Stock valuation must reflect true profits; tax officer may depart from the assessee's method when accounting distorts income.

Section 13 of the Income-tax Act, 1922 requires income to be computed according to the assessee's regular method of accounting, but permits departure where that method does not truly reflect profits. The text explains that if stock valuation on the assessee's adopted basis distorts true income, the Income-tax Officer may substitute a proper basis to deduce profits correctly. It also notes that a departure in an earlier year from the regular cost method, by using market value for closing stock, was not binding as the regular accounting practice. On that reasoning, cost valuation for opening and closing stock was treated as the proper method, with rectification of the earlier assessment contemplated under Section 35.

---

---

Issues: Whether, in the circumstances of the case, the Income-tax Officer was legally entitled to revise the valuation of the opening and closing stocks for the assessment year 1941-42 on a cost basis and add the resulting difference to the assessee's total income, notwithstanding the method adopted in the previous year.

Analysis: Section 13 of the Income-tax Act, 1922 requires income, profits and gains to be computed in accordance with the method of accounting regularly employed by the assessee, but it also empowers the Income-tax Officer to adopt another basis where the method used does not properly deduce the true profits. The assessee's regular practice had been to value both opening and closing stock at cost price, and the departure in the earlier year by adopting market value at closing stock was not the regular method. Since the market price was admittedly higher than cost, the Income-tax Officer was justified in restoring the cost basis for the later year and in proposing rectification of the earlier assessment under Section 35.

Conclusion: The Income-tax Officer was entitled in law to adopt the cost basis for the assessment year 1941-42, and the reference was answered in the affirmative.

Final Conclusion: The assessment on cost basis for the relevant year was upheld, with consequential revision of the earlier year's assessment contemplated under the Act.

Ratio Decidendi: Where the assessee's adopted method of accounting does not reflect the true profits, the Income-tax Officer may depart from it and compute income on a basis that correctly deduces the profits, including by valuing stock consistently with the proper accounting method.

---