TaxTMI 
TaxTMI 
2018 (12) TMI 696
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.... in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the value of the closing stock determined by the Commissioner of Income Tax (Appeals)?: 3. The assessee is an individual, running a proprietorship concern, engaged in the manufacture and export of leather products. On 22.01.2004, a search was conducted in the residential premises of the assessee, pursuant to which, a notice under Section 153A of the Act was issued. In response to such notice, the assessee filed return of income declaring a loss of Rs. 3,39,93,012/-, apart from the agricultural income of Rs. 2,31,203/-. 4. The assessee's case is that during the previous year, relevant to the assessment year 2000-01, he had commenced business of trading in shares, and throughout the year, there was tremendous fluctuation in the value of shares due to hawala transaction, and only towards the end of the year, the value of shares stabilized. 5. The assessee would state that he was advised that the valuation of closing stock of shares would have to reflect a realistic value and accordingly, the assessee valued the closing stock of shares on the basis of "since realised price". ....
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.... accounts on the basis of the events that occurred after the finalization of the same. Accordingly, the Tribunal held that the valuation of the closing stock would have to be made on the basis of "cost" or "market: value, whichever is lower. Aggrieved by the same, the assessee is before us by way of this appeal. 10. We have heard Ms.Sree Lakshmi Valli, learned counsel for the appellant/assessee and Mr.T.Ravi Kumar, learned Senior Standing Counsel for the respondent/Revenue. 11. The assessment order dated 31.03.2006, is sort of unique in its narration. We say so because, the Assessing Officer has posed certain questions to the authorized representative of the assessee, culled out answers from him and the assessment order proceeds on a question-answer basis. 12. Be that as it may, we are required to decide the question as to whether the assessee was justified in valuing the closing stock of shares on the basis of "since realised value", which according to the assessee is the value actually realised by the assessee on the sale of the stock during the first month after the end of the financial year. 13. The sum and substance of the finding of the Assessing Officer in his le....
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....of the market value, as it was lower than the market value. The Tribunal while affirming the order passed by the CIT(A), agreed with the assessee's stand that a business man dealing in shares, does have a right to do prudential accounting but, cannot re-write his accounts. 16. Thus, we have to consider as to whether the valuation of the closing stock, based on the realised price disclosed in the P & L account, is permissible; and whether the authorities below and the Tribunal were right in coming to the conclusion that the method of accounting adopted by the assessee, is an unconventional method of accounting and an attempt to re-write his accounts. 17. In terms of Section 145(2) of the Act, the Central Government may notify in the Official Gazette accounting standards to be followed by any class of assessees or in respect of any class of income. 17.1. Section 145A of the Act commences with a non obstante clause stating that notwithstanding anything to the contrary contained in Section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be ....
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.... date on which the financial statements are approved by the Board of Directors in the case of a company and two types of events have been identified viz., (a) those that provide future evidence of conditions that existed at the balance sheet date; and (b) those that are indicative of conditions that arose subsequent to the balance sheet date. 22. In the Explanation, Clause 4 explains contingencies and in terms of sub-Clause 4.1, it is stated that the term "contingencies" used in AS-4 is restricted to conditions or situations at the balance sheet date, the financial effect of which is to be determined by future events, which may or may not occur. 23. Sub-Clause 4.2 states that estimates are required for determining the amounts to be stated in the financial statements for many on-going and recurring activities of an enterprise. However, one must distinguish between an event, which is certain and one which is uncertain. 23.1. Sub-Clause 4.3 states that uncertainty relating to future events can be expressed by a range of outcomes. 23.2. Clause 5 deals with accounting treatment of contingent losses. 23.3. Sub-Clause 5.1 states that the accounting treatment of a contingent....
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....69(E) and 31/2018: dated 25.01.1996 and 31.03.2005 respectively, issued in exercise of the powers conferred under sub-Section (2) of Section 145 of the Act notifying the accounting standard to be followed by all assessees operating mercantile system of accounting. 28. Clause 4 of the said notification states that accounting policies adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business, profession or vocation in the financial statements prepared and presented on the basis of such accounting policies. It identifies 3 major considerations governing the selection and application of accounting policies, viz., (i) prudence; (ii) substance over form; and (iii) materiality. Thus, in terms of what has been said in sub-Clauses 4(i) and 4(ii) of the notification, provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information; and the accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.....
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....n the profit of the accounting year would not be reflected and a portion of the profit, which was earned in one year, would be shifted to next year. This finding cannot be applied to the facts of the assessee's case. However, in paragraph 12 of the same judgment, the Division Bench pointed out that the correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by the fall in the market price of the goods at the end of the accounting year. We bear in mind this observation made by the Division Bench. 33. The third decision, relied on by the Revenue is the case of Britsh Paints India Ltd., (supra). Paragraph 10 of the said judgment was referred to, which reads as follows:- "10.Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-intrade at cost or market value, whichever is the lower, is a matter entirely within the discretion of....
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....of accounting and it is well established that, on general principles of commercial accounting, in the profit and loss account, the values of stock-in-trade at the beginning and at the end of the accounting year should be noted at the cost or market value, whichever is lower-the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. The above decision lays down the legal principle which needs to be adopted not only by the assessee but, also the Revenue as well. 36. Thus, the question, which looms large for consideration is whether the assessee should be precluded from reflecting the actual realised cost of share and should a figure which obviously does not match with the sale price realised, be relied on for the purpose of making the amount addition. 37. In CIT vs. Birla Gwalior (P.) Ltd., (1973) 89 ITR 0266, the assessee had foregone an agency commission, which was claimed as a revenue expenditure. While testing the correctness of the order of the Tribunal, which allowed the s....
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....f this nature the Court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language.: 38. As could be seen from the facts of the above case, the commission was foregone after the closing of the balance sheet yet the Court pointed out that the reality and speciality of the situation should be given due regard rendering pure theoretical or doctrinaire aspect. 39. In CIT vs. Shoorji Vallabhdas & Co. reported in (1962) 46 ITR 0144 (SC), the question was whether two sums are income of the assessee for the previous year ended 31.03.1948. While answering the said question, it was pointed out that a mere book-keeping entry cannot be income, unless income has actually resulted, and where lesser income is actually received consequent to a subsequent agreement, only that part is taxable and not the entire income accounted in the books. Therefore, in our considered view, if the stand taken by the Revenue before us has to be accepted, it would be fallen foul of the law lai....
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.... could be deduced from the accounts as maintained by the assessee, then the ITO was to accept the same if the said system was being regularly employed. It was held that what was the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained with reference to the relevant evidence and not on doctrines or theories. 42. Referring to the valuation of closing stock adopted by the said assessee, the Court held that the system of valuing the closing stock with reference to selling price, subsequent to the last date of the accounting year has been consistently followed by the assessee and it has not been held by the IT Authorities that correct profits and gains could not be deduced from the accounts so maintained. Approving the finding of the Appellate Authority in the assessee's case for the earlier assessment year, it was held that the method adopted by the assessee is in fact, nearer to the reality of the fact and as such could be treated as a correct and perfect method of valuation. 43. In our considered view, the decision in Mahalaxmi Sugar Mills Co. Ltd. (supra) would squarely apply to the case on hand. The Assessing ....
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....ow the change in method of valuation of stock of tea at the end of the previous year and added back the resultant loss. Before the CIT(A), the assessee contended that the stock valuation adopted by them was a normal practice followed in the entire tea industry for valuation of stock of tea at the end of the accounting year and there was no reason why the Assessing Officer should refuse to accept the change in method of stock valuation followed by the assessee. The CIT(A), while holding that the assessee was at liberty to change the method of valuation of closing stock, held that it cannot be allowed, if it results in loss of Revenue, and accordingly, confirmed the order of the Assessing Officer. 48. On appeal to the Tribunal, the assessee succeeded, which order was questioned by the Revenue before the High Court of Calcutta. The Court referred to the accounting standard more particularly, AS-2 on valuation of inventories and held that the assessee has changed its method of stock valuation from "selling price" to "since realised price" and/or "estimated realisable value", which is nothing but, "net realisable value". It was pointed out that what is relevant to consider is whet....