Stock valuation on FIFO basis is scientific

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We follow the mercantile system of accounting and value our stock on FIFO (first-in, first-out) method. The assessment officer has rejected it saying it is not a scientific way of stock valuation. Is he correct?

No, if you have been regularly following this method for stock valuations. In the Bindal Jewellers case, (202) 257 ITR 777 (Rajasthan), while dealing with a similar question, the court said on the basis of the material brought on record the value might differ from place to place with different person and the value of the closing stock could not be mathematically calculated.

The money value attributed to the stock should be decided and estimated by the authority concerned in a reasonable and judicial manner on the basis of facts and circumstances of the case available before him. Thus it is clear that a reasonable view has to be given acceptance. In view of this, the assessment officer cannot reject the method of valuation followed by you.

Can the rate of depreciation applicable to a plant be applied for the cold storage?

In the Commissioner of Income Tax vs Birla Jute & Industries Ltd case, (2003) 260 ITR 55 (Calcutta), it was held that the word "plant" as defined in Section 43(3) was not a exhaustive definition but an inclusive one and included any article or object fixed or movable, live or dead, used by a business for carrying on his business and it was not necessarily confined to an apparatus, used for mechanical operation or process or was employed in mechanical or industrial business.

The test is to be applied for such determination, is does the article fulfils the function of a plant in the assessee's trading activity? It is a tool of his trade with which he carries his business? If the answer is yes, it will be a plant.

A cold storage requires to be built in a certain specific manner and without that, a chamber cannot be commissioned and for which a licence is required to be obtained and before grant of licence, the Act and the Rules provide for certification by the appropriate authorities.

Without such a certification and grant of licence, a chamber cannot be put to commission. In fact, it is the whole building, which houses the chambers to be constructed in a particular manner according to the specification.

Without a thermocole, a chamber cannot function. At the same time, the building the thermocole cannot have a separate existence. Both these parts are integral to each other. One cannot survive without the other.

Therefore, a cold storage is a plant. But it would not be the whole building of the cold storage that would be treated as plant. Only that part of the cold storage building, which is used for storing goods, can be treated as a plant. It also depends on the facts and circumstances of each case and has to be decided having regard to the specification therein.

We manufacture asbestos sheets and purchase cement from market. We were advised that it would be economical to set up a captive mini cement plant at the same location. We got a feasibility report prepared and paid a fee for it.

This amount was claimed as a revenue expenditure in our return for 2000-2001. The assessment was completed after scrutiny and the claim for the expenditure on feasibility report was accepted. We have now received a notice under Section 148 few days back for re-assessment.

Though no reasons have been given in the notice, the assessment officer informally told us that the re-assessment proceedings had been initiated to treat the expenditure on feasibility report as capital expenditure and disallowed the same. Can re-assessment proceeding be initiated on this ground?

For the reasons mentioned, the re-assessment proceedings seem to be not valid if all the basic facts relating to the expenditure on feasibility report were filed along with the return of income. Once a possible view has been taken while allowing the expenditure on the basis of facts stated, the fact that another view is possible cannot give ground to conclude that the income has escaped assessment. Hence, the notice issued by the assessment officer under Section 148 can be challenged.

My plot of land has been acquired by the government for a highway. The compensation, to be paid, has not yet been determined but the land cannot be sold now. The assessment officer wants to adopt market value of the land for the wealth tax assessment. This will create a big tax liability. Can he do so?

No. Whenever there is any restriction on the transfer of any land, it is a matter of common knowledge that the value of the property or land, as the case may be, will be normally reduced. Hence, adoption of market value for wealth tax assessment will not be correct.

What is the meaning of "record" in the context of Section 154 proceedings? Does it include anything else, besides the assessment order?

The term "record" for the purpose of Section 154 does not merely mean the assessment order. The return of income, all the accompanying papers and documents annexed to the return are also part of the record and if there has been omission on the part of the assessment officer to take note of the contents of the said record while making his order, the mistake can be regarded as apparent and rectification could be resorted to.