowed.
14. The appeal of the assessee for the assessment year 1992-93 is thus partly allowed in the terms indicated above.
15. We now move on to the assessee’s appeal for the assessment year 1993-94 i.e. ITA No. 6411/Mum./96.
16. The ground of appeal in this appeal are exactly the same as in the appeal for the assessment year 1992-93 and even numbering of grounds is the same. The difference is only in the terms of quantum of respective disallowance.
17. Following the view taken by us for the assessment year 1992-93, as above, we dismiss the ground Nos. 2, 4 and 5. Ground No. 2 is dismissed following the esteemed views of Hon’ble jurisdictional High Court in the case of Arrow India Ltd. (supra) and ground Nos. 4 and 5 are dismissed as not pressed.
18. Ground No. 1 is also dismissed as the disallowance of canteen expenses in the present assessment year is only 10% of the total expenses under that head, in accordance with the accepted past history of the case.
19. As regards ground No. 3, following the view taken by us for the assessment year 1992-93 and for the detailed reasons set out in our order for the assessment year 1992-93, we direct to accept the method of accounting for valuation of stock as adopted by the assessee. The assessee gets the relief accordingly. Ground No. 3 is thus allowed.
20. In the result, the appeal filed by the assessee is partly allowed in the terms indicated above.
21. To sum up, both the appeals filed by the assessee are partly allowed in the terms indicated above.