Section 145

Method of accounting*

Scope of provision

Provision is mandatory - Section 145 of the Act is mandatory - Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428 (SC).

Provision is only a machinery provision, and it cannot override charging provision - Section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax. It is only a machinery provision and cannot qualify the charging section so as to make the latter otiose, nor can it be given overriding effect so as to defeat the charge - CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.).

No specific set of accounts is prescribed - Section 145 does not say, nor is there any provision in the Act that an assessee carrying on a business shall maintain a specified set of accounts - P. Appavu Pillai v. CIT [1965] 58 ITR 622 (Mad.).

Note : Even rule 6F prescribes certain specified books of account for certain professionals only, and not to businessmen.

Section 145 is couched in mandatory terms and the department is bound to accept the assessee’s choice of method regularly employed, except for the situation wherein the Assessing Officer is permitted to intervene in case it is found that the income, profits and gains cannot be arrived at by the method employed by the assessee. The position of law is further well settled that a regular method adopted by an assessee cannot be rejected merely because it gives benefit to an assessee in certain years - CIT v. Advance Construction Co. (P.) Ltd. [2005] 143 Taxman 61/275 ITR 30 (Guj.).

Estoppel will not operate - The income-tax department is entitled to judge the accounts of an assessee each year on their merits. The fact that they have accepted a particular form of accounts as sufficient in one year does not debar them from holding later that particular items or particular claims made by the assessee in later years have not been established. There is no question of estoppel in such a case - Jamna Das Rameshwar Das v. CIT [1952] 21 ITR 109 (Punj.).

Accounting systems

The two principal systems - Among Indian businessmen, as elsewhere, there are currently two principal systems of book-keeping. There is firstly the cash system in which a record is maintained of actual receipts and actual disbursements entries being posted when money or money’s worth is actually received, collected or disbursed. There is secondly the mercantile system in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of a receipt or payment. Whereas under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous, in which certain elements and incidents of the cash and mercantile system are combined - CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC).

Accounting Standards - The Companies (Accounting Standards) Rules, 2006 framed under section 642(1), which adopts Accounting Standards’ (‘AS’) 22 issued by Institute of Chartered Accountants of India, does not suffer from the vice of excessive delegation and the same is not incongruous/inconsistent which provisions of the Act including Schedule VI. Further, it cannot be said that AS 22 insofar as it relates to deferred taxation is inconsistent with and ultra vires provisions of Companies Act, 1956, Income-tax Act, 1961 and Constitution of India - J.K. Industries Ltd. v. UOI [2007] 165 Taxman 323 (SC).

Different methods can be adopted for different sources - It is legitimate to expect that the assessee would exercise his option under section 145 for his own benefit. If the assessee thought that it would be more advantageous to it to follow the cash system in respect of its income assessable under other sources and to follow the mercantile system in respect of its income assessable under business, it is entitled to do so - J.K. Bankers v. CIT [1974] 94 ITR 107 (All.).

Different methods can be adopted for different parts of business - An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis - CIT v. E.A.E.T. Sundararaj [1975] 99 ITR 226 (Mad.).

‘Cash’ under the cash system includes money’s worth - A cash basis of accounting is not confined to receipt of cash alone or to receipt of current coin or currency notes alone. It will still be a cash basis of accounting where payment is received in kind or in money’s worth - Seth Kishori Lal Babulal v. CIT [1963] 49 ITR 502 (All.).

‘Regular’ does not mean ‘permanent’ for system of accounting - It is undoubtedly correct that the statute stipulates that the income shall be computed on the system of accounting ‘regularly’ followed by the assessee. It should mean ‘during the period under consideration’. However, the provision cannot be interpreted to mean that once a system of accounting is adopted, it can never be changed. ‘Regular’ cannot in the present context mean permanent. It has not been pointed out with reference to any provision that a change is impermissible or barred even when it is warranted by the existing situation. Where the assessee, a government company, switched over from mercantile system to hybrid system in respect of its liability on account of interest because ‘it was not realising interest in time’, and the finding of the Tribunal was that the change-over adopted ‘was a legitimate and bona fide need of accounting’ and ‘there was no mala fide intention’, it was held that the procedure adopted by the assessee could not be said to violate section 145 - CIT v. Punjab State Industrial Development Corpn. Ltd. [2002] 255 ITR 351 (Punj. & Har.).

Assessee’s choice

Assessee has the choice on method, but such method should be shown as regularly followed - The choice of the method of accounting lies with the assessee; but the assessee must show that he has followed the method regularly for his own purposes - CIT v. McMillan & Co. [1958] 33 ITR 182 (SC).

A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom - Investment Ltd. v. CIT [1970] 77 ITR 533 (SC).

Where an accounting system which is approved by the ICAI has been adopted by the assessee, the income-tax authority has no option/jurisdiction to meddle in the matter either by directing the assessee to maintain its accounts in a particular manner or to adopt a different method for valuing the work-in-progress - MKB Asia (P.) Ltd. v. CIT [2008] 167 Taxman 256 (Gau.).

Department cannot compel assessee to choose a particular method - The option is with the assessee and not with the department so that the department cannot compel an assessee to adopt the mercantile system of accounting, if the assessee chooses to adopt the cash system - Juggilal Kamlapat Bankers v. CIT [1975] 101 ITR 40 (All.).

Option regarding adoption of system of accounting is with the assessee and not with the income-tax department. The assessee is indeed free even to follow different methods of accounting for income from different sources in an appropriate case. The department cannot compel the assessee to adopt the mercantile system of accounting - CIT v. Smt. Vimla D. Sonwane [1994] 75 Taxman 335 (Bom.).

Change of method is not prohibited - Section 145(1) does not postulate any agreement or contract regarding the method of accounting to be employed by a taxpayer. This section also does not lay any embargo on him to alter his method of accounting. An assessee can change the method of accounting unilaterally in respect of a source of income - Reform Flour Mills (P.) Ltd. v. CIT [1978] 114 ITR 227 (Cal.).

Change of method does not require prior approval - A change in the method of accounting need not have the approval of the income-tax authorities, nor need it be supported by cogent reasons showing the bona fides of the assessee - Snow White Food Products Co. Ltd. v. CIT [1983] 141 ITR 847 (Cal.) (Per contra).

ITO’s powers to reject accounts

ITO is not compelled to accept accounts in all cases - Section 145 does not compel the ITO to accept in all cases a balance-sheet of cash receipts and outgoings prepared from the books of account - CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC).

ITO is not bound to accept system of accounting - It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which had not been questioned in the past. There is no estoppel in these matters, and the officer is not bound by the method followed in the earlier years - CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC).

ITO is not bound by the declared profits - The ITO, even when he accepts the assessee’s method of accounting, is not bound by the figure of profits shown in the accounts - CIT v. McMillan & Co. [1958] 33 ITR 182 (SC).

ITO must record a clear finding - The ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. It is not open to the ITO to intervene and substitute a different system of accounting from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better - CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 ITR 442 (AP).

Insignificant mistakes cannot form the basis - Insignificant mistakes noticed in the accounts of one year, like one item of interest not brought into account or one item of receipt having been incorrectly recorded, cannot form the basis for rejecting the accounts of the other years - CIT v. Padamchand Ramgopal [1970] 76 ITR 719 (SC).

Non-mention of addresses of purchasers in cash transactions, relevance of - In the case of a cash transaction where delivery of goods is taken against cash payment, it is hardly necessary for the seller to bother about the name and address of the purchaser. Accordingly, in such cases, the account books of the assessee cannot be rejected merely on the ground that the addresses of the purchasers are not mentioned in the case of cash transactions - R.B. Jessaram Fatehchand v. CIT [1970] 75 ITR 33 (Bom.).

Absence of stock registers, cash memos, vouchers, etc., and existence of low profits are relevant factors - Where absence of a stock register, cash memos etc., if coupled with other factors like absence of vouchers in support of the expenses and purchases and existence of low profit, may give rise to a legitimate inference that all is not well with the books and the same cannot be relied upon to assess the income, profits or gains of an assessee, the authorities would be justified in rejecting the account books under section 145(2) and in making the assessment in the manner contemplated in that provision - Awadesh Pratap Singh Abdul Rehman & Bros. v. CIT [1994] 76 Taxman 106 (All.).

Non-maintenance of stock register can justify rejection of accounts - Keeping of a stock register is of great importance because that is a means of verifying the assessee’s accounts by having a ‘quantitative tally’; if, after taking into account all the materials including the want of a stock register, it is found that from the method of accounting the correct profits of the business are not deductible, the operation of section 145(3) of the Act would be attracted - S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC).

Failure to maintain stock accounts by a wholesale dealer, relevance of - Where the assessee is a wholesale dealer, failure to maintain stock accounts would be a substantial defect in the accounts justifying an inference that the accounts were maintained in a manner from which the true and correct profits were not deductible. In such cases, the ITO would be justified in rejecting the book version of the profit of the assessee, and making necessary additions to the declared profits on estimate basis - Amiya Kumar Roy & Bros. v. CIT 1994 Tax LR 616 (Cal.).

Adoption of different standards for receipts and production in stock accounts can justify rejection of accounts - If the stocks received are shown in the books by one standard and the goods produced from those stocks are shown by another standard, it is quite clear that profits cannot be correctly deduced. In such cases, the ITO would be justified in rejecting the method and in estimating the income - Howrah Trading Co. (P.) Ltd. v. CIT [1968] 67 ITR 582 (Cal.).

Estimation of profits

Assessee must be given opportunity to rebut estimate - Where the ITO did not state the basis of his estimate and no opportunity was given to the assessee to rebut that basis, his order was liable to be set aside - S. Sarabhaiah Setty & Sons v. CIT [1967] 64 ITR 175 (AP).

Where, after rejecting the accounts of the assessee, an estimate of the turnover and gross profits is fixed to the detriment of the assessee, the assessee is entitled to know the basis and also to an opportunity to rebut the same - Yaggina Veeraraghavulu & Mavuleti Somaraju & Co. v. CIT [1966] 62 ITR 528 (AP).

Assessee must be furnished with details of comparable cases relied upon - An assessment made by estimating the profits of the assessee on flat rate basis on the basis of comparable cases, without furnishing details of such cases to the assessee, is illegal - Joseph Thomas & Bros. v. CIT [1968] 68 ITR 796 (Ker.).

Assessee must be provided opportunity to cross-examine witnesses - While estimating profits where oral evidence of witness was relied on by the income-tax authorities, the assessee must be given opportunity to cross-examine the witness and where comparative instances of other business were supplied by the assessee it was also necessary for the department to come to a finding as to the norm of the gross profit on the basis of comparative cases - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.).

Basis for estimation and computation must be disclosed by ITO in a speaking order - If the assessee fails to satisfy the ITO as to the correctness of the profits returned by him, it is open to the ITO to take a higher percentage consistent with the state of trade in the locality or with any special circumstances of the assessee which warrant higher rate of profits. However the ITO must disclose the basis and manner of computation and make his order a speaking order - Seth Nathuram Munalal v. CIT [1954] 25 ITR 216 (Nag.).

Estimation must not be arbitrary, vague and fanciful but must be legal and regular - The law says that the ITO shall make the assessment to the best of his judgment; it means that he must make it according to the rules of reason and justice, not according to private opinion, but according to law and not humour, and the assessment is to be not arbitrary, vague and fanciful, but legal and regular - Mysore Fertiliser Co. v. CIT [1966] 59 ITR 268 (Mad.).

Estimate based on both relevant and irrelevant material cannot be sustained even partly - If an estimate is based partly on irrelevant material and partly on relevant material, it is difficult to sustain the estimate because it cannot be said as to what extent and which part of the figure of estimate depends upon the irrelevant portion of the matter - Surajmal Champalal v. CIT [1967] 66 ITR 396 (Pat.).

Profits can be computed even before completion of a venture - Profits can be computed even if a particular trade adventure is not completed - P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC).

In the case of works contracts, one need not wait till the contract was completed in order to ascertain the income; it is open to the revenue to estimate the profit on the basis of the receipts in each year of construction although the contract was not completed - Tirath Ram Ahuja (P.) Ltd. v. CIT [1976] 103 ITR 15 (Delhi).

Book entries are not relevant to allow deductions - Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his right nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter - Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC).

Where estimation has nexus to material on record and exercise of discretion is not arbitrary or capricious, Tribunal’s findings are unquestionable - So long as the best judgment has nexus to material on record and the discretion in that behalf has not been exercised arbitrarily or capriciously, it is not open to scrutiny in reference proceedings to give rise to a question of law or to a mixed question of law and fact - CIT v. Surjit Singh Mahesh Kumar [1994] 210 ITR 83 (All.).

Assessing Officer must first counter the assessee’s evidence about gross profit rate - Where the assessee has given a comparative instance of gross profit rate, it is necessary for the department to come to a finding as to the norm of the gross profit on the basis of comparative cases. Therefore, it is the duty of the Assessing Officer to counter the comparative statement cited by the assessee before he can have the option to estimate the gross profit - CIT v. Eastern Commercial Enterprises [1994] 210 ITR 103 (Cal.).

Additions made straightaway on grounds of low profits and less profit rate cannot be sustained - Additions to the profits of the assessee made solely on the ground that it was low without giving a specific finding that the accounts of the assessee were not correct and complete, or that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. The mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not by itself be sufficient to justify the addition - Aluminium Industries (P.) Ltd. v. CIT [1995] 80 Taxman 184 (Gauhati).

Works contracts

In works contract cases, cost of materials/stores supplied to contractor must be excluded from turnover - Since no element of profit is involved in the turnover represented by the cost of stores/materials supplied by the department to the assessee, the income or profit derived by the assessee from such contracts will have to be determined on the basis of the value of the contracts represented by the cash payment received by the assessee exclusive of the cost of the material/stores received for being fixed, used or incorporated in the works undertaken by them - Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC).

Valuation of stock

Principles deducible from decided cases - From the various decisions of the Supreme Court, it can be held that (1) for valuing the closing stock, it is open to the assessee to value it at cost or market value, whichever is lower; (2) in the balance-sheet even if the securities and shares are valued at cost, from that no firm conclusion can be drawn; a taxpayer is free to employ for the purpose of his trade his own method of keeping accounts and, for that purpose, to value stock-in-trade either at cost or market price; (3) a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation; (4) the concept of real income is certainly applicable in judging whether there has been income or not, but in every case it must be applied with care and within the recognised limits; (5) whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation; (6) under section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the ITO the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the ITO may determine. Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That could not be discarded by the departmental authorities, on the ground that the assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) - United Commercial Bank v. CIT [1999] 106 Taxman 601/240 ITR 355 (SC).

Dissolution of firm due to death of partner - Where a firm got dissolved due to death of a partner, and on the very next day, the firm was reconstituted with the remaining partners, and business continued without any interruption, the closing stock is to be valued at the cost or market price, whichever is lower, and not at market value - Sakthi Trading Co. v. CIT [2001] 250 ITR 871 (SC).

Stock-in-trade must be valued for ascertainment of profits - As a normal rule, the profits should be ascertained by valuing the stock-in-trade at the beginning and at the end of the accounting year - P.M. Mohammad Meerakhan v. CIT [1969] 73 ITR 735 (SC).

Closing stock must be valued for ascertainment of true trading results - It is settled law that the true trading results of a business for an accounting period cannot be ascertained without taking into account the value of the stock-in-trade remaining at the end of the period - A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC); CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC).

No profit can arise out of valuation of closing stock - Though loss due to a fall in price below cost is allowed even if such loss has not been actually realised, no question of charging the appreciated value of closing stock as ‘notional profits’ can arise. It is a misconception to think that any profit ‘arises out of the valuation of the closing stock’ and the situs of its arising or accrual is where the valuation is made - Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC).

Adopting a recognised new method cannot be questioned - Where it is found that the change adopted by the assessee was for bona fide purpose and was not actuated by consideration to reduce income for income-tax purposes, the revenue has no right to interfere with the change in the method of valuation of opening stock - CIT v. Mopeds India Ltd. [1988] 173 ITR 347 (AP).

Direct cost method is a recognised one - The ‘direct cost’ method of valuation of closing stock is a recognised method in commercial practice; the difference between ‘total cost’ and ‘direct cost’ methods is that in a total cost method certain overheads are added while in the direct cost method the same overheads are excluded - CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad.).

Valuation at cost is one of the recognised methods - Valuation of stock at cost is one of the recognised methods. No inference may therefore arise from the employment of the method of valuing stock at cost. Nor is the description of stock in balance-sheet as ‘investments’ decisive - Investment Ltd. v. CIT [1970] 77 ITR 533 (SC).

It is settled that the correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by reason of the fall in the market value of the goods below the original cost. Ordinarily, therefore, the goods should not be written down below the cost price except where there is an actual or anticipated loss. On the other hand, if the fall in the price is only such as would reduce merely the prospective profit, there would be no justification to discard the initial valuation at cost. - CIT v. Hindustan Zinc Ltd. [2007] 161 Taxman 162/291 ITR 391 (SC).

Valuation of closing stock at cost or at market value whichever is less is a generally accepted and established rule of commercial practice - As the entry for stock which appears in a trading account is merely intended to cancel the charges for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure. From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year’s result a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question. While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy - Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC).

Permissibility of valuation of stock at market value would be only if market value of stock is lower than cost of stock; where market value of stock had been taken into consideration while arriving at chargeable income although market value of stock was more than the cost value of stock, rejection of accounts maintained by assessee for valuation of closing stock by Assessing Officer was in accordance with law - Sanjeev Woollen Mills v. CIT [2005] 149 Taxman 431/279 ITR 434 (SC).

Closing stock cannot be valued at market value when such value is higher than cost - The proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule, custom recognises only one exceptions and that is to value the stock at market value if that is lower. But on no principle can one justify the valuation of the closing stock at a market value higher than cost as that will result in the taxation of notional profits which the assessee has not realised - A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC).

Rate of valuation must be applied to entire closing stock - The assessee is entitled to value closing stock at cost or market price whichever is lower, but that has to be applied to the entire closing stock. There is no justification in bifurcating the closing stock on the presumption that some of this would have to be surrendered as levy. If the assessee wants to take the sale price for a part of the stock, then the entire stock will have to be worked out on the basis of sale price - Harinagar Sugar Mills Ltd. v. CIT [1994] 207 ITR 901 (Bom.).

Where both opening and closing stock are undervalued, both should be altered - When the opening and closing stocks of a business are both undervalued, if the method of altering both valuations is not adopted, it is perfectly plain that the profit which is brought forward is not the real one. In such cases, the real profits of a particular year cannot be ascertained by merely raising the valuation of the closing stock, not taking into consideration the similar under valuation of the opening stock - CIT v. Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245 (PC).

Value declared to bank for overdraft purposes cannot be relied upon, for making additions - The figures furnished to the bank for purposes of obtaining an overdraft are not concerned with the actual stock valuation for determining the trade results for purposes of ascertaining the profits and gains derived from business. Where an assessee was consistently valuing the opening and closing stocks by making suitable deductions towards the declining demand in the market and the method was accepted by the ITO as patently correct, the ITO could not make any addition towards undervaluation of stock on the ground that in an overdraft application the assessee had declared higher value to the bank - India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.).

Closing stock of dissolved firm should be valued at market price only - In order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock in hand should be made on the basis of the prevailing market price - G.R. Ramachari & Co. v. CIT [1961] 41 ITR 142 (Mad.) affirmed in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC); Also see Popular Automobiles v. CIT [1989] 179 ITR 632 (Ker.).

No addition should be made towards reduction in income due to bona fide change in method of valuation of stock - If the method of stock valuation is changed by the assessee and if the change is bona fide, even if the taxable income is reduced on account of such change, it is not open to the revenue to add any amount in the taxable income of the assessee which is the resultant effect of the changed method of valuation, especially when the new method which was adopted had been continuously followed in subsequent years but the revenue had not objected to the change in the subsequent years - CIT v. Atul Products Ltd. [2002] 125 Taxman 727 (Guj.).

Once liability to duty has been fully discharged by actual payment no part thereof should be considered for valuing closing stock - Once the liability towards excise duty for the year under consideration has been discharged by actual payment and debit entry to that effect has been made in the profit and loss account, any part of that amount cannot be shown as a liability by putting the credit entry of such part for the purpose of valuing the closing stock of unsold stock. If unsold stock is there and duty has already been paid, that duty cannot be ignored. The duty which has already been paid on unsold stock forms part of the closing stock of assets, and even section 43B does not come in the way as the actual payment against the excise duty liability has been made - Berger Paints India Ltd. v. CIT [2002] 253 ITR 738/124 Taxman 118 (Cal.).

Customs duty - Customs duty paid is not to be included in value of closing stock - CIT v. India Pistons Ltd. [2006] 282 ITR 632 (Mad.).

Excise duty - Excise duty on raw materials used in the closing stock as well as on the finished goods will not form part of the value of the closing stock - CIT v. Lakshmi Mills Co. Ltd. [2007] 158 Taxman 420 (Mad.).

Modvat credit - In view of the decision of the Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 130 Taxman 179, addition made to the closing stock on account of MODVAT credit was to be deleted - CIT v. Parle Biscuits Ltd. [2006] 282 ITR 547 (Bom.).

Proprietary business converted into partnership - In case of conversion of proprietary business into partnership firm, stock need not be valued at market price - CIT v. M. Kathiresan [2006] 285 ITR 206 (Mad.).