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TMI Blog1990 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court stated that the Income-tax Appellate Tribunal was not justified in rejecting the method of valuation of the goods-in-process and the finished products on the basis of the cost of raw materials after excluding altogether the overhead expenditure. The Tribunal had, by its order dated February 27, 1969, upheld the findings of the Income-tax Officer, as 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer may determine :..." The question to be determined by the Assessing Officer in exercise of his power under this provision is whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that the method adopted by the assessee is a well-recognised method among accountants of repute. The assessee's counsel places much reliance upon the decision of the House of Lords in Duple Motor Bodies Ltd. V. IRC [1961] 1 WLR 739 (HL). That was a case where the assessee carried on the business of building bodies for motor-coaches. At the end of each accounting period, 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income-tax Act, or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss 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 ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was liable to be rejected for the relevant and subsequent years as the system adopted, by the assessee was likely to produce stock valuations which were seriously and substantially incorrect, thereby causing distortion of the assessment of the profits and gains for the year. It is not only the right but the duty of the Assessing Officer to consider whether or not the books 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he period should also be taken in. It would be fantastic not to do it: it would be utterly impossible accurately to assess profits and gains merely on statement of receipts and payments or on the basis of turnover. It has long been recognised that the right method of assessing profits and gains is to take into account the value of the stock-in-trade at the beginning and the value of the 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 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the profits of the year without taking into account the value of the stock one has at the beginning of, and at the end of, the accounting year. (2) The figures for stock are just as important as any other figures. Values may have to be estimated when market price is taken, but any departure from accuracy is reflected in the trading account (3) Stock should be taken either at cost price or at 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 ; [195 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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