2011 (12) TMI 243 - HC - Income Tax

Valuation of closing stock - method of accounting consistently followed by assessee Revenue contending suppressed valuation of closing stock Held that - In case of CIT vs British Paints India Ltd (1990 - TMI - 5324 - Supreme Court) it was held that the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past, is not a ground to permit the assessee to continue with the valuation method. In present case, assessee has not taken into consideration actual manufacturing expenses while valuing the closing stock. Stock has been valued at cost plus Rs.100/- per ton for the last 15 years. Such method of valuation has not found favour with the Hon ble Supreme Court in the aforesaid case. - Decided in favor of Revenue.

Summary

Issues:
1. Valuation of closing stock based on consistent method.
2. Consideration of actual manufacturing expenses for valuation.
3. Application of correct method for computing taxable income.

Issue 1: Valuation of closing stock based on consistent method
The case involved a dispute regarding the valuation of closing stock by the assessee using a consistent method. The assessee had been valuing the closing stock of oil in process by adding a fixed amount per ton for the past 15 years. The Assessing Officer made an addition to the closing stock valuation, contending that the fixed amount did not represent actual manufacturing expenses. The Commissioner of Income-Tax initially deleted the addition, citing the consistent method adopted by the assessee in previous years. However, the Tribunal set aside the deletion, relying on a Supreme Court judgment emphasizing the importance of considering all costs for accurate stock valuation.

Issue 2: Consideration of actual manufacturing expenses for valuation
The Assessing Officer argued that the method of valuing closing stock by adding a fixed amount per ton was flawed as it did not reflect the actual manufacturing expenses incurred. The officer contended that in a period of rising prices, failing to consider actual expenses could lead to a distorted picture of the business's true state for computing taxable income. The Tribunal, in line with the Supreme Court's ruling, held that excluding costs other than raw materials for stock valuation could result in incorrect profit computation, shifting income between years. The Tribunal emphasized the duty of the Assessing Officer to determine the correct taxable income based on actual expenses rather than accepting a method that distorts the financial position.

Issue 3: Application of correct method for computing taxable income
The Tribunal's decision was based on the Supreme Court's guidance that the Assessing Officer has the duty to ensure that the books reflect the true state of accounts for deriving the correct income. The Court clarified that the officer is not bound to accept the accounting method consistently followed by the assessee if it does not accurately represent the financial position. The Supreme Court's ruling highlighted the importance of considering all costs for stock valuation to avoid understating taxable profits. Consequently, the Tribunal's findings aligning with the Supreme Court's directives led to the resolution of the question of law in favor of the Revenue and against the assessee, emphasizing the significance of applying the correct method for computing taxable income.

This detailed analysis of the judgment highlights the key issues surrounding the valuation of closing stock, consideration of actual manufacturing expenses, and the application of the correct method for computing taxable income as determined by the High Court in the case.