TaxTMI 
TaxTMI 
2005 (11) TMI 26
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....ck of raw-material/semifinished goods were valued at cost price and finished goods at the market price. For the assessment year 1992-93 (hereinafter to be referred to as the "first year"), the assessee valued the closing stock at the rate of Rs. 130 per kg. whereas the opening stock was shown at Rs. 90 per kg. In the subsequent year 1993-94, the assessee valued the opening stock at Rs. 130 per kg. for the finished goods and there was no closing stock. The assessee returned a loss of Rs. 54,420 for the second year. For the first year, the assessee claimed benefit under section 80HHC of the Income-tax Act, 1961 (hereinafter to be referred to as the "Act"). It is the case of the assessee that during the financial year 1991-92, the rupee had undergone devaluation against U.S.$. The price of the U.S.$ as on April 1, 1991 was Rs. 18 per dollar and at the time of the closing as on March 31, 1992, it was Rs. 31 per U.S. dollar. As per the evidence, the assessee's case is that at the relevant time the market price of the blanket in the international market was U.S.$ 4.59 per kg. and the rate of U.S. dollar in rupees 18.20 per dollar. As such, the market price was Rs. 90 per kg. as on M....
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.... an appeal for the first year and also for the second year before the Commissioner of Income-tax (Appeals). Both the appeals were dismissed by the Commissioner of Income-tax (Appeals) by observing that by merely following a particular system of accounting regularly in the past would not entitle the assessee to follow the same system of accounting which was not in accordance with the standard principles of accountancy and placed reliance on the judgment of this court in CIT v. British Paints India Ltd. [1991] 188 ITR 44. It was held that the Assessing Officer had rightly interfered, as duty bound under the provisions of section 145 of the Act to compute the correct taxable income of each year and for that purpose, there was need to change the system of accounting regularly followed by the assessee, that must be done. As per the appellate authority, no person could earn profit from his own pocket. The valuation of the closing stock required the valuing of closing stock either at cost or at market price, whichever was lower. The assessee, aggrieved by the orders passed by the Commissioner of Income-tax (Appeals), further filed appeals before the Income-tax Appellate Tribunal. The Inc....
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....ellant has adopted a method of accounting to defraud the Revenue particularly so when the accounting method chosen by the assessee is not for a particular year and is being adopted consistently from the year 1985-86. It is further urged that it is a well-settled principle of income-tax law that the assessee is free to adopt any system of accounting and the valuation chosen at the market rate has been a well settled principle of accounting and therefore simply because the assessee has claimed benefit under section 80HHC, in a particular year the method of accounting could not have been found fault with. It was further urged that the provisions of section 145(1) of the Act are not attracted as the assessee had adopted the valuation of the finished goods on market price and consistently followed the same. The contention of counsel proceeded on the exercise of jurisdiction and he urged that the power under section 145 of the Act could only be exercised if there is material to prove that the method in question is such that in the opinion of the Assessing Officer, the income cannot be properly deduced. The sine qua non for enforcing the provisions of section 145 of the Act is that the As....
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....or any earlier previous year. (2) Where the Assessing Officer is not satisfied about the correctness or the completeness of the accounts of the assessee, or where no method of accounting has been regularly employed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." Section 145 provides that in case the Assessing Officer is of the view that the assessee's accounts are incomplete or incorrect or the method of accounting has not been regularly followed by the assessee, the Assessing Officer may resort to make best judgment assessment in the manner pro-vided under section 144 of the Act instead of making assessment under section 143 of the Act. To attract section 145 of the Act, it is necessary that: (a) the assessee has computed the income in accordance with the method of accounting regularly employed by the assessee ; and (b) provided where the accounts are correct and complete to the satisfaction of the Assessing Officer ; but (c) the method employed is such that in the opinion of the Assessing Officer, the income cannot be deduced therefrom then the Assessing Officer may adopt a different method of computation of the incom....
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....xt year. As per the Assessing Officer by virtue of this method in the assessment year 1992-93 the gross profit ratio was 2,054.60 per cent, for the first year which stood in stark contrast to 119.18 per cent, for the accounting year 1991-92 and 64.85 per cent, for accounting year 1991 and, therefore, the method adopted shows artificially inflated profit in order to get the deduction benefit under section 80HHC of the Income-tax Act. While framing the question of law the High Court has also framed a question whether in the facts and circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in holding that the higher market rate of valuation of closing stock adopted by the assessee was correct, without appreciating that acceptance of the said method had resulted in doctored abnormal gross profit ratio of 2054.60 per cent., which by no yardstick of the basic principles of accountancy could be held as proper reflection of income. The High Court has arrived at the conclusion that this gross inflation in the profit was made merely to get the benefit of section 80HHC for the first year and suppress the profit in the second year. Thus it is apparent that the Ass....
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....t for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes'." The court further observed: "We have already said that in England there is no provision which compels the tax officer to adopt in the computation of income the system of accounting regularly employed by the assessee. But whatever may be the system, whether it is cash or mercantile, as observed by Croom-Johnson J. in a trading venture it would be impossible accurately to assess the true profits without taking into account the value of the stock-in-trade at the beginning and at the end of the year ..." From the above it is clear that it is settled law that the true profit of business for an accounting period cannot be ascertained without taking into account the value of the stock-in-trade remaining at the end of the period and that such valuation is a necessary element in the process of determining the trade result of the period. The principles on which the method of valuation of closing stock is done is also well settled. They have been set out in Whimster and Co. v. CIR ....
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....alue of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure ... From this rigid doctrine one exception is very generally recognized on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the....
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....not realized. The aforesaid catena of decisions recognized the accounting practice of valuation of closing stock and permissible limit thereof of showing the stock at cost or at market value whichever is lower. Permissibility of valuation of the stock at market value would be only if the value of the market value of the stock is lower than the cost of the stock. In CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), at page 128: "Again as observed by this court in CIT v. McMillan and Co. [1958] 33 ITR 182 the expression 'in the opinion of the Income-tax Officer' in the proviso to section 13 of the Indian Income-tax Act, 1922 does not confer a mere discretionary power; in the context it imposes a statutory duty on the Income-tax Officer to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced therefrom." It is said in S.N. Namasivayam Chettiar v. CIT [1960] 38 ITR 579 (SC), it is for the officer to consider the material placed before him and, if, upon such consideration, he is of the opinion that co....
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....In the present case by showing the market value of the closing stock the assessee has earned potential profit out of itself in as much as the stock-in-trade remained with the assessee at the closing of the accounting year. Secondly, putting the stock at the market value does not and cannot bring in any real profit which is necessary for taxing the income under the Act as is held in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC). Thirdly, it is a settled principle of income-tax law that it is the real income, which is taxable under the Act. This proposition was enunciated in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC), which was pronounced in CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC). Under section 145 of the Act chargeable income has to be deduced from the accounts regularly employed by the assessee, if in the opinion of the Assessing Officer the accounts are correct and complete. The Assessing Officer can apply a different method of accounts to deduce the income chargeable if in his opinion from the method employed by the assessee the chargeable income cannot properly be deduced. The recognized an....