1961 (10) TMI 86 - HC - Income Tax

Court allows assessee to value opening stock at market price as of inheritance date.

Commissioner of Income-Tax, Madras Versus A.V. Appu Chettiar

The court ruled in favor of the assessee, allowing them to value their opening stock at the market price as of the date of inheritance. The court ... - Issues Involved:1. Whether the assessee is entitled to show its first purchase from the estate of the testator at the market price on the date of such purchase.2. The appropriate method of stock valuation for income-tax purposes under the mercantile system of accounting in a case where there has been a succession to a business.3. The principle of valuation of stock acquired through inheritance or bequest.Issue-wise Detailed Analysis:1. Entitlement to Show First Purchase at Market Price:The primary issue was whether the assessee firm could value its opening stock, inherited from the deceased testator, at the market price of Rs. 3,53,064 as of January 6, 1951. The assessee firm, constituted by the testator's daughters, began its operations on January 22, 1951, and adopted the market price for the opening stock, diverging from the inventory value of Rs. 2,78,866 recorded in the deceased's books. The Income-tax Officer initially rejected this valuation, insisting on the original inventory value. However, the Appellate Assistant Commissioner and subsequently the Tribunal accepted the assessee's approach, emphasizing that the stock should be valued at market rates as of the date of vesting.2. Stock Valuation for Income-Tax Purposes:The judgment delves into the principles of stock valuation under the mercantile system of accounting. It is well-established that the value of trading stock at the beginning and end of the accounting year should be recorded at cost or market value, whichever is lower. The Supreme Court in Kikabhai Premchand v. Commissioner of Income-tax affirmed that an assessee can choose their method of stock valuation, provided there is consistency. The court reiterated that the valuation method should be adhered to consistently, either at cost or market value, at both the beginning and end of the year.3. Valuation of Stock Acquired Through Inheritance or Bequest:The court examined whether stock obtained by inheritance should be valued at nil or at its original cost to the predecessor. It rejected the department's contention that inherited stock should have a nil value, reasoning that the market value represents the cost to the new owner. The court cited cases such as Osborne v. Steel Barrel Co. Ltd. and Craddock v. Zevo Finance Co. Ltd., which recognized that the value of stock should reflect the actual consideration paid, whether in cash or other forms. The court concluded that for inherited stock, the market value at the date of inheritance is the appropriate valuation, as it represents the real value to the new owner.Conclusion:The court affirmed that the assessee was entitled to value its opening stock at the market price of Rs. 3,53,064 as of January 6, 1951. It emphasized that the business started by the assessee was a new business, and the stock put into this business should be valued at its market value at the time of inheritance. The court concluded that the Tribunal's view was correct and answered the question in the affirmative, in favor of the assessee. The assessee was also awarded costs of Rs. 250.