9911796707
TMI Blog1990 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed by the Appellate Assistant Commissioner, that the assessee's goods-in-process and finished products were liable to be valued at 100 per cent of the cost which included the overhead expenditure and not at 84.49 per cent. as claimed by the assessee. The assessee is a limited liability company engaged in the business of manufacture and sale of paints. It contended before the authorities that it had been its consistent practice to value the goods-in-process and finished products exclusively at the cost of raw materials and totally excluding overhead expenditure. The justification for this practice, according to the assessee, was that the goods being paints had limited storage life and, if not quickly disposed of, they were liable to lose their market value. This contention of the assessee was rejected by the. Income-tax Officer observing that, at no time, had the assessee claimed any deduction on account of deterioration or damage to its goods. The Officer held that there was no justification to recognise a practice, as claimed by the assessee, of valuing its stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of accounting regularly employed by the assessee. What is to be determined by the officer in exercise of his power is a question of fact, i.e., whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. In the words of Viscount Haldane, "it is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business" (Sun Insurance Office v. Clark 19121 AC 443, 455 (HL). Referring to section 13 of the Indian Income-tax Act, 1922, which corresponds to section 145 of the Income-tax Act, 1961, this court had stated in Chhabildas Tribhuvandas Shah v. CIT [1966] 59 ITR 733, 731) "We may point out that we are not concerned with the correctness of the conclusion and we are only concerned with the question whether there is any material in support of the finding of the Appellate Tribunal. In cases involving the applicability of the proviso to section 13, the question to be determined by the Income-tax Officer is a question of fact, namely, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod, the assessee had on hand a number of unfinished bodies. In computing the value of work-in-progress for income-tax purposes, the assessee adopted what is called the "direct cost" method, on the basis of which only the direct cost of raw materials and labour expended on the work was taken into account. The Revenue sought to value the work-in-progress on an "on-cost" basis. The direct cost method, as adopted by the assessee in that case, takes into account monies spent solely for the purpose of the manufacture of the particular goods, whilst the on-cost method treats, as an additional item of cost, proportions of various items of expenditure incurred in connection with the manufacture of those goods as well as of other goods. The two principal elements in "direct cost", as adopted by the assessee in that case, are labour and raw materials and that method is far more accurate in respect of the goods-in-progress which, by their very nature, have insignificant market value. On the other hand, there is much uncertainty in the "on-cost" method. The House of Lords held that, particularly in View of the fact that the direct cost method had been applied consistently in the past and bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes . . ." Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the goods. Valuation of the stock-in-trade at cost or market value, whichever is the lower, is a matter entirely within the discretion of the assessee. But whichever method he adopts, it should disclose a true picture of his profits and gains. If, on the other hand, he adopts a system which does not disclose the true state of affairs for the determination of tax, even if it is ideally suited for other purposes of his business, such as the creation of reserve, declaration of dividends, planning and the like, it is the duty of the Assessing Officer to adopt any such computation as he deems appropriate for the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years. In CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), Lord Thankerton stated that section 13 of the Indian Income-tax Act, 1922, related to a method of accounting regularly employed by the assessee. The section, postulated that such a method of accounting was the necessary basis of computation, unless, in the opinion of the Income-tax Officer, the income, profits and gains could not properly be deduced from such method. But it could very well be that, "though the profit brought out in the accounts is not the true figure for income-tax purposes the true figure can be accurately deduced therefrom ......." But it was not correct view that the Income-tax Officer was "prima facie entitled" to accept the profits mentioned in the accounts where there was a method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stock-in-trade at the end as two of the items in the computation. I need not cite authority for the general proposition, which is admitted at the Bar, that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes. " Referring to those observations, Shah J., as he then was, in CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, 132 (SC) says: " We have already, said that in England there is no provision which compels the tax officer to adopt in the computation of income the system of accounting regularly employed by the assessee. But whatever may be the system, whether it is cash or mercantile, as observed by Croom-Johnson J. in a trading venture it would be impossible accurately to assess the true profits without taking into account the value of the stock-in-trade at the beginning and at the end of the year . . . ." The Income-tax Act does not contain any specific provision for the valuation of stock. Income, profits and gains must, however, be computed in the manner provided by the Act, It is the duty of the officer to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market price, whichever is the lower......" Lord Herschell in Russell v. Town and County Bank Ltd. [1888] 13 AC 418, 424 ; 4 TLR, 500 (HL) observes: "The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts . . ." What is the profit of a trade or business is a question of fact and it must be ascertained, as all facts must be ascertained, with reference to the relevant evidence, and not on doctrines or theories : "no assumption need be made unless the facts cannot be ascertained, and then only to the extent to which they cannot be ascertained. There is no room for theories as to flow of costs . Minister of National Revenue v. Anaconda American Brass Ltd. [1956] AC 85 ; [1956] 30 ITR 84,99 (PC). Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer-nay it imposes a duty upon him-to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where, accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
