Consistency in tax treatment and proper stock valuation govern deduction claims and year-end diamond inventory assessment.

The commentary addresses two income-tax issues. First, deduction for amortised preliminary expenses under section 35D(2)(c)(iv) was accepted on the basis of consistency, as the same claim had been allowed in earlier years and no distinguishing facts were shown. Second, closing stock of polished diamonds had to be valued strictly in accordance with the assessee's declared net realisable value method; absence of quality-wise stock records did not by itself justify rejection of accounts under section 145, but valuation based on next-year sales was not permissible for year-end stock. The stock valuation issue was therefore restored for limited reconsideration on proper application of the declared method.

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Issues: (i) Whether the assessee was entitled to deduction under section 35D(2)(c)(iv) of the Income-tax Act, 1961 in respect of amortised preliminary expenses. (ii) Whether the addition made on account of under-valuation of closing stock of polished diamonds was justified and whether the accounts could be rejected under section 145 of the Income-tax Act, 1961.

Issue (i): Whether the assessee was entitled to deduction under section 35D(2)(c)(iv) of the Income-tax Act, 1961 in respect of amortised preliminary expenses.

Analysis: The allowance had already been accepted in the assessee's own earlier years. The same claim had been upheld in the assessee's case, and the Revenue had not shown any distinguishing feature. The principle of consistency therefore applied.

Conclusion: The claim under section 35D(2)(c)(iv) was rightly allowed, and the Revenue had no basis to interfere.

Issue (ii): Whether the addition made on account of under-valuation of closing stock of polished diamonds was justified and whether the accounts could be rejected under section 145 of the Income-tax Act, 1961.

Analysis: The assessee followed the net realisable value method for valuing closing stock, but the valuation was worked out by reference to sales of the next year rather than the last sale of the year. The absence of quality-wise stock records did not, by itself, make the accounts incomplete or incorrect. However, the declared method had not been applied strictly, and the use of next-year sales was not permissible for valuation as on the closing date. The Assessing Officer was therefore not justified in invoking FIFO and the matter required fresh examination limited to correct application of the declared method.

Conclusion: The rejection of the stock valuation adopted by the assessee was not sustained as made, but the issue was set aside for fresh consideration on the limited question of proper closing stock valuation.

Final Conclusion: The Revenue succeeded only to the extent that the stock-valuation issue was restored for limited reconsideration, while the deduction under section 35D was upheld.

Ratio Decidendi: A recognised method of stock valuation cannot be disturbed merely because accounts are otherwise maintained, but the method must be applied consistently and in accordance with its own stated basis; valuation cannot be based on post-year sales when the declared method requires year-end realisable value.

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