Stock valuation must reflect true trading results; notional base stock values can be rejected, with corresponding opening stock adjustment required.

Stock valuation for income-tax purposes must reflect true trading results, and a consistently followed base stock method can be rejected where it uses notional values disconnected from actual cost or market-based valuation. The article notes that the closing stock of silverware and raw silver was upheld as capable of revaluation at higher market-linked figures, while the opening stock also required corresponding adjustment to arrive at the correct trading result; the matter on that aspect required verification and fresh computation.

---

---

Issues: (i) Whether the Revenue was justified in rejecting the assessee's base stock method of valuing closing stock of silverware and raw silver and in substituting higher market-based values. (ii) Whether, if the closing base stock was revalued, the opening base stock also required corresponding revaluation for arriving at the correct trading result.

Issue (i): Whether the Revenue was justified in rejecting the assessee's base stock method of valuing closing stock of silverware and raw silver and in substituting higher market-based values.

Analysis: The assessee had consistently valued the identified base stock at fixed historical rates, but the market prices of silver and silverware had risen substantially and the adopted figures were not the actual cost of the replenished stock. A regularly followed accounting method can be displaced if it does not disclose the true income, profits and gains of the year. The accepted rule for stock valuation is cost or market value, whichever is lower, and a notional figure unrelated to real cost cannot be retained merely because it was followed in earlier years. On that basis, the departmental authorities were entitled to reject the base stock valuation for the closing stock.

Conclusion: The rejection of the assessee's closing stock valuation was upheld and the Revenue succeeded on this issue.

Issue (ii): Whether, if the closing base stock was revalued, the opening base stock also required corresponding revaluation for arriving at the correct trading result.

Analysis: Once the closing base stock was brought to a different valuation basis, fairness and correct computation of trading results required that the opening base stock be correspondingly adjusted. The assessee furnished working statements showing that the resultant addition would be lower if the opening stock was also revalued, and the figures required verification by the assessing authority.

Conclusion: The assessee's alternative claim was accepted in principle and the matter was sent back for verification and fresh computation of the difference.

Final Conclusion: The base stock method could not be continued for closing stock valuation where it failed to reflect true profits, but the corresponding opening stock also had to be taken into account to compute the correct taxable result, so the Revenue appeal succeeded only in part.

Ratio Decidendi: For income-tax purposes, stock valuation must reflect true trading results, and a consistently followed method may be rejected where it adopts notional values disconnected from actual cost or market-based valuation.

---