Central Clectronics Ltd.,, Ghaziabad v. AO, New Delhi

ITA 3850/DEL/2009 | 2006-2007
Pronouncement Date: 04-05-2010 | Result: Partly Allowed

Appeal Details

RSA Number 385020114 RSA 2009
Assessee PAN AAACC1261G
Bench Delhi
Appeal Number ITA 3850/DEL/2009
Duration Of Justice 7 month(s) 24 day(s)
Appellant Central Clectronics Ltd.,, Ghaziabad
Respondent AO, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 04-05-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 04-05-2010
Date Of Final Hearing 04-05-2010
Next Hearing Date 04-05-2010
Assessment Year 2006-2007
Appeal Filed On 10-09-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI R.P. TOLANI JUDICIAL MEMBER AND SHRI K.G. BANSAL ACCOUNTANT MEMBER ITA NO.3850/DEL./2009 (ASSESSMENT YEAR : 2006-07) M/S. CENTRAL ELECTRONICS LTD. VS. A.O. WARD 3 ( 2) 4 INDUSTRIAL AREA NEW DELHI. SAHIBABAD 201 010 (U.P.) (PAN : AAACC1261G) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI R.S. SINGHVI & JITENDER KUMAR C.A.S REVENUE BY : SHRI MANISH GUPTA DR ORDER PER R.P. TOLANI JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF THE CIT (A) FOR THE ASSESSMENT YEAR 2006-07. FOLLOWING GROUNDS ARE RAISED : 1. THAT THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN CONFIRMING THE A.O.S ACTION OF DISALLOWING RS.1628 6000/- OUT OF THE CLAIMED AMOUNT OF RS.20357000/- FROM DEFERRE D REVENUE EXPENDITURE IGNORING THE FACT THAT THE SAME WAS CLA IMED AS PER THE AS-26 ISSUED BY THE ICAI NEW DELHI. 2. THAT THE LD. CIT (A) ERRED IN LAW AND ON FACTS I N CONFIRMING THE A.O.S ACTION OF DISALLOWING WRITE O FF OF INVENTORY OF NON/SLOW MOVING ITEMS OF RS.2109977/- IGNORING THE FACT THAT THE WRITE OFF OF INVENTORY WAS AS PER THE ACCEPTED ACCOUNTING POLICY FOLLOWED FROM YEAR TO YEAR AND TH AT THE INVENTORY WRITTEN OFF HAD NO MARKET VALUE ON ACCOUN T OF ITA NO.3850/DEL./2009 2 BECOMING OLD AND OBSOLETE KEEPING IN VIEW OF THE FA CT OF FAST CHANGING ELECTRONIC TECHNOLOGY FROM YEAR TO YEAR. 3. THAT THE LD. CIT (A) WRONGLY REJECTED THE ASSESS EES SUBMISSIONS FILED DURING ASSESSMENT PROCEEDINGS AND APPEAL PROCEEDINGS IN SUPPORT OF THE CLAIMED DEDUCTIONS. 4. THAT THE LD. CIT (A) ERRED IN LAW ON FACTS IN IG NORING THE PAST HISTORY OF THE CASE WHEN SUCH DISALLOWANCES WE RE ALLOWED IN APPEALS IN PREVIOUS ASSESSMENT YEARS. 2. ASSESSEE IS A CENTRAL GOVERNMENT ORGANIZATION. C OPY OF COD APPROVAL FOR PROSECUTING THE APPEAL IS PLACED ON RECORD. 3. LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTSET CONTENDS THAT GROUND NO.2 REGARDING DISALLOWANCE IN RESPECT OF WRITING O F INVENTORY OF NON/SLOW MOVING ITEMS IS COVERED IN ITS FAVOUR BY ITAT DECIS ION DATED 27.11.2009 IN ITS OWN CASE IN ITA NOS.233 & 1821/DEL/2009 FOR ASS ESSMENT YEARS 2004-05 & 2005-06. ITAT DELETED THE ADDITION BY FOLLOWING OBSERVATIONS : 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. THIS HAS NOT BEEN DISPUTED THA T THE ASSESSEE BEING A CENTRAL GOVERNMENT ORGANIZATION REGARDING P OLICIES INVENTORY PREPARATION AND OBSOLETE FOLLOWS A WELL G UARDED CONSISTENT POLICY. THE ANNUAL AUDIT IS DONE BY CAG . IT HAS NOT BEEN POINTED OUT THAT THE WRITING OFF OF INVENTORY WAS IN RESPECT OF SLOW MOVING OR NON-MOVING ITEMS. WE ARE OF THE VIEW THAT WITH THESE FACTS ON RECORD THE ASSESSEE IS ELIGIBL E FOR DEDUCTION OF SLOW MOVING NON-OBSOLETE ITEMS AS CLAIMED. OUR VIEW IS FORTIFIED BY THE JUDGMENT OF RAJASTHAN HIGH COURT I N THE CASE OF CIT VS. WOLKEM INDIA LTD. 221 CTR 767. THIS GROUN D OF ASSESSEE IN BOTH THE YEARS IS ALLOWED. 4. APROPOS GROUND NO.1 BRIEF FACTS ARE THAT THE AS SESSEE COMPANY HAS WRITTEN OFF AN AMOUNT OF RS.2 03 57 000/- AND CHARG ED IT TO P&L ACCOUNT. ITA NO.3850/DEL./2009 3 THE ASSESSEE COMPANY HAD SOLD 250 SOLAR PUMPS TO TH E END USERS DURING THE FINANCIAL YEAR 2000-01 AGAINST IREDA WATER PUMPS SC HEME VIDE AGREEMENT DATED 10.10.2000. THE SALE PRICE PER PUMP SET WAS RS.4 56 000/- AGAINST WHICH THEN COMPANY REALIZED ONLY RS.3 06 000/-. TH E SHORT FALL IN REALIZATION OF RS.1 50 000/- PER SET WAS RECEIVED AS LOAN TO BE REPAYABLE IN 10 ANNUAL INSTALLMENTS AT 2.5% INTEREST PER ANNUM. THE TOTAL SHORT FALL IN SALE REALIZATION OF RS.4 07 14 000/- WAS TREATED AS DEFERRED REVENUE EXPENDITURE TO BE WRITTEN OFF DURING THE REPAYMENT PERIOD OF THE LOAN. ACCOR DINGLY RS.40 761 400/- HAS BEEN WRITTEN OFF AND CHARGED TO P&L ACCOUNT EAC H YEAR STARTING FROM 2000-01. DURING THE CURRENT YEAR THE COMPANY HAS C HANGED ITS ACCOUNTING POLICY AND THEREBY THE BALANCE AMOUNT OF RS.203.57 LACS IS CLAIMED AS MISCELLANEOUS EXPENSES IN THE ASSESSEE BALANCE SHEE T AND IS WRITTEN OFF. 4.1 THE A.O. OBSERVED THAT THE SALE PRICE OF SPV PU MPS AS PER THE SALE AGREEMENT OF IREDA IS RS.4 56 000/- PER PUMP. THE SUBSIDY ELEMENT AS PER THE AGREEMENT OF IREDA IS RS.2 25 000/- PER PUMP. IN ADDITION TO THE ABOVE AN AMOUNT OF RS.81 000/- PER PUMP IS PAID BY PEDA ( END USER) TO THE COMPANY AS ONE TIME PAYMENT. HENCE THE COMPANY HA S REALIZED RS.3 06 000/- PER PUMP. THE SHORT FALL OF RS.1 50 000/- PER PUMP IS COMPENSATED BY IREDA IN THE FORM OF SOFT LOAN OF RS .2 07 900/- PER PUMP AT THE SUBSIDIZED RATE OF INTEREST OF 2.5% PER ANNUM O N REDUCING BASIS TO MEET THE COST OF PUMP. THIS AMOUNT OF SOFT LOAN IS REPA YABLE BY THE COMPANY IN 10 ITA NO.3850/DEL./2009 4 YEARLY EQUAL INSTALMENTS ALONG WITH INTEREST. THE SHORT FALL ON ACCOUNT OF REALIZATION HAS BEEN MET AND COMPENSATED BY MEANS O F SOFT LOAN PROVIDED BY IREDA. THE A.O. WAS OF THE VIEW THAT THERE IS PRAC TICALLY NO LOSS TO THE ASSESSEE COMPANY AND HENCE THE AMOUNT WRITTEN OFF I N THE BOOKS OF ACCOUNTS WAS DISALLOWED AS DONE IN EARLIER YEARS. 5. AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL. HOW EVER CIT (A) PARTLY ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING OBSE RVATIONS : A PERUSAL OF THE ABOVE DESCRIPTION SHOWS THAT ITE MS FALLING WITHIN THE CATEGORY OF INTANGIBLE ITEMS A RE THE ITEMS SUCH AS COMPUTER SOFTWARE PATENTS COPYRIGHTS MOT ION PICTURE FILMS CUSTOMER LISTS MORTGAGE SERVICING RIGHTS ET C. THE APPELLANTS CLAIM OF LOSS ON SALE OF SPV WATER PUMP S IS NOT SIMILAR TO THE NATURE OF ITEMS COVERED BY THE SCOPE OF INTANGIBLE ASSETS AS DESCRIBED IN PARA 7 OF AS- 26. SINCE LOSS ON SALE OF SPV PUMPS WHICH THE APPELLANT HAD BEEN CLAIMING OVER THE PERIOD OF TEN YEARS I.E. EQUIVALE NT TO THE PERIOD OF REPAYMENT AND PERIOD OF BENEFIT OF SOFT L OAN IS NOT AN INTANGIBLE ASSET AS-26 IS NOT APPLICABLE IN A PPELLANTS CASE AND HENCE THE CHANGE OF METHOD OF ACCOUNTING CANNOT BE ATTRIBUTED TO AS-26. MOREOVER THE APPELLANT HAS BEEN FOLLOWING A REGU LAR METHOD OF ACCOUNTING FOR CLAIMING THIS LOSS AND IN VIEW OF THE SPECIFIC PROVISIONS OF THE INCOME TAX ACT INCOME I S TO BE COMPUTED AS PER THE REGULAR METHOD ADOPTED BY THE A PPELLANT. AS REGARDS APPELLANTS CONTENTION THAT THE COMPANY WILL CONSISTENTLY FOLLOW THE CHANGED ACCOUNTING POLICY I FIND THAT THIS CHANGE IN ACCOUNTING POLICY HAS BEEN DONE FOR A SPECIFIC ENTRY OF LOSS ON ACCOUNT OF SALE OF SPV WATER PUMPS . BY THE CHANGE OF METHOD THE APPELLANT HAS CLAIMED THE COM PLETE LOSS IN ONE YEAR ONLY. THUS THE CHANGE OF METHOD IS EF FECTIVE ONLY FOR THE YEAR UNDER REFERENCE. THE APPELLANT HAS AL SO SUBMITTED THAT THE BOARD OF DIRECTORS REFUSED TO ADOPT THE AC COUNTS WITH THE PROPOSED QUALIFICATION OF THE STATUTORY AUDITOR S. HOWEVER AS ALREADY DISCUSSED ABOVE THE APPELLANT CONCERN H AD TAKEN A ITA NO.3850/DEL./2009 5 DECISION IN EARLIER YEARS TO TREAT THIS LOSS IN A S PECIFIC MANNER DUE TO THE REASONS ELABORATED IN ANNUAL REPORTS. T HERE IS NO CHANGE IN THE CIRCUMSTANCES OF THE CASE AND THE REP AYMENT PERIOD OF LOAN IS STILL NOT OVER. LD. AR HAS ALSO NOT BROUGHT ON RECORD ANY DOCUMENTS PERTAINING TO THE REFUSAL OF B OARD OF DIRECTORS TO ADOPT THE ACCOUNTS AS WAS BEING DONE I N EARLIER YEARS. IN VIEW OF THE DISCUSSION ABOVE I FIND THAT THERE WAS NO JUSTIFICATION FOR CHANGE OF ACCOUNTING POLICY WITH REGARD TO LOSS ON SALE OF SPV WATER PUMPS. HENCE THE APPELL ANTS CLAIM FOR THE AMOUNT OF RS.2 03 57 000/- IS NOT ACCEPTABL E. HOWEVER IN VIEW OF THE DECISIONS OF EARLIER YEARS THE RELIEF IS ALLOWED ON DEFERRED BASIS FOR AN AMOUNT OF RS.40 71 000/-. 6. AGGRIEVED ASSESSEE IS BEFORE US. LEARNED COUNSE L FOR THE ASSESSEE CONTENDS THAT THE ASSESSEE IS A PUBLIC SECTOR UNDER TAKING AND THERE IS NO PERSONAL INTEREST OF BOARD OF DIRECTORS OF THE COMP ANY IN ACCOUNTING POLICIES. THE ACCOUNTING POLICIES ARE ADOPTED BY A REGIME OF INTERNAL CHECKS AND BALANCES OF ACCOUNTING POLICIES. THE CHANGE IN MET HOD ADOPTED FOR WRITING OFF OF BALANCE DEFERRED EXPENDITURE WAS IN CONSONAN CE WITH AS-26 ICAI AND THEREFORE THE BALANCE AMOUNT WAS WRITTEN OFF AS BO ARD OF DIRECTORS REFUSED TO ADOPT THE ACCOUNT WITH THE PROPOSED QUALIFICATION O F THE STATUTORY AUDITORS. THE ASSESSEE WAS ENTITLED TO CHANGE ITS METHOD OF A CCOUNTING AND WHAT A.O. SHOULD HAVE LOOKED INTO WAS WHETHER THE CHANGE IS B ONAFIDE OR NOT. THE ASSESSEE COMPANY IN THIS YEAR ADOPTED A POLICY OF W RITING OFF OF INTANGIBLE ITEMS IN THE YEAR OF OCCURRENCE. SINCE THE WRITE O FF WAS CRYSTALLIZED DUE TO THIS CHANGE OF POLICY IT CANNOT BE TERMED AS ISOLA TED INCIDENT NOR CAN BE HELD ITA NO.3850/DEL./2009 6 TO BE MALA FIDE. IT HAS BEEN ARGUED THAT A.O. HAS NOWHERE ADVERTED TO DO THE ISSUE OF CHANGE IN METHOD OF ACCOUNTING AND ITS BON AFIDE. A.O. DISALLOWED THE SAME ONLY BY FOLLOWING CONCLUSION : HENCE THE ASSESSEE COMPANY HAS SAVED SUBSTANTIAL INTEREST ON ACCOUNT OF LOAN PROVIDED BY IREDA. HEN CE PRACTICALLY THERE IS NO LOSS TO THE ASSESSEE COMPA NY AND THE AMOUNT WRITTEN OFF IS DISALLOWED AND ADDED BACK IN THE INCOME OF THE ASSESSEE. 7. LEARNED DR IS HEARD WHO SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. IN RESPECT OF GROUND NO.2 I.E. DISALLOWANCE IN RES PECT OF WRITING OF INVENTORY OF NON/SLOW MOVING ITEMS WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE AFORESAID DECISION DATED 27.11.2009 OF ITAT. RESPECTFULLY FOLLOWING THE SAME WE ALLOW THIS GROUND. 9. APROPOS GROUND NO.1 FIRST AND FOREMOST ISSUE BE FORE THE A.O. WAS TO DECIDE THE ISSUE AS TO WHETHER THE ASSESSEE WAS ELI GIBLE FOR CHANGE OF METHOD OF ACCOUNTING AND FURTHER WHETHER THE CHANGE ADOPTE D WAS BONAFIDE OR NOT. A.O. HAS NOT ADVERTED TO THIS CRUCIAL ISSUE AND THE ISSUE IS DECIDED AGAINST THE ASSESSEE ONLY ON LIMITED OBSERVATION THAT THERE IS NO LOSS TO COMPANY. RELEVANT DOCUMENTS INCLUDING EXPERT OPINION ABOUT T HE CHANGE IN METHOD OF ACCOUNTING AND BOARD OF DIRECTORS NOT TO ADOPT THE ACCOUNTS ON THE BASIS OF QUALIFIED REMARKS OF CHARTERED ACCOUNTANTS HAVE IMP ORTANT BEARING WHICH HAVE NOT BEEN ADVERTED. IN THESE FACTS AND CIRCUMS TANCES WE ARE INCLINED TO ITA NO.3850/DEL./2009 7 SET ASIDE THE ISSUE ABOUT BONAFIDES OF CHANGE IN ME THOD OF ACCOUNTING AND THE WRITE OFF OF ABOVE AMOUNT BACK TO THE FILE OF A.O. TO DECIDE THE SAME FRESH IN ACCORDANCE WITH LAW AFTER GIVING AN OPPORTUNITY OF BEING HEARD. THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 4 TH DAY OF MAY 2010. SD/- (K.G. BANSAL) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 4 TH DAY OF MAY 2010 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-VI NEW DELHI. 5.CIT(ITAT) NEW DELHI. AR ITAT NEW DELHI. CONTD8 ITA NO.3850/DEL./2009 8 PER K.G. BANSAL : AM I AGREE WITH MY LD. BROTHER THAT THE CASE HAS TO BE RESTORED TO THE FILE OF THE AO IN RESPECT OF GROUND NO. 1 OF TH E APPEAL OF THE REVENUE. IN FACT THE LD. DR AND THE LD. COUNSEL AGREED THAT THIS GROUND MAY BE RESTORED TO THE FILE OF THE AO. HOWEVER THE BAC KGROUND IN RESPECT OF AFORESAID AGREED VIEW IS STATED HEREUNDER. 2. THE FACTS OF THE CASE HAVE BEEN MENTIONED IN PARAGRAPH 4 ON PAGE 2 OF THE ORDER OF MY LEARNED BROTHER. 3. PARA 7 OF THE ACCOUNTING STANDARD-26 (AS-26) RELIED UPON BY THE LD. COUNSEL HAS BEEN REPRODUCED ON PAGE 5 OF THE O RDER OF THE LD. CIT(APPEALS) WHICH READS AS UNDER:- ENTERPRISES FREQUENTLY EXPEND RESOURCES OR INC UR LIABILITIES ON THE ACQUISITION DEVELOPMENT MAINTENANCE OR ENHANCEMENT OF INTANGIBLE RESOURCES SUCH AS SCIENTIFIC O R TECHNICAL KNOWLEDGE DESIGN AND IMPLEMENTATION OF NEW P ROCESSES OR SYSTEMS LICENCES INTELLECTUAL PROPERTY MARKET KNOWLEDGE AND TRADEMARKS (INCLUDING BRAND NAMES AND PUBLI SHING TITLES). COMMON EXAMPLES OF ITEMS ENCOMPASSED BY THESE BROAD HEADINGS ARE COMPUTER SOFTWARE PATENTS COPYR IGHTS MOTION PICTURE FILMS CUSTOMER LISTS MORTGAGE SERVI CING RIGHTS FISHING LICENCES IMPORT QUOTAS FRANCHISES CU STOMER OR SUPPLIER RELATIONSHIPS CUSTOMER LOYALTY MARK ET SHARE AND MARKETING RIGHTS. GOODWILL IS ANOTHER EXAMPLE OF AN ITEM OF INTANGIBLE NATURE WHICH EITHER ARISES ON ACQU ISITION OR IS INTERNALLY GENERATED. 4. ON THE AFORESAID FACTS THE LD. CIT(APPEAL S) CONCLUDED THAT (I) THERE IS NO CHANGE WHATSOEVER IN THE FACTS OF TH IS YEAR VIS--VIS THE FACTS ITA NO.3850/DEL./2009 9 OF LAST YEAR; (II) THE CHANGE IN ACCOUNTING PRACTICE IS EFFECTIVELY MEANT FOR THIS YEAR ONLY AS IT HAS BEEN MADE IN RESP ECT OF DEFERRED REVENUE EXPENDITURE AS DESCRIBED IN PARAGRAPH 4 OF TH E ORDER OF MY LEARNED BROTHER; AND (III) AS-26 IS NOT APPLICABLE TO A N ITEM OF EXPENDITURE AS IT IS APPLICABLE ONLY TO AN INTANGIBLE ASSET. 5. THE LD. DR SUPPORTS THE ORDER OF THE LD. CIT (APPEALS) BY FURTHER SUBMITTING THAT THE CHANGE IN ACCOUNTING SYSTEM OF THIS ITEM HAS BEEN MADE WITH A VIEW TO REDUCE THE TAX LIABILITY OF THIS YEAR. IN THIS CONNECTION HE RELIES ON THE ACCOUNTS OF THIS YEAR EARLIE R YEARS AND SUBSEQUENT YEARS. THE ACCOUNTS OF THIS YEAR AND EARLIER YEARS HA VE BEEN CONSIDERED BY BOTH THE LOWER AUTHORITIES BUT THE ACCOUNTS FOR SUBSEQUENT YEARS HAVE NOT BEEN CONSIDERED BY ANY ONE OF THEM FOR COMING TO A CONCLUSION WHETHER THE CHANGE HAS BEEN MADE WITH A VIEW TO REDUCE THE TAX LIABILITY OF THIS YEAR. THUS THE MATTER REQUIRES TO GO BACK TO THE AO SO THAT HE MAY HEAR THE ASSESSEE AT LENGTH IN RESPECT OF THIS MATTER . 5.1 IN ORDER TO SUPPORT THE ORDER OF THE LD. CI T(APPEALS) ON THIS GROUND HE RELIES ON THE DECISION OF B BENCH OF DELHI TRIBUNAL IN THE CASE OF NATIONAL FERTILIZERS LTD. VS. DEPUTY CIT (2009) 12 0 ITD 259. IT WAS OBSERVED IN PARAGRAPH 8.3 ON PAGE 290 AS UNDE R:- 8.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. THE ISSUE BEFORE US IS NOT ONLY WHE THER THE CHANGE IN METHOD OF ACCOUNTING WAS BONA FIDE O R MALA FIDE FOR THE REASON THAT THE BASIC ARGUMENT OF THE LD. COUNSEL IS ITA NO.3850/DEL./2009 10 THAT THE CHANGE IS MADE IN ACCORDANCE WITH THE ACCOUNTING STANDARD PRESCRIBED BY THE ICAI. HOWEVER THE LEARNED CIT(A) CLEARLY POINTED OUT THAT AS-2 DEALS ONLY WITH SUCH SPARES WHICH ARE USED IN REPAIRS OF MACHINERY WHILE AS-10 DEALS WITH SUCH SPARES AND MACHINERY WHICH IS TH E OPERATING ASSET OF THE ASSESSEE USED IN THE PROCESS OF MANU FACTURE. UNDER AS-10 THE ASSET HAS TO BE WRITTEN OFF OVER I TS USEFUL LIFE. THE ASSESSEE EARLIER CONSIDERED THE USEFUL LI FE OF TOOLS TO BE THREE YEARS. NOTHING IS SHOWN TO US TO REACH TO A CONCLUSION AS TO HOW THIS LIFE HAS NOW BECOME ONE YEAR. I N ABSENCE THEREOF IT IS HELD THAT THE LEARNED CIT(A) W AS RIGHT IN UPHOLDING THE ORDER OF THE ASSESSING OFFICER. THU S THIS GROUND IS DISMISSED. 5.2 FURTHER HE RELIES ON THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF TRIVENI ENGINEERING & INDUSTRIES LTD. VS. CIT (2010) 385 ITR 430. AT PLACITUM 3 THE COURT HAS HELD AS UNDE R:- AS REGARDS THE ISSUE RAISED WITH REGARD TO REJ ECTING THE METHOD IN THE CHANGE OF VALUATION OF CLOSING STO CK WE FIND THAT THE FINDING ARRIVED AT BY THE THREE AUTHO RITIES BELOW THAT THE CHANGE IN THE VALUATION OF CLOSING STOCK WAS NOT BONA FIDE IS A PURE FINDING OF FACT AND NO QUESTI ON OF LAW ARISES MUCH LESS A SUBSTANTIAL QUESTION OF LAW. WE ALS O AGREE THAT THE CHANGE IN THE METHOD OF VALUATION OF THE CLOS ING STOCK WAS NOT BONA FIDE BECAUSE THE AUTHORITIES BELOW HAVE NOTED THAT FOR THE ASSESSMENT YEAR IN QUESTION SEEKING OF CHANGE IN THE METHOD OF VALUATION OF THE CLOSING STOCK WA S IN THE YEAR WHERE THERE WAS HUGE RISE IN THE PROFITS OF THE ASSESSEE- COMPANY AND THE CHANGE WAS ADOPTED IN ORDER T O REDUCE PROFITS IN THE RELEVANT YEAR. THE FACT THAT T HE CHANGE IS NOT BONA FIDE IS MORE THAN ABUNDANTLY CLEAR FROM THE FACT THAT THE ASSESSEE ONCE AGAIN SWITCHED BACK TO THE OLD METHOD OF VALUATION OF CLOSING STOCK JUST ONE YEAR T HEREAFTER IN THE ASSESSMENT YEAR 1993-94. THE CONTENTION OF THE C OUNSEL FOR THE APPELLANT THAT THE ASSESSEE-COMPANY WAS ENTITLE D TO FOLLOW A SCIENTIFIC BASIS FOR VALUATION OF THE CLOSING STOCK IS NOT IN ISSUE BECAUSE NO DOUBT A COMPANY CAN ADOPT SUCH A METHOD FOR VALUATION OF THE CLOSING STOCK BUT SUCH V ALUATION OF CLOSING STOCK HAD TO BE ADOPTED ON A CONSISTEN T BASIS AND ITA NO.3850/DEL./2009 11 CANNOT BE CHANGED TO SUIT THE CONVENIENCE OF THE ASSESSEE SO AS TO DEPRIVE THE REVENUE OF LEGITIMATE TA X. IT HAS RIGHTLY BEEN FOUND BY ALL THE AUTHORITIES BELOW T HAT THE CHANGE IN THE VALUATION STOCK WAS NOT BONA FIDE. N OTHING FURTHER NEED BE SAID ON THIS ASPECT. 6. THE LD. COUNSEL HAD RELIED UPON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF NONSUCH TEA ESTATE LTD. VS . CIT (1975) 98 ITR 189. HE DISTINGUISHED THE CASE BY MENTIONING THAT SECTION 326 OF THE COMPANIES ACT 1956 CONTAINED AN ABSOLUTE PROHI BITION AGAINST THE APPOINTMENT OR RE-APPOINTMENT OF A MANAGING AGE NT BEFORE APPROVAL OF THE CENTRAL GOVERNMENT. IT IS FOR THIS REASON TH AT IT HAS BEEN HELD THAT THE LIABILITY ARISES WHEN THE APPROVAL IS RECEIVED . IN THIS CONNECTION HE RELIES ON THE OBSERVATIONS OF THE COURT AT PAGE 193 WHICH READ AS UNDER:- SECTION 326 PROHIBITS THE APPOINTMENT OR RE- APPOINTMENT OF A MANAGING AGENT UNLESS THE CENTRAL GOVERNMENT APPROVED SUCH APPOINTMENT OR REAPPOINTMENT. THE CENTRAL GO VERNMENT WOULD NOT ACCORD ITS APPROVAL UNLESS THE RE QUIREMENTS SPECIFIED IN CLAUSES (A) (B) AND (C) OF SUB-SEC TION (2) OF THE SECTION HAVE BEEN FULFILLED. THEREFORE IT CANNO T BE ASSUMED THAT THE CENTRAL GOVERNMENT WILL APPROVE EVER Y PROPOSED APPOINTMENT OR REAPPOINTMENT OF A MANAGING AGEN T. THUS IN THE INSTANT CASE IT IS ONLY WHEN THE CENTRAL G OVERNMENT CONVEYED ITS APPROVAL TO THE APPOINTMENT OF M/S HARRISONS AND CROSFIELD LTD. AS MANAGING AGENTS BY ITS LE TTER DATED SEPTEMBER 2 1957 THAT THE APPOINTMENT BECAME EFFECTIVE AND THE COMPANYS LIABILITY TO PAY THE REMUNER ATION OF THE MANAGING AGENTS ACCRUED. THE POSITION HERE IS NOT THAT THE LIABILITY HAD ARISEN EARLIER AND ITS QUANTIFICAT ION ONLY DEPENDED ON THE APPROVAL OF THE CENTRAL GOVERNMENT . IT IS TRUE THAT THE LIABILITY BECAME EFFECTIVE FROM APRIL 1 1956 A DATE ANTERIOR TO THE RELEVANT PREVIOUS YEAR BUT THAT IS BECAUSE THE CENTRAL GOVERNMENT CHOSE TO GIVE ITS APPROVAL R ETROSPECTIVE OPERATION. THE LIABILITY IN THESE CIRCUMSTANC ES CANNOT BE ITA NO.3850/DEL./2009 12 SAID TO HAVE ARISEN FROM ANY DATE PRIOR TO SEP TEMBER 2 1957 WHEN THE APPROVAL WAS GIVEN AS SECTION 326 C ONTAINS AN ABSOLUTE PROHIBITION AGAINST THE APPOINTMENT OR REAPPOINTMENT OF A MANAGING AGENT BEFORE THE APPROVAL OF THE CENTRAL GOVERNMENT WAS OBTAINED. IN OUR OPINION THE POSITION IS QUITE CLEAR FROM THE TERMS OF SECTION 326 AND W E DO NOT CONSIDER IT NECESSARY TO REFER TO THE AUTHORITIE S CITED BY THE LEARNED COUNSEL FOR EITHER SIDE. 7. IT HAS BEEN MENTIONED EARLIER THAT THE MAT TER REQUIRES TO GO BACK TO THE FILE OF THE AO FOR DECIDING THE ISSUE AFRESH AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. WHILE F RAMING THE FRESH ASSESSMENT HE SHALL CONSIDER THE ACCOUNTS OF THI S YEAR EARLIER YEARS AND SUBSEQUENT YEAR; AS-26 IN THE LIGHT OF ENTRIES OF INTANGIBLE ASSETS MADE THEREIN; AND CASES CITED BEFORE US AS AFORESA ID. 8. IN THE RESULT THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE 4 TH DAY OF MAY 2010. SD/- (K.G.BANSAL) ACCOUNTANT MEMBER DATE OF ORDER: 4 TH MAY 2010. COPY OF THE ORDER FORWARDED TO: M/S CENTRAL ELECTRONICS LTD. SAHIBABAD. AO WARD 3(2) NEW DELHI. CIT(A) CIT THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.