2001 (4) TMI 174 - AT - Income Tax

Tribunal allows assessee to value closing stock at cost or market rate for income tax purposes

Additional Commissioner Of Income-Tax Versus Dalhousie Investment Trust Co. Ltd.

The Tribunal upheld the CIT(A)'s order, allowing the assessee to value closing stock at cost or market rate, whichever is lower, for income tax purposes. ... Method Of Accounting, Valuation Of Stock Issues Involved:1. Method of valuation of stock adopted by the assessee for income tax purposes.2. Allowance of loss claimed by the assessee due to the difference in stock valuation.Detailed Analysis:Issue 1: Method of valuation of stock adopted by the assessee for income tax purposesThe Revenue challenged the CIT(A)'s direction to accept the method of stock valuation adopted by the assessee in its computation of total income, which differed from the method used in preparing its final accounts. The Assessing Officer (AO) found that the assessee claimed a loss due to valuing stock at market rate or cost, whichever was lower, for income tax purposes, while the final accounts valued stock at cost. The AO disallowed this claim, noting no such claim in previous years.The CIT(A) accepted the assessee's contention, citing the Supreme Court decision in United Commercial Bank v. CIT, which allowed the valuation of closing stock on a different basis for statutory accounts and income tax returns. The Departmental Representative argued that section 145 of the Income-tax Act mandates income computation based on the method of accounting regularly employed by the assessee. The assessee's counsel cited judicial precedents supporting the practice of valuing stock at cost or market rate, whichever is lower.The Tribunal upheld the CIT(A)'s decision, referencing the Privy Council's ruling in Sarangpur Cotton Mfg. Co. Ltd., which stated that the method of accounting for business purposes should be used for tax computation unless the AO determines that income cannot be properly deduced from it. The Tribunal emphasized that the principle of valuing stock at cost or market rate, whichever is lower, is well-established in commercial practice and recognized by various judicial decisions.Issue 2: Allowance of loss claimed by the assessee due to the difference in stock valuationThe AO disallowed the assessee's claim of loss due to the difference in stock valuation, noting no such claim in earlier years. The assessee argued that it consistently followed the method of valuing closing stock at cost or market rate, whichever is lower, for income tax purposes, and the change in the final accounts was due to amendments in the Companies Act, 1956.The Tribunal noted that the Supreme Court in United Commercial Bank allowed the valuation of closing stock at cost for statutory balance sheets while using cost or market rate, whichever is lower, for income tax returns. This practice was accepted by the Department, and the Tribunal found no reason to deviate from it. The Tribunal held that the real income of the assessee should be computed using the well-recognized method of valuing closing stock at cost or market rate, whichever is lower.The Tribunal also referenced the Supreme Court's decision in Chainrup Sampatram, which supported the anticipation of loss in stock valuation, and the principle that closing stock should be valued at cost or market price, whichever is lower, to reflect a true picture of profits and gains.Conclusion:The Tribunal upheld the CIT(A)'s order, allowing the assessee's method of valuing closing stock at cost or market rate, whichever is lower, for income tax purposes, and dismissed the Revenue's appeal. The Tribunal emphasized that this method is a well-recognized rule of commercial practice and accountancy, supported by judicial precedents, and necessary for computing the real income of the assessee.