1983 (1) TMI 64 - HC - Income Tax

Summary

Issues Involved
1. Validity of the notice issued under Section 148 read with Section 147(a) of the Income Tax Act, 1961.
2. Alleged failure to disclose fully and truly all material facts necessary for assessment.
3. Consistency in the method of stock valuation and its acceptance by the Income Tax Department.
4. Duty of the Income Tax Officer (ITO) to investigate the method of stock valuation.

Detailed Analysis

1. Validity of the notice issued under Section 148 read with Section 147(a) of the Income Tax Act, 1961
The petitioner, a public limited company, challenged the notice issued by the Income Tax Officer (ITO) under Section 148 read with Section 147(a) of the Income Tax Act, 1961, which initiated proceedings to reopen its income-tax assessment for the assessment year 1972-73. The notice was issued on the grounds that the petitioner had failed to disclose fully and truly all material facts necessary for its assessment, leading to income chargeable to tax escaping assessment for that year.

2. Alleged failure to disclose fully and truly all material facts necessary for assessment
The respondent argued that the petitioner had not disclosed the correct valuation of the closing stock, specifically the yarn in process, which was valued at 12 paise per kilogram. The respondent claimed this valuation was too low given the increase in costs, resulting in the suppression of profits. The petitioner countered that it had consistently followed this method of valuation for several years, which had been accepted by the Department.

3. Consistency in the method of stock valuation and its acceptance by the Income Tax Department
The petitioner had been valuing its stock of yarn in process at a fixed rate of 12 paise per kilogram for many years, a method accepted by the Income Tax Department. The court noted that the method of valuation followed by the petitioner was known to the respondent and the ITO assessing it, as evidenced by the reasons recorded for reopening the assessment and the statements made in the affidavit-in-reply. The court emphasized that any change in the method of valuation must be notified to the Department, but since no change was made, the petitioner was presumed to have continued with the same method.

4. Duty of the Income Tax Officer (ITO) to investigate the method of stock valuation
The court held that it was the duty of the ITO to investigate the facts and find out the method followed by the petitioner in valuing the stock. The petitioner had disclosed all primary facts necessary for its assessment, and it was not required to disclose something already known to the Department. The court referenced the House of Lords decision in Duple Motor Bodies Ltd. v. Ostime, which stated that it is permissible to value stock at a figure different from the cost method, and it was the ITO's responsibility to investigate and draw correct inferences.

Conclusion
The court concluded that the petitioner had not failed to disclose all material facts necessary for assessment. The method of valuation adopted by the petitioner was known to the Department, and the ITO should have investigated the method followed. The court found the present case directly covered by its decision in Aryodaya Spg. & Wvg. Co. Ltd. v. ITO, where similar issues were raised and decided in favor of the petitioner. Consequently, the court allowed the petition, quashing and setting aside the notice dated March 28, 1982, and made the rule absolute with costs.