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TMI Blog1948 (8) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the past, the method of valuing some items of the closing stock on the average cost basis and others on the market basis for the relevant account year is in conformity with law and principle and whether the true profits of the year can be properly deduced from such basis of valuation. The assessees are dealers in dye-stuffs and chemicals comprising numerous items. In valuing their opening and closing stock, the method followed by them was to take the average cost or market value, whichever was lower, in respect of each separate article of the stock. For the relevant period the average cost of the opening stock was in respect of all the items lower than the market rate and so the assessee valued the opening stock (which was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of stock, either the average cost or the market rate, whichever is lower. He called this a concession, probably meaning thereby that there is nothing in the Act which lays down such a rule of valuation. But the rule appears to be well established both in England and in India, and it has not been contended by the Income-tax authorities that it is a mere matter of concession ex gratia which they could refuse to grant in any particular case. Stock-in-trade in hand is an essential item in the computation of the profit for a period. The accepted basis of valuation of stock is cost or market value, whichever is lower, at the date to which the accounts for a period are made up. In Whimster d Co. v. Commissioners of Inland Revenue [1925] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld add that the accepted rule is that the assessee in crediting the closing stock figure is to take either the cost price or the market value whichever be the less-a provision obviously intended to be in favour of the trader and which enables him more evenly to distribute his loss. This rule has been sometimes described as an exception to the general rule, namely, the rule that a precautionary reserve for anticipated loss is not allowable and no unrealised loss could be set off against the profits of the period. In Halsbury's Laws of England (2nd edition), Vol. 17, Section 232 runs thus :- It is to be observed that the allowance by the Inland Revenue authorities of a writing down of stock when market value is lower than cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the assessees are allowed to adopt the market value only when it is lower than cost with respect to a particular article on the theory of a notional loss, likewise, he contends, they must be compelled to adopt the market value even when it is higher than the cost because they would be making a notional profit. Calculating on this basis, so the argument ran, the true profits and gains can be ascertained as regards the stock. Though at first sight the argument looks plausible, we consider that there is a fallacy underlying it. In the illustrative case which we mentioned above, namely, where the business comprised only one kind of article of merchandise, supposing the market value at the closing date is higher than the cost, the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of assessment the profit expected to be realised in the future. We, therefore, cannot accept the contention of the learned counsel for the department. If one can speculate on the rationale of the rule, which allows an assessee to adopt the market value when it is lower than the cost, it appears to be this: If one were to imagine a sale taking place on the closing day of the entire stock, it is reasonable to expect that the articles of which the market value is lower would not fetch anything more than at those rates, and therefore loss would be certain. But there would be no assurance that there would be a market for the entire stock of articles of which the market value is higher and therefore it would be hazardous to assume t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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