2002 (12) TMI 25 - HC - Income Tax

Allegation of undervaluation of the closing stock of the free sugar - Whether, Tribunal was right in holding that the assessee was entitled to adopt the value of its closing stock at a rate which was prevalent on October 25, 1983, whereas its previous year ended on September 30, 1983? - There was no finding of fact by the Tribunal that the system of accounting adopted by the assessee would disclose the true and correct profit of the year in question - In the absence of any such finding, we hold that the Tribunal was not correct in directing the Assessing Officer to adopt the value of the closing stock on the date which was prevailing subsequent to the end of the accounting year as the market value of the stock as at the end of the previous year. Accordingly, the question of law referred to us is answered against the assessee and in favour of the Revenue

Summary

Issues Involved:
1. Whether the assessee was entitled to adopt the value of its closing stock at a rate prevalent on October 25, 1983, whereas its previous year ended on September 30, 1983.

Issue-wise Detailed Analysis:

1. Entitlement to Adopt Closing Stock Value Post Accounting Year-End:

The core issue revolves around whether the assessee can value its closing stock based on the rate prevalent on October 25, 1983, despite the accounting year ending on September 30, 1983. The Assessing Officer (AO) observed an undervaluation of the closing stock of free sugar, valued by the assessee at Rs. 330 per quintal on October 25, 1983, instead of Rs. 352 per quintal as of September 30, 1983. This discrepancy led to an addition of Rs. 21,91,992 to the assessee's income for undervaluation.

The Commissioner of Income-tax (Appeals) upheld the AO's decision, emphasizing that the valuation should reflect the market value at the end of the accounting year, not a date thereafter. The Income-tax Appellate Tribunal, however, sided with the assessee, referencing the Delhi High Court's decision in CIT v. Mahalakshmi Sugar Mills Co. Ltd. [1993] 200 ITR 275, and stated that the assessee's method was closer to reality and consistently followed.

Upon review, the High Court examined the principles established by the Supreme Court and other precedents. The Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481 and CIT v. British Paints India Ltd. [1991] 188 ITR 44 underscored that closing stock should be valued at cost or market price, whichever is lower, at the end of the accounting year. The valuation practice aims to reflect true profits by balancing the costs of unsold goods against their market value at the accounting year's close.

The High Court noted that the assessee did not adhere to this principle, instead valuing the stock when finalizing accounts post the accounting year-end. This method could distort the true profit for the year, as it might shift profits to another year. The court emphasized that the AO must ensure the books reflect the accurate state of affairs and true income for the year.

The High Court also reviewed the International Accounting Standard IAS-2 and statements from the Institute of Chartered Accountants, which allow considering post-balance-sheet events only if they confirm conditions existing at the balance-sheet date. However, the significant fluctuation in sugar prices between September 30 and October 25, 1983, did not conform to this principle.

The Tribunal's reliance on the Delhi High Court's decision was deemed inapplicable, as there was no finding that the assessee's method accurately reflected true profits. The High Court concluded that merely following a regular system is insufficient; the method must disclose correct profits and gains for the year.

Conclusion:
The High Court held that the Tribunal erred in allowing the assessee to adopt the closing stock value as of October 25, 1983. The correct approach is to value the stock as of the accounting year-end, September 30, 1983. Consequently, the question of law was answered against the assessee and in favor of the Revenue, with no costs awarded.