1990 (12) TMI 2 - SC - Income Tax

Revenue appeals allowed; stock must be valued at cost unless market fall justifies write-down; include full production costs

Commissioner of Income-Tax Versus British Paints India Limited

SC allowed Revenue appeals, set aside the HC judgment and upheld the Tribunal and Assessing Officer. The Court held that stock must be entered at cost ... Method of valuation of Stock - valuation of goods-in-process and the finished products on the basis of the cost of raw materials after excluding altogether the overhead expenditure - Applicability of Section 145 - HELD THAT:- The correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by reason of the fall in the market value of those goods below their original cost. Ordinarily, therefore, the goods should riot be written down below the cost price except where there is an actual or anticipated loss. On the other hand, if the fall in the price is only such as it would reduce merely the prospective profit, there would be no justification to discard the initial valuation at cost. It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessments Each year being self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced therefrom. It is therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income. The Tribunal's order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was clearly wrong in interfering with those findings. Accordingly, we set aside the judgment of the High Court and allow the appeals of the Revenue with costs throughout. Issues Involved:1. Justification for the method of valuation of goods-in-process and finished products.2. Inclusion of overhead expenditure in the valuation of stock.3. Applicability of Section 145 of the Income-tax Act, 1961.4. Consistency and correctness of the assessee's method of accounting.5. The duty of the Assessing Officer in determining true income.Issue-wise Detailed Analysis:1. Justification for the Method of Valuation of Goods-in-Process and Finished Products:The assessee, a limited liability company engaged in the manufacture and sale of paints, consistently valued its goods-in-process and finished products exclusively at the cost of raw materials, excluding overhead expenditure. The justification was that paints have a limited storage life, risking a loss in market value if not quickly disposed of. However, the Income-tax Officer rejected this practice, noting that the assessee had never claimed deductions for deterioration or damage to its goods. The Tribunal upheld this view, stating there was no evidence of deterioration and no justification for excluding overhead expenditure.2. Inclusion of Overhead Expenditure in the Valuation of Stock:The Income-tax Officer recalculated the value of the opening and closing stocks by adding overhead expenditure, leading to an addition of Rs. 1,04,417 for the assessment year 1963-64 and a deduction of Rs. 3,338 for the assessment year 1964-65. This recalculation was confirmed by the Appellate Assistant Commissioner and the Tribunal. The Tribunal emphasized that the valuation of stock solely with reference to the cost of raw materials was inappropriate for computing income chargeable under the Income-tax Act.3. Applicability of Section 145 of the Income-tax Act, 1961:Section 145(1) mandates that income chargeable under the head 'Profits and gains of business or profession' shall be computed in accordance with the method of accounting regularly employed by the assessee. However, if the method employed does not allow proper deduction of income, the Assessing Officer must compute the income upon such basis as he determines. The question of whether income can be properly deduced from the accounts is a factual determination that the officer must make based on relevant material and correct principles.4. Consistency and Correctness of the Assessee's Method of Accounting:The assessee argued that its method of accounting had been accepted by the Revenue for several years without objection. However, the Revenue raised an objection during the assessment years in question, arguing that overhead expenditure was not included in the stock value. The Tribunal found that the method adopted by the assessee, which excluded all costs other than raw materials, was likely to result in a distorted picture of the business's true state for computing chargeable income. The Tribunal's findings were based on cogent evidence and correct principles.5. The Duty of the Assessing Officer in Determining True Income:The Assessing Officer is obligated to ensure that the accounts disclose the true state of affairs for determining tax. If the method of accounting does not disclose the true income, the officer must adopt a computation method that accurately reflects the taxable income. This duty is imposed by Section 145 of the Income-tax Act, 1961. The officer is not bound by the method followed in earlier years and must consider whether the accounts provide a true picture of profits and gains.Conclusion:The Supreme Court set aside the judgment of the Calcutta High Court, which had ruled in favor of the assessee. The Tribunal's order, affirming the Assessing Officer's inclusion of overhead expenditure in the stock valuation, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was wrong in interfering with those findings. The appeals of the Revenue were allowed with costs throughout.