Stock valuation method can be rejected for tax purposes when it distorts true profits and requires matching opening-stock adjustment.

A regularly followed base stock method for valuing closing stock of silverware and raw silver may be rejected for tax purposes where it does not reflect true profits, because income must be computed on a basis that discloses the real trading result. The note states that stock valuation should ordinarily follow cost or market value, whichever is lower, and a notional figure unrelated to actual cost may distort taxable income. It also notes that if closing stock is revalued on a different basis, the opening stock of the same item should receive a corresponding adjustment, subject to verification and fresh computation.

---

---

Issues: (i) Whether the base stock method adopted for valuing the closing stock of silverware and raw silver was acceptable for income-tax purposes. (ii) If the closing stock was to be revalued, whether the opening stock of the same base stock also required corresponding revaluation.

Issue (i): Whether the base stock method adopted for valuing the closing stock of silverware and raw silver was acceptable for income-tax purposes.

Analysis: The assessee had consistently valued a minimum base stock of silverware and raw silver at fixed rates despite replenishments at higher market prices. The method was accepted in earlier years, but consistency alone could not prevail if the method failed to disclose true profits. The accepted rule for stock valuation is cost or market value, whichever is lower, and a notional figure unrelated to actual cost may be rejected where it distorts the computation of profits and gains. The Tribunal relied on the statutory duty to compute correct taxable profits and on authorities holding that the revenue may disregard a method of accounting that does not truly reflect income.

Conclusion: The base stock method, as applied to the closing stock in this case, was not acceptable, and the Revenue succeeded on this issue.

Issue (ii): If the closing stock was to be revalued, whether the opening stock of the same base stock also required corresponding revaluation.

Analysis: Once the closing stock of the base stock was brought to a different basis, the opening stock of the same item could not be left untouched if the true trading result of the year was to be ascertained. Corresponding adjustment to opening stock was therefore necessary in principle, subject to verification of the assessee's workings and computation in accordance with law.

Conclusion: The opening stock also required corresponding revaluation, and the matter was sent for verification and fresh computation.

Final Conclusion: The order in favour of the Revenue on the main question was retained, but the assessment was directed to be recomputed by making a corresponding adjustment to the opening stock, making the disposal only partly in favour of the Revenue.

Ratio Decidendi: A regularly followed accounting method may be rejected for tax purposes if, in the year under assessment, it does not disclose the true income, profits and gains of the business, and stock valuation must be made on a basis that reflects the real trading result for the year.

---