A Single Bench of the Kerala High Court has ruled that 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 petitioner is an individual resident and an assessee to Income Tax for the purposes of the Income Tax Act, 1961 and the Rules made thereunder. The petitioner is engaged in the business of trading of jewelry and articles of gold.
The petitioner established and commenced its business operation in 1978. It is said that the petitioner has been maintaining regular books of accounts since the inception of its business venture in the year 1978.
The petitioner has been following the mercantile system of accounting and has been consistently valuing its stock/inventory at a lower cost or market value, determining cost using the Last-In-First-Out ( LIFO ) method.
The Central Government, under Section 145(2) of the Income Tax Act 1961, notified ICDS applicable from Assessment Year 2017-18, mandating FIFO or weighted average cost for inventory valuation. Clause 22 of ICDS stipulates that opening stock should be valued the same as the closing stock of the previous year. The petitioner argued that the retrospective substitution of Section 145A led to a significant increase in 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, 1961. 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.
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.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
