Item-wise stock valuation at lower of cost or market value upheld where regular accounting method reflected true trading profits

Item-wise stock valuation followed regularly in the accounts could not be displaced by an aggregate basis merely because some articles would show a notional profit at market value. Trading profits are to be computed under the method of accounting regularly employed, unless that method fails to deduce true profits. The accepted commercial rule permits valuation of stock-in-trade at cost or market value, whichever is lower, and supports recognition of unrealised loss but not unrealised profit. Accordingly, the assessee could value closing stock item-wise at the lower of cost or market value, and the departmental objection to that method failed.

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Issues: Whether, where opening stock had been valued item-wise on the average cost basis, the closing stock could be valued by applying the lower of average cost or market value item-wise to different articles instead of taking one aggregate valuation.

Analysis: Stock-in-trade is an essential element in computing trading profits, and the accepted commercial rule is valuation at cost or market value, whichever is lower. The controlling principle under Section 13 of the Income-tax Act, 1922 is that income, profits and gains are to be computed according to the method of accounting regularly employed by the assessee, unless that method is such that true profits cannot properly be deduced. The reasoning underlying the rule permits recognition of unrealised loss where market value is below cost, but does not justify bringing in unrealised profit by forcing valuation at market rate where it is higher than cost. There is no legal principle requiring the assessee to adopt a single aggregate basis for all items when the regular accounting method values each item separately and the method is not shown to be improper or false.

Conclusion: The assessee was entitled to value the closing stock item-wise by taking cost or market value, whichever was lower, and the reference was answered in the affirmative.

Final Conclusion: The departmental challenge to the stock valuation method failed, and the regular accounting method adopted by the assessee was accepted for computation of trading results.

Ratio Decidendi: Where an assessee regularly follows an item-wise stock valuation method that accords with commercial accounting principles, the income-tax authorities cannot substitute an aggregate basis merely because some items would yield a notional profit at market value; valuation must reflect the lower of cost or market value item-wise unless the method prevents proper deduction of true profits.

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