1953 (9) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee was entitled to value his closing stock at market rate.
2. Whether there was a change in the method of accounting employed by the assessee.
3. The burden of proof regarding the method of accounting.

Detailed Analysis:

1. Entitlement to Value Closing Stock at Market Rate:
The primary issue was whether the assessee could value his closing stock at market rate. The assessee, a firm engaged in wholesale cloth business, showed a net loss after valuing his closing stock at market rate, which was lower than the cost price. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal disagreed, insisting that the closing stock should be valued at cost price as done in previous years.

The judgment references several legal precedents and principles, emphasizing that an assessee is entitled to value the closing stock either at cost price or market value, whichever is lower. This principle is upheld in various cases such as Whimster & Co. v. Commissioners of Inland Revenue and Inland Revenue Commissioners v. Cock, Russell and Co. Limited. The rationale is to allow traders to spread out their losses more evenly.

2. Change in the Method of Accounting:
The Tribunal found that the assessee had not consistently valued his closing stock at the lower of cost price or market price in previous years. However, the Department failed to prove that the assessee had always valued his stock at cost price even when the market price was lower. The judgment clarifies that the burden of proving a change in the method of accounting lies with the Department.

The court referred to Section 13 of the Indian Income-tax Act, which mandates that the method of accounting regularly employed by the assessee should be accepted unless it fails to properly deduce income, profits, and gains. The judgment also cites Commissioner of Income-tax, Bombay Presidency v. Ahmedabad New Cotton Mills Company Limited, affirming that the method of valuing closing stock is part of the method of accounting.

3. Burden of Proof:
The judgment underscores that the burden of proving a deviation from the regular method of accounting rests with the Department. The Tribunal noted that there was no evidence that the assessee had valued his stock at cost price in years where the market price was lower. Consequently, it could not be inferred that the assessee had changed his method of accounting.

The court concluded that the assessee was entitled to value his closing stock at market rate, as there was no definitive proof of a change in the regular method of accounting. The Income-tax Officer's addition of Rs. 63,722 to the assessee's income was unwarranted without a clear finding of such a change.

Conclusion:
The court answered the referred question by affirming that the assessee was entitled to value his closing stock at market rate. The judgment highlighted the principles of commercial accounting and the burden of proof required to establish a change in the method of accounting. The assessee, however, was not awarded costs due to the rejection of his plea that he had always valued his stock at the lower of cost price or market price.