2006 (10) TMI 69 - HC - Income Tax

Valuation of stock - Assessee adopted two different methods of valuation of closing stock - Held that two different methods of valuation of closing stock not permissible

Summary

Issues Involved:
1. Jurisdiction of the Income-tax Appellate Tribunal in rectifying its own order under section 254(2) of the Income-tax Act, 1961.
2. Correctness of the Tribunal's decision to value the closing stock of free sugar at two different rates.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Income-tax Appellate Tribunal in Rectifying its Own Order:
The first issue concerns whether the Income-tax Appellate Tribunal exceeded its jurisdiction by allowing the assessee's miscellaneous application, thereby revising its own order, which is not permissible under section 254(2) of the Income-tax Act, 1961.

The Tribunal initially held that the principle of net realizable value for valuing closing stock is not incorrect. However, it applied the method of cost or market price, whichever is lower, as adopted by the assessee in previous years (1974-75 to 1977-78). The assessee filed a miscellaneous application, arguing that the Tribunal's decision contained a mistake regarding the valuation of free sale sugar. The Tribunal rectified its order, accepting the assessee's argument partially.

The High Court found that the Tribunal had not applied the principle of net realizable value for the entire closing stock of free sale sugar, despite accepting it as a correct principle. The Tribunal's rectification was seen as a review of its earlier order, which is beyond the scope of section 254(2). The High Court cited the Supreme Court's decision in T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50, which held that a mistake apparent on the record must be obvious and patent, not something requiring a long process of reasoning. Additionally, the High Court referenced Biswanath Prasad and Sons v. CIT [2005] 277 ITR 265, which stated that the Tribunal cannot exercise any power of review unless specifically provided by the statute.

Thus, the High Court concluded that the Tribunal was not justified in reviewing its order under the guise of rectification, as there was no error apparent on the record. The first question was answered in favor of the Revenue and against the assessee.

2. Correctness of the Tribunal's Decision to Value the Closing Stock of Free Sugar at Two Different Rates:
The second issue pertains to whether the Tribunal was correct in valuing the closing stock of free sugar at two different rates: one for the quantity sold up to November 30, 1978, and another for the remaining stock as of June 30, 1978.

The Tribunal initially directed the valuation of closing stock by applying the method of cost or market price, whichever is lower, consistent with the assessee's practice in previous years. However, upon the assessee's application, the Tribunal revised its order to value 42,704 qtls. of free sugar at the amount realized by November 30, 1978, and the remaining 28,789 qtls. at Rs. 207.86 per qtl., the cost price as of June 30, 1978.

The High Court held that the principles established in Ramswarup Bengalimal v. CIT [1954] 25 ITR 17 and Chainrup Sampatram v. CIT [1953] 24 ITR 481 dictate that the closing stock must be valued at cost or market price, whichever is lower, and the value of closing stock must be the same as the opening stock in the succeeding year. The Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44 and United Commercial Bank v. CIT [1999] 240 ITR 355 also upheld this principle.

The High Court emphasized that adopting two different methods for valuing the closing stock in the same year is not permissible under law, as it would not reflect the true profit/loss and could lead to anomalous results. Therefore, the Tribunal's decision to value the closing stock of free sugar at two different rates was incorrect. The second question was also answered in favor of the Revenue and against the assessee.

Conclusion:
Both questions referred to the High Court were answered in favor of the Revenue and against the assessee. The Tribunal's rectification of its order was deemed beyond its jurisdiction, and the method of valuing the closing stock at two different rates was found to be incorrect. No order as to costs was made.