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TMI Blog1994 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee worked out the profit of the Penta plant at Rs. 9,34,127 for the purpose of application of section 80J of the Income-tax Act, 1961. While calculating the profit of the Penta plant at Rs. 9,34,127, the value of Formaldehyde which went into the manufacture of Penta was valued at cost and debited to the Penta unit. The assessee claimed deduction of Rs. 2,21,066 under section 80J in respect of the Penta plant. The Income-tax Officer, however, did not grant relief under section 80J to the assessee in respect of the assessee's current profits on the ground that the Penta unit had incurred a loss and not profit. In arriving at this conclusion, the Income-tax Officer calculated the cost of Formaldehyde which went into the manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is used in the manufacture of an end-product in another industrial unit. Therefore, there is no question of any actual sale by one industrial unit of the assessee-company of the raw material manufactured by it to another industrial unit of the assessee company where this raw material is utilised for the manufacture of another product. In order, however, to determine the profits of the second industrial unit for the purpose of section 80J, it is necessary to consider how the raw material so supplied is to be valued for the purpose of determining the cost price of the end-product. The profit will be the difference between market price of the end-product so sold less its cost price. It is well-established that the question of valuation of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis that had this raw material been either sold by the first unit or purchased by the second unit of the assessee from the market, he would have paid a higher price. Is this in accordance with the commercial method of accounting ? In the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506, the Supreme Court considered the case of an assessee who was a dealer in silver and shares. He was the sole owner of the business. The assessee maintained his accounts according to the mercantile system and valued his stock at cost price both at the beginning and at the end of a year. During the relevant year of account, the assessee withdrew some silver bars and shares from the business and settled them on certain trusts in which he was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d utilised them in a transaction which brought him neither income nor profit nor gain, the valuation given by the assessee was correct. This was a case where business assets were withdrawn by the assessee and utilised for a non-business purpose. The Supreme Court also considered a converse case where assets which were originally acquired for non-business purposes were subsequently introduced as business assets. This was the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 (SC). The assessee in this case held by way of investment several shares in several companies. Subsequently, the assessee commenced a business in shares converting the shares into stock-in-trade of the business. The assessee subsequently sold the shares at a profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the Income-tax Act so provides. Our attention was, however, drawn to a decision of the Gujarat High Court in the case of Anil Starch Products Ltd. v. CIT [1966] 59 ITR 514. The Gujarat High Court considered a situation similar to the present case for the purpose of application of section 15C of the Indian Income-tax Act, 1922. In the case before the Gujarat High Court, the assessee-company which manufactured and sold industrial starch subsequently set up another plant for producing dextrose in which starch was used as a raw material. The Gujarat High Court held that in computing the profits of the new industrial undertaking for the purpose of section 15C, the starch supplied by the old industrial undertaking should be valued at the mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition of such potential profit to the cost price of the raw material manufactured and transferred by the assessee-company to its own unit might also lead to certain difficulties in a given case. For example, in respect of the unit which supplied the raw material its books of account will have to show those profits as accruing when the raw material is transferred to another unit. If the end-product is ultimately not sold at all for any reason during the relevant accounting year, the hypothetical profits would still have to be included in the total income of the assessee for the relevant assessment year although such profits have not actually been realised. Ordinarily, the addition of such potential profits goes counter to the notion of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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