1987 (9) TMI 81 - AT - Income Tax

Accounting Year, Assessment Year, Closing Stock, Market Value, Sugar Mills, Supreme Court, The High Court, Total Income

Issues Involved:
1. Justification of CIT (Appeals) in giving relief to the assessee-bank on account of valuation of the closing stock of Government securities.
2. Whether the opening stock should also be revalued on the same principle as the closing stock when there is a change in the method of valuation.

Detailed Analysis:

1. Justification of CIT (Appeals) in Giving Relief to the Assessee-Bank:
The primary issue in this case is whether the CIT (Appeals) was justified in providing relief to the assessee-bank by deleting the disallowance made by the IAC (Asst.) regarding the valuation of the closing stock of Government securities. The assessee-bank had changed its method of valuation from market price to cost or market price, whichever was lower, resulting in a reduction of the closing stock value by Rs. 9,03,819.34. The IAC (Asst.) accepted this change as bona fide but adjusted the opening stock valuation on the same principle, reducing it by Rs. 2,88,500, which increased the total income of the assessee.

The CIT (Appeals) reversed the IAC (Asst.)'s decision, citing judgments from the Hon'ble Allahabad High Court in cases like Ram Luxman Sugar Mills v. CIT and Ramswarup Bengalimal v. CIT, which were based on the Supreme Court's decision in Chainrup Sampatram v. CIT. The CIT (Appeals) concluded that it was not permissible for the Income-tax Department to revalue the opening stock merely because the closing stock was valued on a different principle.

2. Revaluation of Opening Stock:
The second issue revolves around whether the opening stock should also be revalued on the same principle as the closing stock when there is a change in the method of valuation. The revenue argued that the real profits of the assessee could not be ascertained without revaluing the opening stock on the same basis as the closing stock. They relied on the Privy Council judgment in CIT v. Ahmedabad New Cotton Mills Co. Ltd., which stated that both the opening and closing stock should be valued on the same principle to determine the real profit.

The assessee countered this by arguing that the judgments of the Hon'ble Allahabad High Court were binding and clearly stipulated that the opening stock should not be revalued merely because the closing stock was valued on a different principle. They also cited the Hon'ble Madras High Court's decision in Indo Commercial Bank Ltd. v. CIT and CIT v. Carborandum Universal Ltd., which supported the view that the new method of valuation could be applied to the closing stock alone without revaluing the opening stock.

The Tribunal, after careful consideration, found merit in the assessee's argument. They noted that the issue was directly covered by the judgment of the Hon'ble Allahabad High Court in Ram Luxman Sugar Mills, which held that the opening stock should not be revalued when the method of valuing the closing stock is changed bona fide. The Tribunal also observed that the Hon'ble Supreme Court in Chainrup Sampatram's case had established that the valuation of the stock is to neutralize the earlier debit entries and not to bring anticipated profits into charge. The Supreme Court had recognized the exception that anticipated losses could be brought into account, even if it distorts the true profits of the year.

The Tribunal concluded that the decision of the Hon'ble Allahabad High Court was binding and that no other High Court judgment had taken a different view. They also noted that the Hon'ble Madras High Court had followed the same principle. Therefore, the CIT (Appeals) was justified in deleting the disallowance made by the IAC (Asst.), and the departmental appeal was dismissed.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decision, providing relief to the assessee-bank by deleting the disallowance related to the valuation of the closing stock of Government securities. They confirmed that the opening stock should not be revalued on the same principle as the closing stock when there is a bona fide change in the method of valuation. This decision was based on binding judgments from the Hon'ble Allahabad High Court and supported by the Hon'ble Supreme Court and Hon'ble Madras High Court.

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