1982 (10) TMI 220 - AT - Income Tax

Issues Involved:
1. Deletion of the addition of the closing stock.
2. Rate of exchange for the dollar to be adopted for closing stock valuation.
3. Applicability of proviso to section 145(1) of the Income-tax Act, 1961.
4. Weighted deduction under section 35B of the Income-tax Act, 1961.

Analysis of the Judgment:

1. Deletion of the Addition of the Closing Stock:
The revenue contended that the Commissioner (Appeals) erred in deleting the addition of the closing stock. The assessee, a firm dealing in precious and semi-precious stones, valued its closing stock at cost, a method consistently followed over the years. The Income Tax Officer (ITO) observed a disparity rate of 48% between the export value and the actual value shown in the closing stock, resulting in an undervaluation. The ITO considered a disparity rate of 40% reasonable, as held by the Tribunal for the assessment year 1975-76, and made an addition of Rs. 7,17,844 to the declared profits.

The Commissioner (Appeals) upheld the applicability of proviso to section 145(1) but deleted the addition, emphasizing that the gross profit rate should be the sole criterion for valuation. The Commissioner noted that the disparity rate and gross profit rate vary yearly and from exporter to exporter. The Commissioner also observed that the ITO did not provide specific reasons for deviating from the earlier appellate decisions and that the exchange rate adopted by the assessee was nearer to the date of production.

2. Rate of Exchange for the Dollar to be Adopted for Closing Stock Valuation:
The ITO adopted an exchange rate of Rs. 8.95 per dollar for valuing the closing stock, while the assessee used Rs. 7.50 per dollar up to 30-6-1976 and Rs. 8.50 thereafter. The Commissioner (Appeals) held that the exchange rate at the time of making the proforma invoice was more appropriate than the rate on the closing day of the accounting year. The Tribunal agreed with the Commissioner, stating that the scientific approach would be to adopt the exchange rate prevailing on the last day of the accounting period. However, since the ITO did not apply this method to the opening stock, the Tribunal refrained from enhancing the asking price of the closing stock.

3. Applicability of Proviso to Section 145(1) of the Income-tax Act, 1961:
The Tribunal agreed that the proviso to section 145(1) was applicable due to the absence of a day-to-day quality-wise stock tally and a definite method of arriving at the cost of each lot. The Tribunal concluded that the disparity rate and gross profit rate should be the same and that the closing stock must be valued first to arrive at the correct gross profit. The Tribunal emphasized that the correct profits can only be worked out after valuing the closing stock.

4. Weighted Deduction under Section 35B of the Income-tax Act, 1961:
The assessee claimed a weighted deduction on various expenses aggregating to Rs. 69,770. The ITO allowed a weighted deduction on expenses of Rs. 42,425, considering that export sales constituted 50% of the total sales. The Commissioner (Appeals) directed the ITO to modify the computation, treating 75% of the expenses as relating to export since export sales constituted 75% of the total sales. The Tribunal upheld the Commissioner (Appeals)'s direction, noting that the ITO's finding that export sales constituted 50% of the total sales was arithmetically incorrect.

Conclusion:
The appeal was dismissed. The Tribunal upheld the deletion of the addition of Rs. 7,17,844 made by the ITO on account of alleged undervaluation of closing stock. The Tribunal also upheld the direction of the Commissioner (Appeals) to treat 75% of the expenses as relating to export for the purpose of weighted deduction under section 35B. The Tribunal emphasized that the correct valuation of closing stock is essential for arriving at the correct gross profit and that the disparity rate and gross profit rate should be the same.

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