ICDS II forced my client off LIFO in AY 2017-18 and the whole switching difference has been taxed in that one year. Is there any answer?
Yes, and the Kerala High Court has given it. It quashed the notices and directed the department either to accept the LIFO valuation of both opening and closing stock for AY 2017-18, or to permit the assessees to value their stocks by applying FIFO or weighted average cost — in other words, the same method must be applied to both ends of the year. What the court did not do is strike down the substituted s.145A or ICDS II.
Decided by the High Court (Dinesh Kumar Singh J) on 2024-05-20, reported as W.P.(C) Nos.30318/2019, 1529/2024, 17949/2020, 17828/2020, 17964/2020, 17972/2020, 28444/2021, 29846/2021, 30448/2021, 30354/2019, 30340/2019, 30373/2019 and 32237/2019 (Kerala High Court). It bears on section 145A, section 145, section 145(2), section ICDS II of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
The arithmetic is what makes this bite. A gold jeweller who had valued stock on LIFO since 1978 carried an opening stock for FY 2016-17 computed on LIFO; ICDS II, notified with effect from AY 2017-18 and reinforced by the substituted s.145A which the Finance Act 2018 made retrospective to the same year, required the closing stock of that very year to be computed on FIFO or weighted average cost. In the lead petition the closing stock of Rs.192,44,87,015 on LIFO became Rs.243,52,03,645 on FIFO, an enhancement of about Rs.51.07 crores taxed in a single year with no corresponding lift in the opening stock. The relief is the consistency principle, not a challenge to the standard: value both ends the same way and the artificial one-year profit disappears. Note the timing point that runs through the whole case — the substitution of s.145A came by the Finance Act 2018, after the return for AY 2017-18 had already been filed. The court also recorded, at para 16, that the retrospective substitution of s.145A was to give relief to assessees who had adopted FIFO to value their stock in AY 2017-18.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioners are dealers in gold jewellery and articles of gold. The lead petitioner is an individual resident assessee who established his business in 1978, has maintained regular books of account since inception, follows the mercantile system, and has consistently valued his stock or inventory at the lower of cost or market value, determining cost by the Last-In-First-Out method; the Revenue had accepted his books throughout and had accepted the LIFO valuation up to 1 April 2017. Clause 16 of ICDS II requires the cost of inventories to be assigned using the First-In-First-Out or weighted average cost formula, and clause 22 provides that the value of the opening stock shall be the closing stock of the immediately preceding year. The consequence, on the petitioners' case, was that the opening stock for the relevant year would be imported from the preceding year on LIFO while the closing stock of the same year would have to be determined on FIFO or weighted average cost. The Finance Act 2018 then substituted s.145A with retrospective effect from 1 April 2017, requiring inventory to be valued at the lower of actual cost or net realisable value computed in accordance with the ICDS, and did so after the return of income for AY 2017-18 had already been filed. In the lead case the closing stock valued at Rs.1,92,44,87,015 under LIFO was revalued at Rs.2,43,52,03,645 under FIFO, producing an enhancement of about Rs.51.07 crores sought to be taxed in AY 2017-18. The petitioners challenged the resulting notices, contending among other things that the mandatory exclusion of LIFO was without intelligible differentia and violated Article 14, and that the opening and closing stock of a year must necessarily be valued on the same basis.
All the writ petitions were partly allowed. The impugned notices in all the writ petitions were quashed. The respondents were directed either to accept the valuation of both opening and closing stock for AY 2017-18 based on the LIFO method, or to permit the petitioners to value their stocks by applying the FIFO or weighted average cost method (para 18). The court did not strike down s.145A or ICDS II.
The court recorded that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory (para 12); that the petitioners had been following LIFO to value closing and opening stock and that this had been accepted by the Revenue up to 1 April 2017 (para 14); and that on the authority of Chainrup Sampatram, P.M. Mohd. Meerakhan, Sanjeev Woolen Mills and A.L.A. Firm the valuation of closing and unsold stock is not the source of income in the hands of the assessee (para 15). It further recorded that the substitution of s.145A with retrospective effect from 1 April 2017 by the Finance Act 2018 was to give relief to those assessees who had adopted FIFO to value their stock in AY 2017-18 (para 16). On the constitutional challenge the court set out the presumption of constitutionality from Dr. Subramanian Swamy, the principles for testing legislation from State of Maharashtra, the definition of reasonable classification from Mohd. Shujat Ali and the manifest arbitrariness test from Shayara Bano (paras 13 to 13.4). Para 17 then sets out, descriptively, what the FIFO and weighted average cost formulas mean, before the direction at para 18.
Given the aforesaid discussion, all the writ petitions are partly allowed, and the impugned notices in all the writ petitions are quashed. The respondents are directed to either accept the valuation of both opening and closing stock, for the Assessment Year 2017-2018, based on the LIFO method or permit the petitioners to value their stocks by applying the FIFO or weighted average cost method.
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Handle my notice → Ask a CA on WhatsAppYes, and the Kerala High Court has given it. It quashed the notices and directed the department either to accept the LIFO valuation of both opening and closing stock for AY 2017-18, or to permit the assessees to value their stocks by applying FIFO or weighted average cost — in other words, the same method must be applied to both ends of the year. What the court did not do is strike down the substituted s.145A or ICDS II. This was decided by the High Court (Dinesh Kumar Singh J) and bears on section 145A, section 145, section 145(2), section ICDS II of the Income Tax Act 1961. It is reported as W.P.(C) Nos.30318/2019, 1529/2024, 17949/2020, 17828/2020, 17964/2020, 17972/2020, 28444/2021, 29846/2021, 30448/2021, 30354/2019, 30340/2019, 30373/2019 and 32237/2019 (Kerala High Court). The arithmetic is what makes this bite. A gold jeweller who had valued stock on LIFO since 1978 carried an opening stock for FY 2016-17 computed on LIFO; ICDS II, notified with effect from AY 2017-18 and reinforced by the substituted s.145A which the Finance Act 2018 made retrospective to the same year, required the closing stock of that very year to be computed on FIFO or weighted average cost. In the lead petition the closing stock of Rs.192,44,87,015 on LIFO became Rs.243,52,03,645 on FIFO, an enhancement of about Rs.51.07 crores taxed in a single year with no corresponding lift in the opening stock. The relief is the consistency principle, not a challenge to the standard: value both ends the same way and the artificial one-year profit disappears. Note the timing point that runs through the whole case — the substitution of s.145A came by the Finance Act 2018, after the return for AY 2017-18 had already been filed. The court also recorded, at para 16, that the retrospective substitution of s.145A was to give relief to assessees who had adopted FIFO to value their stock in AY 2017-18. If it applies to you, the first step is this: Identify the exact quantum of the switching difference and show it is a valuation artefact, not income: put the opening and closing stock on the same footing and compute the profit both ways.
The petitioners are dealers in gold jewellery and articles of gold. The lead petitioner is an individual resident assessee who established his business in 1978, has maintained regular books of account since inception, follows the mercantile system, and has consistently valued his stock or inventory at the lower of cost or market value, determining cost by the Last-In-First-Out method; the Revenue had accepted his books throughout and had accepted the LIFO valuation up to 1 April 2017. Clause 16 of ICDS II requires the cost of inventories to be assigned using the First-In-First-Out or weighted average cost formula, and clause 22 provides that the value of the opening stock shall be the closing stock of the immediately preceding year. The consequence, on the petitioners' case, was that the opening stock for the relevant year would be imported from the preceding year on LIFO while the closing stock of the same year would have to be determined on FIFO or weighted average cost. The Finance Act 2018 then substituted s.145A with retrospective effect from 1 April 2017, requiring inventory to be valued at the lower of actual cost or net realisable value computed in accordance with the ICDS, and did so after the return of income for AY 2017-18 had already been filed. In the lead case the closing stock valued at Rs.1,92,44,87,015 under LIFO was revalued at Rs.2,43,52,03,645 under FIFO, producing an enhancement of about Rs.51.07 crores sought to be taxed in AY 2017-18. The petitioners challenged the resulting notices, contending among other things that the mandatory exclusion of LIFO was without intelligible differentia and violated Article 14, and that the opening and closing stock of a year must necessarily be valued on the same basis. The matter was decided on 2024-05-20 by the High Court (Dinesh Kumar Singh J). On those facts the High Court held as follows. All the writ petitions were partly allowed. The impugned notices in all the writ petitions were quashed. The respondents were directed either to accept the valuation of both opening and closing stock for AY 2017-18 based on the LIFO method, or to permit the petitioners to value their stocks by applying the FIFO or weighted average cost method (para 18). The court did not strike down s.145A or ICDS II.
The court recorded that an assessee is entitled to adopt one or the other method of computation of its income if a particular method has not been made mandatory (para 12); that the petitioners had been following LIFO to value closing and opening stock and that this had been accepted by the Revenue up to 1 April 2017 (para 14); and that on the authority of Chainrup Sampatram, P.M. Mohd. Meerakhan, Sanjeev Woolen Mills and A.L.A. Firm the valuation of closing and unsold stock is not the source of income in the hands of the assessee (para 15). It further recorded that the substitution of s.145A with retrospective effect from 1 April 2017 by the Finance Act 2018 was to give relief to those assessees who had adopted FIFO to value their stock in AY 2017-18 (para 16). On the constitutional challenge the court set out the presumption of constitutionality from Dr. Subramanian Swamy, the principles for testing legislation from State of Maharashtra, the definition of reasonable classification from Mohd. Shujat Ali and the manifest arbitrariness test from Shayara Bano (paras 13 to 13.4). Para 17 then sets out, descriptively, what the FIFO and weighted average cost formulas mean, before the direction at para 18. In the words reproduced by the source cited on this page: "Given the aforesaid discussion, all the writ petitions are partly allowed, and the impugned notices in all the writ petitions are quashed. The respondents are directed to either accept the valuation of both opening and closing stock, for the Assessment Year 2017-2018, based on the LIFO method or permit the petitioners to value their stocks by applying the FIFO or weighted average cost method." The decision followed or applied Chainrup Sampatram v. CIT — relied on for the proposition that valuation of closing and unsold stock is not a source of income (para 15); The Chamber of Tax Consultants v. Union of India (2017) — extracts from the Delhi High Court's summary of findings reproduced in the judgment.
It was decided by the High Court on 2024-05-20 and is reported as W.P.(C) Nos.30318/2019, 1529/2024, 17949/2020, 17828/2020, 17964/2020, 17972/2020, 28444/2021, 29846/2021, 30448/2021, 30354/2019, 30340/2019, 30373/2019 and 32237/2019 (Kerala High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 145A, section 145, section 145(2), section ICDS II, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All the writ petitions were partly allowed. The impugned notices in all the writ petitions were quashed. The respondents were directed either to accept the valuation of both opening and closing stock for AY 2017-18 based on the LIFO method, or to permit the petitioners to value their stocks by applying the FIFO or weighted average cost method (para 18). The court did not strike down s.145A or ICDS II. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 145A, section 145, section 145(2), section ICDS II of the Income Tax Act 1961, and was decided by Dinesh Kumar Singh J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Invoke the settled rule, which the court accepted, that the opening and closing stock of a year have to be valued on the same basis; a change of method that touches only the closing stock distorts the year's result. Do not pitch the case as a challenge to the vires of s.145A or ICDS II — this court gave relief without striking either down, and the presumption of constitutionality was expressly in play. Where the assessee has already switched to FIFO or weighted average cost, check whether the department is nonetheless taxing the opening-stock difference; the direction here works in both directions. For AY 2016-17 and earlier there is no operative ICDS and no substituted s.145A, so the older authorities on freedom to choose a consistent method continue to govern.
Still good law. The Kolkata Bench of the Tribunal applied this judgment in Chandra Bros. v ITO, Ward-37(1), Kolkata (22 July 2025), adopting the holding in its own reasoning at paragraph 13 that opening and closing stock must be valued on the same basis, and directing recomputation under ICDS II. The Cochin Bench in Aryacon Contractors and Engineers Pvt Ltd v ACIT (6 January 2025) also refers to the judgment's limits on retrospective application of the substituted s.145A. No Supreme Court matter arising from it has been found, and nothing doubting or distinguishing it. Two things should be said about what the judgment is, because it is easy to over-read. It is a decision of a single judge of the Kerala High Court, so it binds there and is persuasive elsewhere. And it did not strike down either s.145A as substituted or ICDS II; the presumption of constitutionality was expressly in play, and the relief given was a direction on how the year is to be computed, not a declaration of invalidity. A case pitched as a challenge to the vires of either is not this case. What survives and travels is the consistency principle: an assessee is entitled to adopt a method where none has been made mandatory, the valuation of closing and unsold stock is not itself a source of income, and the opening and closing stock of a year must be valued on the same basis. That reasoning rests on Chainrup Sampatram, P.M. Mohd. Meerakhan, Sanjeev Woolen Mills and A.L.A. Firm, which are the authorities to take to a Bench outside Kerala. For assessment year 2016-17 and earlier there is no operative ICDS and no substituted s.145A, and the older authorities on freedom to choose a consistent method continue to govern. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
ON THE BATCH AND THE CAUSE TITLES. This is a common judgment in a batch of thirteen writ petitions - W.P.(C) Nos.30318/2019, 1529/2024, 17949/2020, 17828/2020, 17964/2020, 17972/2020, 28444/2021, 29846/2021, 30448/2021, 30354/2019, 30340/2019, 30373/2019 and 32237/2019 - and it circulates under several different cause titles, one for each petitioner: Josco Bullion Traders, Josgold, P.P. Alphonsa and P.A. Jose. They are all the same judgment of 20 May 2024. The printed header carries W.P.(C) No. 30318 of 2019 with P.A. Jose as petitioner, and paragraph 2 records that petition as the lead. A search under one name will miss copies filed under another. ON THE PARAGRAPHS. The operative reasoning runs from paragraphs 12 to 16 and the direction is at paragraph 18; those have been read word for word. Paragraph 17 is purely descriptive - it explains the first-in-first-out formula and the weighted average cost formula and contains no reasoning - and it was recovered twice in identical words. Nothing on this page rests on any other paragraph. A WARNING ABOUT QUOTED MATERIAL INSIDE THE JUDGMENT. This judgment reproduces, verbatim, clauses (x) and (xi) of paragraph 102 of the Delhi High Court's conclusions in The Chamber of Tax Consultants. Those are quoted material inside this judgment and are not this Court's own paragraphs. Anyone citing a numbered conclusion found within this judgment should check whose numbering it is. ON THE BENCH. A single judge, Dinesh Kumar Singh J. WHAT THE COURT DID NOT DO. It did not strike down s.145A as substituted or ICDS II. On the constitutional challenge it set out the presumption of constitutionality from Dr. Subramanian Swamy, the principles for testing legislation from State of Maharashtra, the definition of reasonable classification from Mohd. Shujat Ali and the manifest arbitrariness test from Shayara Bano, at paragraphs 13 to 13.4, and then gave relief on a different footing altogether - the consistency of the method applied to both ends of the year. Read the vires discussion as background rather than as a holding. ON THE ARITHMETIC, which is what makes the point bite. In the lead petition the closing stock of Rs.192,44,87,015 on last-in-first-out became Rs.243,52,03,645 on first-in-first-out, an enhancement of about Rs.51.07 crores taxed in a single year with no corresponding lift in the opening stock. The petitioner had valued stock on that method since 1978 and the Revenue had accepted it up to 1 April 2017. The Court also recorded, at paragraph 16, that the retrospective substitution of s.145A by the Finance Act 2018 was to give relief to assessees who had adopted first-in-first-out in assessment year 2017-18. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All the writ petitions were partly allowed. The impugned notices in all the writ petitions were quashed. The respondents were directed either to accept the valuation of both opening and closing stock for AY 2017-18 based on the LIFO method, or to permit the petitioners to value their stocks by applying the FIFO or weighted average cost method (para 18). The court did not strike down s.145A or ICDS II.
TaxSphere, “P.A. Jose v Union of India — ICDS II displaced LIFO from AY 2017-18, but opening and closing stock cannot be valued on two different methods”, https://taxnotice.vittsphere.com/caselaw/case/pa-jose-v-uoi-lifo-icds-ii-and-substituted-145a-opening-and-closing-stock/ (validity last checked 2026-09-08)
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