True trading profit requires closing stock valuation where cash-basis accounts distort business income.

Section 13 of the Indian Income-tax Act, 1922 permits business income to be computed according to the regularly employed method of accounting only when that method can properly disclose true profits. Where a cash-basis account omits closing stock while debiting the cost at the start of the year, it may distort trading results by converting profit into capital recoupment. In a trading venture, stock-in-trade is essential to accurate profit computation, so the tax authority may value closing stock and adjust the accounts to reflect real business income.

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Issues: Whether, in computing business income under the Indian Income-tax Act, 1922, the Income-tax Officer could invoke the proviso to section 13 and take into account the value of closing stock of a wasting asset even though the assessee maintained accounts substantially on a cash basis and had debited the cost of acquisition at the commencement of the year.

Analysis: Section 13 requires income, profits and gains to be computed in accordance with the method of accounting regularly employed, but only if the profits can properly be deduced therefrom. The section does not compel acceptance of a statement of cash receipts and outgoings where that method fails to disclose true trading results. In a trading venture, stock-in-trade is an essential element in ascertaining real profits, and ignoring the value of the asset at the close of the year while debiting its cost at the beginning would distort the annual result and convert trading profit into capital recoupment. The Income-tax Officer was therefore entitled to make the computation on a basis that brought the closing value into account.

Conclusion: The assessee's cash-basis accounts could not prevent the Income-tax Officer from valuing the closing stock for the purpose of properly deducing business profits, and the answer to the reference was rightly in the affirmative.

Final Conclusion: The assessment could be made by adjusting the accounts so as to reflect the true trading profit, and the Revenue succeeded.

Ratio Decidendi: Where the assessee's regularly employed accounting method does not permit the true profits of a trading venture to be properly deduced, the tax authority may compute income on a basis that includes appropriate stock-in-trade valuation at the close of the accounting year.

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