Natural justice in section 263 proceedings and corresponding stock valuation adjustments under section 145A were both applied.

Revisional proceedings under section 263 completed without effective hearing were set aside, with the matter restored for fresh adjudication after affording the assessee an opportunity to raise all legal contentions. On valuation, it was held that where VAT is added to closing stock under section 145A, corresponding adjustments must also be made to purchases, sales and opening stock. The Assessing Officer was directed to give effect to the matching adjustments required by the statutory valuation method.

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Issues: (i) Whether the revisional order under section 263 of the Income-tax Act, 1961, passed without affording effective opportunity, could be sustained; (ii) Whether VAT added to closing stock required corresponding adjustments to purchases, sales, and opening stock under section 145A of the Income-tax Act, 1961.

Issue (i): Whether the revisional order under section 263 of the Income-tax Act, 1961, passed without affording effective opportunity, could be sustained.

Analysis: The assessee complained of violation of natural justice in the revisional proceedings. The matter was found fit to be restored so that the assessee could raise all legal contentions before the revisional authority. Reliance was placed on the jurisdictional principle that where the order suffers from denial of opportunity, the proper course is remand for fresh consideration.

Conclusion: The revisional order was set aside and the matter was restored to the file of the Principal Commissioner for fresh adjudication after hearing the assessee.

Issue (ii): Whether VAT added to closing stock required corresponding adjustments to purchases, sales, and opening stock under section 145A of the Income-tax Act, 1961.

Analysis: The controversy concerned valuation adjustments under section 145A and the related accounting treatment. It was held that corresponding adjustments must also be made to purchases, sales, and opening stock when VAT is brought into the valuation of closing stock.

Conclusion: The Assessing Officer was directed to make the corresponding adjustments in accordance with section 145A.

Final Conclusion: One appeal was restored for fresh consideration and the other was allowed on the valuation issue, leaving the assessee substantially successful in both matters.

Ratio Decidendi: Where revisional proceedings are found to have been completed without effective hearing, the proper course is remand for fresh consideration, and under section 145A, stock valuation adjustments must be made on a corresponding basis across purchases, sales, and opening stock.

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