Lower-of-cost-or-market valuation of closing stock remains valid for tax computation despite Companies Act accounts.

Closing stock of shares and securities may be valued at cost or market value, whichever is lower, as a recognised rule of commercial accounting reflecting prudent recognition of anticipated loss. For income-tax computation, section 145 requires the regularly employed method of accounting to be accepted unless income cannot properly be deduced from it. A statutory balance sheet showing cost valuation under the Companies Act did not by itself displace the consistently followed tax computation method. The assessee was therefore entitled to adopt the lower-of-cost-or-market method, and the Revenue's objection under section 145 was rejected.

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Issues: Whether the assessee was entitled, for income-tax purposes, to value closing stock of shares and securities at cost or market value whichever is lower, even though its statutory accounts reflected valuation at cost under the Companies Act, and whether section 145 permitted rejection of that method.

Analysis: The method of valuing closing stock at cost or market value whichever is lower is a well-recognised rule of commercial accounting and reflects prudent recognition of anticipated loss. Section 145 requires computation of business income in accordance with the method of accounting regularly employed by the assessee, unless the Assessing Officer forms the opinion that income cannot properly be deduced therefrom. The fact that the statutory balance sheet adopted cost valuation did not, by itself, displace the consistently followed tax computation method. The principle that accounting practice cannot override the taxing statute was distinguished from the position where the statute itself recognises the accounting method for tax computation.

Conclusion: The assessee was entitled to compute income on the basis of closing stock valued at cost or market value whichever is lower, and the Revenue's objection under section 145 was rejected.

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