A Single Bench of the Kerala High Court has directed the Department to either accept the LIFO-based valuation for both opening and closing stock for the 2017-18 assessment year or allow the petitioner to use FIFO or the weighted average cost method for their stock valuation.
It was also observed that, for those who did not use FIFO, as it was not mandatory, forcing them to adopt FIFO for that year would lead to unjust outcomes.
The petitioner, a resident individual and Income Tax assessee under the Income Tax Act, 1961, is engaged in the jewelry and gold trading business.
The petitioner started business operations in 1978 and has maintained regular books of accounts since then. Following the mercantile system of accounting, the petitioner has consistently valued stock/inventory at the lower of cost or market value, using the Last-In-First-Out (LIFO) method to determine cost.
Under Section 145(2) of the Income Tax Act 1961, the Central Government notified the Income Computation and Disclosure Standards (ICDS), effective from Assessment Year 2017-18, which mandates using the First-In-First-Out (FIFO) or weighted average cost for inventory valuation. Clause 22 of ICDS requires that the opening stock be valued the same as the closing stock of the previous year. The petitioner argued that the retrospective substitution of Section 145A significantly increased the value of their closing stock, resulting in a substantial tax burden.
The petitioner contended that Clause 16 of ICDS (II) violates Article 14 of the Constitution of India due to unreasonable classification and contradicts the principle of real income, which is fundamental to the Income Tax Act. The Department countered that the Legislature has the authority to standardize stock valuation methods and has rightfully done so by amending Section 145A.
The court noted that the retrospective amendment does not apply to assessees who consistently used the Last-In-First-Out (LIFO) method and filed their returns before the Finance Act, 2018.
Justice Dinesh Kumar Singh observed that the retrospective amendment of Section 145A, effective from April 1, 2017, introduced by the Finance Act of 2018, aims to assist assessees who had used FIFO to value their stock in the 2017-18 assessment year, thus ensuring their returns remain valid. However, for those who did not use FIFO, as it was not mandatory, forcing them to adopt FIFO for that year would lead to unjust outcomes.
It was held that the same valuation method must be used for both opening and closing stock within the same year.
“Clause 16 of the Income Computation and Disclosure Standards (ICDS), which mandates the use of the first-in, first-out (FIFO) or weighted average cost for inventory valuation, cannot be applied to the opening stock valuation for the Assessment Year 2017-2018”, the bench noted.
The Kerala High Court thus directed the Department to either accept the LIFO-based valuation for both opening and closing stock for the 2017-18 assessment year or allow the petitioner to use FIFO or the weighted average cost method for their stock valuation.
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