Consistent stock valuation is required to compute true profits; adjusting only closing stock cannot replace proper income computation.

Annual profits must be computed on a consistent stock-valuation basis carried from year to year; adjusting only closing stock without making a corresponding adjustment to opening stock distorts true profit. The Privy Council held that where the assessee regularly employed a proper method of accounting, income and profits had to be computed accordingly under section 13 of the Indian Income-tax Act, 1922. Revaluing only one side of the trading account could not determine real profits, so the Revenue's approach was rejected and the assessee's method was upheld.

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Issues: Whether real profits of a business can be ascertained by merely increasing the valuation of closing stock while ignoring the corresponding undervaluation of opening stock.

Analysis: The Board held that annual profits must be computed on a consistent method of stock valuation carried through from year to year. If one end of the account is adjusted without making a corresponding adjustment at the other end, the resulting figure does not represent true profit. Section 13 of the Indian Income-tax Act, 1922 requires income, profits and gains to be computed in accordance with the method of accounting regularly employed by the assessee, and that method was found to be proper and regularly followed in the present case.

Conclusion: Real profits could not be determined by revaluing only the closing stock, and the question was answered against the Revenue and in favour of the assessee.

Ratio Decidendi: Where stock is valued on a regular accounting basis, corresponding adjustments must be made to both opening and closing stock; profits cannot be correctly computed by altering only one side of the account.

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