1948 (8) TMI 21 - HC - Income Tax

Summary

Issues:
Valuation of opening and closing stock based on average cost and market value.
Method of valuing closing stock item-wise.
Compliance with law and principles in determining true profits.

Analysis:
The case involved a question referred by the Income-tax Appellate Tribunal regarding the valuation of opening and closing stock by the assessee, who were dealers in dye-stuffs and chemicals. The method followed was to value stock based on average cost or market value, whichever was lower, for each separate article. The Tribunal accepted this method, but the Commissioner contended that separate valuations should be made for each article, taking the lower of the average cost and market value. The key issue was whether the valuation should be item-wise or in the aggregate.

The court noted that the accepted basis for valuing stock is cost or market value, whichever is lower, at the date of account preparation. It was established that the assessee could adopt the lower of cost or market value for each article. The rule was considered well-established in both England and India, favoring the trader to evenly distribute losses. The court cited precedents emphasizing the importance of valuing stock at cost or market price, whichever is lower, to compute profits accurately.

The Commissioner argued that valuing stock item-wise does not properly deduce profits, insisting on aggregating market values for all articles. However, the court rejected this argument, stating that the Income-tax Act allows the assessee to use their regular accounting method unless it distorts profits. The court emphasized that the method must be consistent with past practices and not arbitrarily changed. It was clarified that the Income-tax Officer can reject the method only if profits cannot be accurately deduced from it.

In conclusion, the court answered the question in the affirmative, supporting the assessee's method of valuing stock based on average cost or market value, whichever was lower, for each article. The respondents were awarded costs. The judgment highlighted the importance of adhering to established accounting principles and the right of the assessee to use their regular accounting method for computing profits unless it distorts the income.