Law:

Section:

Section 145 of the income-tax act, 1961-Method of accounting-Change of-Assessee, who was regularly valuing stock under total cost method, changed over to direct cost method which excluded certain expenses which were to be included under former method-Though ito did not allow change of method, tribunal found that change of method being bona fide and intended to be followed consistently in future and held that assessee was entitled to adopt new method-whether tribunal justified-held, on facts, yes-Whether assessee, in first year of adoption of new method, can apply it for valuation of closing stock only and retain valuation of opening stock of year as per old method, even though this was detrimental to interests of revenue in that year-held, on facts, yes Facts The assessee-company filed a revised return wherein part of the closing stock was valued at a lesser figure by the 'direct cost' method, whereas, in the past, the assessee was regularly following 'total cost' method. The assessee explained that the difference between the two methods was that in the direct cost method, certain overhead expenses such as administrative expenses were excluded while in the total cost, they were included. The assessee also submitted that it intended to follow the direct cost method consistently in future. The ITO, however, did not allow this change of method and added back the difference in the value of the closing stock, resutling from the adoption of the 'direct cost' method, instead of the method of 'total cost' followed earlier, on the grounds that the valuation adopted regardless of the market value or full cost was not only arbitrary but also inconsistent with the assessee's past practice and that since the new method had been applied only for valuing the closing stock and the value of the opening stock of the year had not been reduced as per the new method, the true profits of the assessee had not been reflected. The AAC allowed the assessee's plea for the change of method, but directed that the opening stock of the year should also be valued as per the new method. The Tribunal upheld the assessee's stand that it was entitled to change the method of valuing stock and…

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