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1. Interpretation of section 80J of the Income-tax Act, 1961 regarding valuation of raw material for computing profits and gains of a new industrial undertaking for exemption purposes. Analysis: The case involved the interpretation of section 80J of the Income-tax Act, 1961, concerning the valuation of raw material for computing profits and gains of a new industrial undertaking for exemption purposes. The assessee, a petro-chemical manufacturer, had a unit manufacturing Formaldehyde, which was utilized as raw material in another unit for the production of Penta. The dispute arose when the Income-tax Officer valued the Formaldehyde at market price instead of cost price, resulting in the denial of section 80J relief to the assessee due to an alleged loss in the Penta unit. The Tribunal upheld this decision, prompting the assessee to challenge the valuation method before the High Court. The High Court analyzed the commercial principles governing the valuation of raw material transferred between units of the same assessee for the purpose of determining profits under section 80J. It emphasized that the valuation should align with ordinary commercial trading practices unless specific provisions dictate otherwise. The court referred to precedents like Sir Kikabhai Premchand v. CIT and CIT v. Bai Shirinbai K. Kooka to illustrate the importance of substance over form in such transactions. It highlighted the need to consider the true profit earned in the relevant accounting period, excluding potential profits or notional income unless mandated by law. Additionally, the court discussed the Gujarat High Court's decision in Anil Starch Products Ltd. v. CIT, which valued raw material at market price for computing profits under a different section of the Income-tax Act, 1922. However, the High Court disagreed with this approach, emphasizing that the usual commercial practice does not involve adding potential profits to the cost price of raw material in the accounts. It cautioned against including hypothetical profits in income calculations, as it could distort the concept of real income. Ultimately, the High Court held that for the assessment year 1974-75, the raw material, Formaldehyde, produced by the old industrial undertaking and used in the new industrial undertaking should be valued at cost price for computing profits and gains under section 80J of the Income-tax Act, 1961. The court clarified that only real income, not notional income, should be considered unless specific provisions state otherwise. It also noted the subsequent amendment to section 80J, effective from April 1, 1976, which mandated valuing goods transferred between business units at market value, a provision not applicable to the case at hand.
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