Consistent stock valuation for business profits: opening stock must match revalued closing stock to avoid distorted taxable income.

Inflated raw jute purchase addition was disallowed because the surrounding circumstances, commission-agent channel, price pattern, and Tribunal material did not establish manipulation, so the Revenue's addition could not stand. Where closing stock was revalued by rejecting the assessee's method, opening stock had also to be revalued on the same basis because business profits under the charging provision must be computed consistently and without distortion; otherwise taxable income would be artificially inflated or depressed. The reference was thus resolved in favour of the assessee on both issues.

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Issues: (i) Whether the addition of Rs. 11,00,000 on the footing of inflated raw jute purchases was justified. (ii) Whether, where the closing stock was revalued, the opening stock of the same year had also to be revalued on a similar basis.

Issue (i): Whether the addition of Rs. 11,00,000 on the footing of inflated raw jute purchases was justified.

Analysis: The issue turned on appreciation of the surrounding circumstances of the purchases, the genuineness of the commission-agent channel, the price pattern prevailing at the relevant time, and the material relied upon by the Tribunal. On the facts found, there was a sufficient basis for the Tribunal to hold that the alleged manipulation was not established and that the addition could not stand.

Conclusion: The addition of Rs. 11,00,000 was not justified and the issue was answered in favour of the assessee.

Issue (ii): Whether, where the closing stock was revalued, the opening stock of the same year had also to be revalued on a similar basis.

Analysis: Section 4 of the Income-tax Act, 1922 charges the total income of the previous year, and the profit of the current year cannot be computed on a distorted basis. If the closing stock is revalued by rejecting the assessee's valuation, consistency requires that the opening stock also be valued similarly, because the opening stock of one year is the closing stock of the previous year. Otherwise, the trading result would be artificially inflated or depressed and the computation of profit would become unrealistic.

Conclusion: The opening stock had to be revalued on the same basis as the closing stock, and the issue was answered in favour of the assessee.

Final Conclusion: The reference was answered wholly in favour of the assessee, with both the disputed addition for alleged inflated purchases and the treatment of opening stock decided against the Revenue.

Ratio Decidendi: For correct computation of business profits under the charging provision, stock valuation must be applied consistently to both opening and closing stock; if one is revalued by rejecting the assessee's basis, the other must ordinarily be revalued on a like basis to avoid distortion of taxable income.

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