1983 (2) TMI 63 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Stock Valuation & Shareholding

The Tribunal upheld the Commissioner of Income Tax (Appeals) [CIT(A)]'s decisions on both issues. The assessee's method of valuation of closing stock was ... - Issues Involved:1. Method of valuation of closing stock.2. Determination of whether the assessee is a company in which the public are substantially interested.Issue-wise Detailed Analysis:1. Method of Valuation of Closing Stock:The primary issue in this appeal was whether the assessee had changed its method of valuation of closing stock, resulting in an undervaluation of Rs. 63,690. The Income Tax Officer (ITO) observed that the assessee had valued the opening stock at market price while valuing the closing stock at cost. This led the ITO to conclude that the assessee had changed its method of valuation, resulting in an undervaluation of the closing stock by Rs. 63,690, which was added to the total income of the assessee.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] held that the assessee was entitled to value the stock at market price or cost, whichever was lower, as per the law. The CIT(A) referenced the case of Ram Laxman Sugar Mills Ltd. vs. CIT (1967) 63 ITR 51 (All), stating that since the assessee consistently followed the same method of valuing the stock over the years, there was no justification for the addition made by the ITO. The CIT(A) thus deleted the addition of Rs. 63,690, stating, 'Since there is no change in the method of accounting and the closing stock have been valued at proper method adopted by the assessee there is no justification for addition of Rs. 63,690 made by the Income-tax Officer and the same deserves to be deleted.'The departmental representative argued for reversing the CIT(A)'s order, while the assessee's counsel justified the CIT(A)'s decision, emphasizing that the cost price of the closing stock was always lower than the market price. After considering the submissions and material, the Tribunal found no merit in the revenue's arguments and upheld the CIT(A)'s decision, noting that the CIT(A) provided cogent and valid reasons for accepting the assessee's method of valuation.2. Determination of Whether the Assessee is a Company in Which the Public are Substantially Interested:The second issue was whether the assessee was a company in which the public were substantially interested. The ITO contended that 60% of the shares were held by five or fewer persons, thus treating the assessee as a company in which the public were not substantially interested. The assessee argued that shares held by cousin brothers and sisters should not be considered as they do not fall within the definition of 'relative' under Section 2(41) of the Income Tax Act.The CIT(A) accepted the assessee's argument, noting that if the shares held by cousin brothers and sisters were excluded, the shareholding of the five persons and their relatives did not exceed 50% of the total shares. The CIT(A) reasoned that the term 'relative' as defined in Section 2(41) does not include cousins, as 'brother' in its natural sense refers to a male having the same parent or one parent in common, not cousins. The CIT(A) concluded that the assessee should be treated as a company in which the public were substantially interested.The departmental representative again argued for reversing the CIT(A)'s decision, while the assessee's counsel supported the CIT(A)'s order. The Tribunal agreed with the CIT(A), stating that the term 'relative' does not include cousin brothers or sisters. The Tribunal referenced Chamber's Twentieth Century Dictionary, which defines a cousin as 'the son or daughter of an uncle or aunt,' supporting the view that cousins do not fall within the definition of 'relative' under Section 2(41). Consequently, the shares held by cousin brothers and sisters were excluded, and the remaining shareholding did not exceed 50% of the total shares. The Tribunal upheld the CIT(A)'s decision, affirming that the assessee is a company in which the public are substantially interested.Conclusion:The appeal was dismissed, with the Tribunal upholding the CIT(A)'s decisions on both issues.