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TMI Blog2002 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... .-In compliance with the directions of this court in T.C.P. No. 165 of 1997 dated July 14, 1997, the Income-tax Appellate Tribunal has stated a case and referred the following question of law for our consideration: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the assessee was entitled to adopt the value of its closing stock at a rate which was prevalent on October 25, 1983, whereas its previous year ended on September 30, 1983?" The assessee is a wholly owned undertaking of the Government of Tamil Nadu, and the assessment year with which we are concerned is 1984-85, with the relevant previous year ending on September 30, 1983. The Assessing Officer, while completing the assessment, was of the opinion that there was an undervaluation of the closing stock of the free sugar held by it. The assessee valued the closing stock of the free sugar at Rs. 330 per quintal when its accounts were finalised on October 25, 1983, whereas the assessee closed its accounts for the assessment year in question on September 30, 1983, and according to the Assessing Officer, the assessee ought to have taken the selling rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is entitled to value its closing stock taking the value of the stock when it finalised its accounts, i.e., on October 25, 1983, though the accounts were closed on September 30, 1983, and whether it is entitled to adopt the value of the closing stock as on October 25, 1983, when its accounts were finalised though the relevant previous year ended on September 30, 1983, and whether the assessee ought to take the value of the closing stock prevalent as on September 30, 1983. The Supreme Court in Chainrup Sampatram v. CIT [1953] 24, ITR 481; AIR 1953 SC 519 held that the true purpose of crediting the value of unsold stock is to balance the costs of those goods entered on the other side of the account at the time of the purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. The recognised accounting practice was approved by the Supreme Court in Chainrup Sampatram's case [1953] 24 ITR 481 and it referred to in paragraph 8 of the Report of the Committee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not adopted the valuation of the closing stock of sugar at the end of the accounting period when it made up its accounts. We are of the view that the assessee is not entitled to value the closing stock on the date when its accounts are prepared and finalised and if the assessee is permitted to adopt such a system, then the profit of the accounting year would not be reflected and a portion of the profit, which was earned in one year, would be shifted to the next year. The correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by the fall in the market price of the goods at the end of the accounting year. The Assessing Officer has also a duty to see whether or not the books of account disclose the true state of affairs during the particular accounting year and whether the correct income earned in the year can be deduced therefrom. The Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44, after noticing the decision in B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269 (HL) and the decisions rendered by the Privy Council as well as by the Supreme Court, laid down t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakshmi Sugar Mills Co. Ltd. [1993] 200 ITR 275, the Bench of the Delhi High Court presided over by Mr. B.N. Kirpal J. (as his Lordship then was) has considered the question whether the assessee was entitled to value the closing stock with reference to the selling price, subsequent to the last date of the accounting year. The court held that the assessee in that case was adopting the selling price subsequent to the last date of the accounting year and the assessee was following this system consistently and there was also positive finding that the true profit could be ascertained from the method of accounting which was being followed by the assessee. The Delhi High Court, therefore, held that in view of the positive finding of fact by the Appellate Tribunal, the correct and true profit could be ascertained from the method of accounting which was followed systematically by the assessee, no addition could be made when the assessee valued the closing stock. This decision apparently supports the case of the assessee. But, on a closer reading, it does not support the case of the assessee. In the case before the Delhi High Court, no doubt it is true, the assessee adopted the market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tants shows that it is open to take note of the events occurring after the balance-sheet date to the extent that such events conform to the conditions existing at the balance-sheet date. However, in the present case, the situation is that there is a wide fluctuation in the value of sugar prevalent at the end of the accounting year from the value prevalent when its accounts were finalised. Therefore, it is not permissible to take note of the events after the end of the previous period as the value of the closing stock did not conform to the condition existing at the end of the balance-sheet date. The standard principles of accountancy also do not help the case of the assessee as there is a wide fluctuation of nearly Rs. 21,91,992, in the closing stock valuation. Further, if the submission of learned counsel for the assessee is accepted, it will lead to a situation that the assessee may finalise its accounts on a convenient date subsequent to the end of the accounting year when the market value of the stock is at a low ebb and thereby the income earned in one accounting year is not taxed which will be against the provisions of the Income-tax Act, as it will be open to the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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