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2002 (12) TMI 30 - HC - Income TaxValuation of stock - Whether, Tribunal was justified in holding that the higher market rate method of valuation of closing stock adopted by the assessee is correct, without appreciating that acceptance of the said method has resulted in a doctored abnormal gross profit ratio of 2054.60 per cent. which, by no yard stick of the basic principles of accountancy can be held as proper reflection of income? - (b) Whether Tribunal was justified in holding that the assessee has followed the market rate method for valuation of closing stock for several years, therefore, the same cannot be disturbed by the Assessing Officer? - We answer both questions in the negative, i.e., in favour of the Department and against the assessee
Issues Involved:
1. Justification of the higher market rate method of valuation of closing stock adopted by the assessee. 2. Authority of the Assessing Officer to alter the method of accounting adopted by the assessee under section 145 of the Income-tax Act. 3. Applicability of the Supreme Court decision in McDowell and Co. Ltd. v. CTO regarding tax avoidance through dubious methods. Issue-wise Detailed Analysis: 1. Justification of the Higher Market Rate Method of Valuation of Closing Stock: The primary issue was whether the assessee's method of valuing the closing stock at a higher market price was legitimate or a device to claim excess deduction under section 80HHC for the assessment year 1992-93 and suppress profits in the subsequent assessment year 1993-94. The assessee valued the opening stock at Rs. 90 per kg and the closing stock at Rs. 130 per kg for the assessment year 1992-93. The Assessing Officer found that this method led to an abnormal gross profit ratio of 2054.60%, which distorted the income and inflated the profits to avail higher deductions under section 80HHC. Consequently, the Assessing Officer computed the total income by applying the principle of "lower of cost or market value," reducing the gross profits and net profits significantly. The Tribunal, however, upheld the assessee's method, noting that it had been consistently followed for several years and resulted in higher income, which the Department had previously accepted. 2. Authority of the Assessing Officer to Alter the Method of Accounting: The Assessing Officer argued that under the proviso to section 145(1), he was empowered to alter the method of accounting if it resulted in a distorted picture of income. The assessee contended that they had followed a consistent method of accounting for several years, valuing the closing stock at market rate, and the Assessing Officer was not justified in changing this method. The court held that the Assessing Officer was justified in applying the principle of "lower of cost or market value" because the method followed by the assessee resulted in escapement of tax. The court emphasized that each assessment year is a separate unit, and the Assessing Officer was correct in valuing the closing stock at Rs. 90 per kg for the assessment year 1992-93 and the opening stock for the assessment year 1993-94 at the same rate. 3. Applicability of the Supreme Court Decision in McDowell and Co. Ltd. v. CTO: The Tribunal had held that the decision in McDowell and Co. Ltd. v. CTO was not applicable in this case. However, the court found that the method adopted by the assessee was a device to inflate deductions under section 80HHC in the first year and suppress profits in the second year, which aligned with the principles laid down in McDowell's case that any colorable device cannot be part of tax planning. Therefore, the Assessing Officer's application of the proviso to section 145(1) was justified. Conclusion: The court answered questions Nos. 1 and 2 in the negative, i.e., in favor of the Department and against the assessee, concluding that the Assessing Officer was justified in altering the method of accounting and valuing the closing stock at the lower of cost or market value. Consequently, there was no need to answer question No. 3. The appeals were allowed, and no order as to costs was given.
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