9911796707
TMI Blog1986 (3) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ion : The ITO found that the assessee was valuing the closing stock exclusive of customs and other fiscal levies. According to the ITO the customs duty on raw materials could not be excluded from the valuation of the goods in stock since it formed an important element in the total cost of the goods. The value of the stock could be made at cost or market price whichever is lower but could not be less than the cost if the cost price was less than the market price. The ITO, therefore, held that the method of valuing the closing stock adopted by the assessee had no scientific basis and the accounts did not indicate the correct profits the assessee earned during the year. Apart from customs duties there were also other fiscal levies, like excise, octroi duty, etc. 4. The ITO, therefore, estimated the value of the closing stock on a proportionate basis of the total duty paid on the goods of both imported and indigenous varieties consumed by the assessee. The total consumption of imported and indigenous goods came to about Rs. 13.52 crores on which the customs duty worked out to Rs. 3.93 crores which worked to an average of 29 per cent. The assessee disclosed closing stock of raw materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made on the principle of direct cost plus labour and fuel but not fiscal levies. Thus, for both finished goods as well as work-in-progress, the fiscal levies have been omitted. But, this, according to the learned counsel, has been done not only in a systematic manner but regarding it as a thoroughly ascertainable and scientific method. 6. Objecting to the method/procedure followed by the department, the learned counsel has pointed out that on this basis the stock as on 1-1-1976 would have to be revalued. The opening stock of 1976 will not tally with the closing stock of 1975. The department gave notice for revaluing the closing stock of 1975 and the assessee had to approach the High Court on a writ and the High Court had granted stay. Whatever be the earliest year in which the revaluation of stock is attempted, the opening stock cannot tally with the closing stock of the earlier year and the accounts have to be disturbed continuously and from year to year. Since the assessee had been following the same method without any change from year to year, the disturbance of the valuation of the closing stock would not affect, over the period of years, the income of the assessee. The same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's business. It cannot also be stated, according to the learned counsel, that the profit of the business cannot be ascertained. The department's right of interference under section 145 of the Act comes in only when the accounts do not giver a correct picture and the profit cannot be properly ascertained. In other circumstances, the department cannot interfere with the method of accounting regularly followed by the assessee. 9. The learned counsel had relied on British Paints India Ltd. v. CIT [1978] 111 ITR 53 (Cal.), as directly supporting his case. Qualified chartered accountants have given unqualified reports of valuation for all years. It was, therefore, difficult, and even erroneous, to hod that the method is incorrect. Apart from fixing the amount of duty to any particular stock on hand, the vast divergence in the amount of duties also affect such valuation. British Paints India Ltd.'s case has clearly laid down the relevance of method regularly followed by the assessee. In that case, the Tribunal's decision was against the assessee but the High Court laid down that there was no rule of law about the valuation at cost or market value. The assessee is, moreover in kits busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Motor Bodies Ltd..The assessee cannot have any particular motive in following this system of stock valuation especially over a period of nearly two decades. That this is the position would be clear also from certain observations of the Tribunal in Goodlass Nerolac Paints Ltd.'s case. Since over the years there cannot be any loss to the revenue or gain to the assessee on account of the stock valuation according to the learned counsel disturbance of the stock valuation was a mere futile exercise. 12. Further, dealing with the points made out on behalf of the revenue, it is pointed out that the rule of cost or market followed by the accountants for valuing the closing stock cannot be elevated to the position of a rule of law. The only rule that both accountancy and income-tax recommends is that the method of valuation should be one from which profit can be reasonably well ascertained. Apart from the fact that these are not hard and fast rules, stock valuation has no bearing on the components of the cost; the valuation must also not take into account unearned profit. Stress is laid on the positive and negative data under which the fiscal levy was worked out, even by the departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ITO and the IAC visited the factory of the assessee and examined the records. It is pointed out that even after this, they could not properly identify the items of the raw materials or the duty paid. It is against these defects that the principle of averaging has been evolved. The company law authorities had investigated the assessee's affairs both from the point of view of dumping and also stock valuation as directed by the Income-tax Department. Being satisfied about the correctness of the method they have dropped the proceedings. Stress is also laid, in this connection on certain proceedings before the Delhi High Court in connection with the stock valuation of the subsequent years. Those proceedings pointed out also how the valuation made by different experts. two charted accounts, Shri P. N. Shah and Thakur, Vaidyanath Aiyar & Co., even in respect of computation made by adopting the same broad principles differed. 15.1 The learned counsel for the department has pointed out that over the year it is well settled that closing stock is to be valued at cost or market price. Even though this is only a practice, this practice has been exalted to the level of a rule of law. The b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar basis in consonance with the normal, proper and legal method, was known to the department only form the auditors' report on the accounts for the year ended 31-3-1977 where they stated : "In the case of raw materials and the finished goods (other than the merchanting goods) such cost or market value has been determined exclusive of customs and excise duties." Such a statement ccurs at note No. 12 in the auditors' report of the year ended 31-3-1978 also. At any rate, according to the learned counsel, an erroneous assessment for one year does not justify repetition of the mistake for any subsequent year or years. The definciency, if not manipulation, was known to the department for the first time and the ITO sought to rectify it immediately thereafter. One cannot get away from the fact that the closing stock was not valued by the assessee according to law and the normal practice in the trade. It is also pointed out that even the statement of the auditors is not supported by any reference to history or practice. In view of the above defect especially referred to by the auditors, the ITO made inquiries regarding the stock valuation and revalued the stock as on 31-12-1975, 31-3-197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has also adopted the averaging method of inclusion of levies in the closing stock valuation. The learned counsel referred to the example elaborately set out in the order of the Commissioner (Appeals) which unambiguously showed how the non-inclusion of fiscal levies in the stock valuation distorted the entire profit computation picture. The assessee.itself while valuing the closing stock of finished goods has taken into account some of the direct expenses which conforms to the legal and accountancy requirement of the department's case. In the fact of such an inaccurate and incomplete method of stock valuation which, not merely indirectly bet even directly, distorted the computation of profit, it was clear that the correct income of the assessee for any of the years cannot be properly worked out. 18. The assessee has made huge profits from year to year and the adjustment of the same by following a correct and scientific method of stock valuation urged by the department, showed that huge additions have to be made to the assessee's income not only for one year but for all the years. There is, in fact, no set off from one year to another over a period as vociferously contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the last case cited furnishes as clear answer to many of the doubts expressed. Ultimately, one has to find out what is the cost price in the hands of the assessee. All includible items should be included in working out this figure unless permitted to be excluded either by law or by practice or accountancy principles. Any other arrangement or method of valuation including that of stock would suggest attempts to avoid proper tax payments. Reference is made in this connection, to the dictum of the Supreme Court in the case of McDwell & Co. Ltd. 20. The assessee's claim that the goods are perishable and a particular method of valuation has, therefore, to be adopted, has also no merit. The assessee is a manufacturer of textile fabrics, wool, etc. Polyester fabrics are not like vegetable and other perishable commodities. Even the reference to the change of fashion as a factor in this regard cannot be seriously taken note of. In fact, according to the learned counsel, the assessee pampers to the high elites of the society and non perishability is not a criterion in purchase of goods in such circumstances circles. Reference to section 43B has also no significance. In the first place, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was not following a scientific method of closing stock valuation. It is correct annual income, therefore, could not be worked out properly in view of the method of valuing closing stock followed. He got the closing stock revalued by taking into account the fiscal levies, etc., and made additions to the total income. Both the opening and the closing stocks were valued. the ITO adopted in the absence of accurate figures for these levies and expenditure estimates on a proportionate or averaging method. This is the subject-matter of the dispute. 23. The Act lays down specific methods of arriving at the income of the assessee for the purpose of its assessments. The items of income are worked out under different heads like salary, income from property, business, etc. Separate computation is made of each item of income under the appropriate head and the total income is computed by adding the figures and making any adjustments thereto as laid down by the Act. The expression 'income', which is the subject-matter of assessment, is not defined in the Act. Both from the generality, therefore, of this definition usually derived from judicial decisions and also the division of the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess is computed as the excess earned during the year over the assets it had at the beginning of the year. The definition of 'income' as given in the classic definition in Spanish Prospecting Co. Ltd. In re. [1911] 1 Ch. 92, 98 per Lord Justice Moulton : "'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates." is relevant in this connection. 25. In finding out, therefore, the income of a business, the value of the net assets at the beginning of the year and their value at the end has to be computed. In a running business at the end of each year there would be stock accumulated and not sold. The stock would consist of the finished products, work-in-progress at various stages of manufacture or production, raw materials, stores and other accessories, tools and a variety of other items. The net income earned during the year can be evaluated only be taking into account the relative value of the above-mentioned items between the beginning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a temporary advantage for a year, that would be wrong. But so long as he follows the same method of valuation for every year of continuance of the business any method of valuation consistently followed with regard to the stock, stores, etc., should be regarded as the correct one. This is primarily because there is no cut and dried absolute method of working out business income ignoring its continuity over the years or assuming its winding up at the end of every year. 27. The department has set much store both from the theoretical as well as practical point of view on methods of valuation of closing stock. It has also been urged that the system of valuing closing stock at market or cost value, whichever is lower, is almost a rule of law. There is a fallacy in these contentions which would be clear from the nature of business income explained at length in the above paragraph. Even accountancy experts advocate the cost or market value whichever is less principle only as one of the best methods. It would be correct for an assessee to value the closing stock at cost for all years, or at market value for all years. If there are different components in the cost he could also without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue which the guidelines have considered. In none of the authorities quoted before us any serious discussion as to how in a continuous business following a consistent system of stock valuation, how any method other than that recommended by the guidelines would be defective is not indicated. It would be, therefore, incorrect to say that either what the guidelines have laid down is the best or only method of stock valuation or that all other methods of valuation would be erroneous and will not indicate the correct annual profit of the business. 28. The departmental authorities, while drawing support from expert opinion like the guidelines, have urged that to arrive at the stock valuation other raw materials cost, the manufacturing cost and all other imposts levied and expenditure incurred thereon should be taken into account. As an abstract concept, certainly no objection can be taken to this contention. It is where one comes to apply this principles to practical realities that difficulties emerge. If a simple proposition of an asset on which some definite expenditure is incurred alone is to be considered for the closing stock, the abstract principle can be even made a realit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the above, work-in-progress itself is a fluid commodity, starting with wool as raw material there is a continuous process of manufacture at various stages going make the finished product. Even if the several stages can be regarded as quantised like the movement of the needle of a watch, the stages of movement are so numerous that it would be impossible to allocate even to an extent of good approximation these levies and expenditure. The work-in-progress may consist of wool in some form, woollen tops at various stages, cloth at various stages, etc. We have, therefore, no doubt, in holding that even form a purely theoretically point of view an accurate method of allocation of expenditure for closing stock valuation is an impossibility. 29. It is against the above background that the assessee has claimed instead of making a futile attempt at accurate allocation of expenditure including fiscal levies for the purposes of stock valuation, it has followed a systematic method of assigning certain items by way of on cost in arriving at the closing stock. The claim made is that insofar as no manipulation is intended or is done so as to reduce the profit or avoid the tax, a bona fide me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the earlier or later year should be ignored, cannot be supported. The department has completely ignored the particular manner in which the business income from other heads. In the case of a continuous business each year telescopes into the subsequent year. Annual income can be worked out only on this understanding. In this context it had been urged that factually there has been as reduction of income for every year in the method of valuation followed by the assessee. The department has relied to support this argument on the computation of the excess to be added while giving effect to the direction of the Commissioner (Appeals). It would appear that the Commissioner (Appeals) has directed the ITO to refer the matter of stock valuation to a chartered accountant. The valuation for two years only have been completed and this gives an increased income for both the years. Evidence in support of the department's case is, thus, limited to two years. The assessee had been following the present method of accounting for about two decades. The valuer chartered accountant has also adopted some methods of averaging, approximation, etc. In the first place what would happen if several more y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als)'s computation deals with a simple theoretical problem such as one that can be given for the high school students to solve. It ignores the simple fact that the number of variables involved in the computation of closing stock are so numerous that such an easy computation cannot be made. The point made out by the assessee's counsel on the contrary relates to two problems : one the taking into account of labour, etc., charges in valuing the work-in-progress; and the other the relevance of the newly introduced section 43B. As regards the first, the point made out is that in valuing the closing stock of work-in-progress as well as the finished goods, the entire labour charges incurred is taken into account and whatever labour charges are not referable to the items of goods sold would be treated as relevant to stock on hand-finished goods as well as work-in-progress. This entire amount the assessee has added to the stock of finished goods. The department's case is that part of the labour expenses should be added to the work-in-progress. Closing stock includes both work-in-progress and finished goods. If the entire labour charge incurred for the goods on stock at whatever stage they b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders nor the company law authorities have regarded this as a defect. In fact there seems to have been some proceedings before the company law authorities in this regard and after full verification of the facts they dropped the proceedings. The department has also been accepting the method from year to year for a very long time. It is idle to say that because the assessee followed this method, the department accepted the figures ignorant of the method followed. The assessee's is one of the biggest cases for assessment. The ITO for every year has satisfied himself about the books of account and computed the profit. We find that he has issued the usual questionnaires to the assessee, called for all specific and several details regarding the balance sheet, profit and loss account, etc., analysed them and then only completed the assessment. In the case of an assessee with big income, certainly the trading account is an important part of the accounts. The ITO has certainly analysed the trading account for every one of these years. This in conjunction with the auditor's report leads to the conclusion that the department knowingly accepted the stock valuation every year. It did not regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the drawback to the extent of duty paid. The duty is paid on items like raw wool which forms the raw material for the finished products which alone is finally exported. The drawback is not an incentive for the export but is only a refund of the duty paid insofar as the imported material has been exported either in the same form or in a different form. It would not, therefore, be incorrect to say that on the exported material no net duty has been paid at all. If the imported material is utilised for sale within the country, the duty would necessarily fall on the finished goods sold in the country. If part of the goods are so sold part of the duty only would be covered. To the extent the goods are exported the entire duty would be refunded. It would not, therefore, be correct to say that the goods on stock on which import duty has been paid should be valued including the import duties, but while the drawback is received it should not go to reduce the overall duty paid. That the computation made by the Commissioner (Appeals) thus is neither correct on a clear appreciation of the nature of the drawback nor takes into account the distortion in the profit computation cannot be denie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the view taken by my learned brother. 2. The main dispute between the assessee and the revenue is that while valuing the closing stock, the fiscal duties, such as excise, customs, sales-tax, octroi, etc., should be included in the purchase price for raw materials, for valuing the closing stock. The assessee has not included these fiscal duties, etc., for valuing the closing stock while claiming the same as deduction in the profit and loss account; and the same system is followed by the assessee in the past and accepted by the department. Now, the only issue is whether the ITO can invoke the provisions of section 145(1) and thereby disturb the valuation of the closing stock as disclosed by the assessee. The Commissioner (Appeals) has taken the view that (1) the method of accounting (valuation of closing stock employed by the assessee) is such that its income from business of an accounting period cannot properly be deducted therefrom; (2) that for determining the income or loss actually for the accounting period, the closing stock of the raw materials, work-in-progress and the finished products (other than the finished product lying in stock with the retail shops of the assessee) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if these fiscal duties including the expenses of manufacturing at various stages makes a substantial difference, if these are included in valuing the closing stock, then that will result in addition of crores every year in the income of the assessee. He further clarified that the system followed by the assessee has not been followed by any other company. Therefore, if the system has been wrongly followed, that does not give any right to the assessee to put into loss the department for ever in future also. 5. I have heard the rival submissions. The basic issue for consideration is to find out the fact whether the system for valuing the closing stock followed by the assessee is such whereby the proper income cannot be deducted. First of all, I do not agree with the learned counsel Shri Palkhivala next any system which is followed in the past should be accepted in the future also when throughout that system is wrong. The basic thing to be seen is whether the system followed by the assessee was proper or not. Once, the authority comes to the conclusion that the system as followed by the assessee in the past was wrong, that can be rejected at any time, at any stage. It does not give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the closing stock by inclusion of these duties on the basis of the reports given by Shri P. N. Shah and TVA & Co. regarding valuation of closing stock as on 31-3-1981, 31-3-1982 and 31-3-1983 : --------------------------------------------------------------------------- 31-3-1981 31-3-1982 31-3-1983 --------------- ------------- --------------- PNS TVA PNS TVA PNS TVA (Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs) --------------------------------------------------------------------------- (A) Duties/taxes 358.63 244.84 438.44 307.66 532.71 444.29 - Increase/(decrease) - - 79.81 62.82 95.37 136.63 (B) Intermediary duties 108.87 83.62 131.48 59.99 97.66 24.25 -Increase/(decrease) - - - (23.63) (33.82) (35.74) (C) Total duties/taxes 467.50 328.46 569.92 367.65 630.37 468.54 -Total increase/ - - 102.42 39.19 60.45 100.89 (decrease) --------------------------------------------------------------------------- The above figures are based on the materials supplied by the assessee. From the perusal of these figures, it is apparent that if we add these fiscal duties in valuing the closing stock, the result is addition in the income of the assessee. Shri Palkhivala pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t due to drawback system in customs duty, the assessee cannot follow the system on the basis of the guidelines given by the Institute of Chartered Accountants. He also gave some names of those companies who have similar business as that of the assessee. The drawback system is available in those companies, but they are following the system for valuation of the closing stock on the guidelines issued by the Institute of Chartered Accountants. It is specifically inquired from Shri Palkhivala to give the name of any company having similar business and has followed the system as followed by the assessee exactly. Not even a single name was given by the learned council Shri Palkhivala. Therefore, considering these facts, the submission of Shri Jetly has to be accepted when other companies have followed the system for valuing the closing stock on the guidelines given by the Institute of Chartered Accountants, the assessee has no specific reasons to depart from those lines especially when proper income is not deducted. Further, when the assessee gets the refund of customs duty, it will not affect the profit as deduction of that was already allowed. If that will be reduced from closing balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itwear. (7) Greatway (Pvt.) Ltd. (8) York Hosiery Dyes Ltd. Though Shri Jetly has given the names of the above companies having similar business and drawback system, Shri Palkhivala has not brought to my notice even a single case, where because of the similar difficulty, the system followed by the assessee was followed by similar other assessee. Shri Palkhivala also relied on the order of the Tribunal in the case of Goodlass Nerolac Paints Ltd., which is placed at pages 97 to 122 of the assessee's paper book. I have gone through the order cited by Shri Palkhivala. The Tribunal has mainly taken into consideration the bona fides of the assessee and also came to the conclusion that there is no escapement of tax. Further, the basic issue before the Tribunal is that is the changed method of valuing the closing stock is proper ? Here we are not concerned with the bona fides, etc. We are basically concerned with the result of system followed by the assessee; whether that results in reduction of the proper or fair income by valuing the closing stock. Therefore, on the facts, the order of the Tribunal in Goodlass Nerolac Paints Ltd.'s case is of no help to the assessee. 9. From the figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are claimed as deduction in computing income in the profit and loss account should be included while valuing the closing stock and on that basis, the addition should be made accordingly. 10. In the result, the matter is restored to the ITO, to examine the matter in the light of the observations made above and decide this issue afresh. Full opportunity of being heard should be given to the assessee. The order of the Commissioner of Sales Tax (Appeals), the reports of P. N. Shah and TVA & Co. should be considered.while deciding this issue. In case, the assessee does not co-operative with the ITO, the ITO is free to estimate the addition on the basis of facts available on the record. In the result, the appeal is partly allowed. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 The above appeal was heard by Dr. V. Balasubramanian, Senior Vice President and myself (Y. R. Meena). Since there is a difference of opinion between the Members on the conclusion in the appeal under consideration the following questions are referred to the Hon'ble President for appointing a Third Member to hear the above appeal so that the same may be decided in accordance with the majority view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and yarn is payable when the intermediate product is removed for further manufacture of the end product. The duty on the end product is payable when the end products are removed from the specified premises, i.e., the bonded warehouse of the appellant for sale to customers or on transfer to a separate factory for manufacture of readymade garments or on transfer to retail shops of the company; and (d) sales tax/purchase tax, octroi duty, etc., on materials purchased as well as on goods sold. As a matter of necessity, the assessee has also to incur other expenses, such as, direct labour, direct expenses, production overheads, other overheads, to bring the raw material into, what is known in the accounting circles, their 'present location and condition'. However, while valuing its closing stock of -. (i) raw materials, (ii) work-in-progress, and (iii) finished goods, the assessee, though has apparently followed a well recognised method of valuing the inventory, namely, cost price or market price whichever is lower, has not taken into account the abovestated fiscal duties paid on or in respect of the closing stock nor included the expenses like direct labour, direct expenses, produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is following the particular method of valuing its closing stock regularly since inception though in the circumstances mentioned above it is not possible to accept that the department has accepted it consciously. 5. The ITO as well as the IAC (who had to consider the issue in view of the applicability of the proviso to section 144B) took the view that the method of valuing the closing stock adopted by the assessee was such that the assessee's income for the year could not properly be deduced. The ITO proposed an addition of Rs. 1.25 lakhs on the ground of under-valuation of the closing stock in his draft assessment order. However, eventually, he made an addition of Rs. 25,96,000 to the closing stock in view of the directions of the IAC issued under section 144B. On appeal, the Commissioner (Appeals) vide paragraph 129 of his order, held that for the purpose of valuation of the closing stock the customs duty paid without reducing the amount of customs duty by the amount of (duty drawback received), excise duty paid, sales tax paid, octroi duty paid and direct expenses including labour, etc., incurred in respect of the stocks remaining on hand have to be taken into consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as follows : "To sum up the case, in my view - non-inclusion of the fiscal duties, etc., in valuing the closing stock is wrong; these duties should be taken into account which are claimed as deduction in computing the income in the profit and loss account as expenses. The drawback system in customs duties does not affect the profits even in a case if the assessee values its closing stock by including the fiscal duties, etc. Section 43B is not in conformity with the system followed by the assessee for valuing the closing stock. Though, the ITO has added Rs. 1.25 lakhs in his draft assessment order, the same was reduced. In my view, this matter should be re-examined on the basis of guidelines issued by the Institute of Chartered Accountants and any expenses such as fiscal duties, etc., which are claimed as deduction in computing income in the profit and loss account should be included while valuing the closing stock and on that basis, the addition should be made accordingly." The learned Judicial Member has restored the matter to the ITO for making an addition to the closing stock after allowing the assessee an opportunity of being heard in the light of the observations made by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from furnishing particulars with regard to omission of sales in respect of each class of goods dealt with by the assessee and indicating quantities of sales of each goods separately, raw materials consumed giving item wise break-up and indicating quantities thereof and the opening and closing stocks of goods purchased giving break-up of each class of goods and indicating quantities thereof. However, in response to a query from the Bench, it was admitted that if an inquiry is instituted under the anti-dumping laws of a country or countries, the assessee can be asked to give all these details. 9. According to the learned counsel, the impugned note of the auditors has been given because of the Manufacturing and other Companies' (Auditor's Report) Order, 1975. It does not mean by any stretch of imagination, that the report of the auditors on the affairs of the assessee for the year is a qualified one. Reference in this regard is made to 'Statement on qualifications in auditor's report' published by the Research Committee of the Institute of Chartered Accountants. Inviting then our attention to the provisions of section 145, it is submitted that the choice of the method of accounting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first proposition, reliance is placed on the Madras High Court's decision in the case of CIT v. Carborandum Unioversal Ltd. [1984] 149 ITR 759. 11. It is stated that section 43B has since been inserted by the Finance Act, 1983, with effect from 1-4-1984. The section provides that sums payable by an assessee by way of tax or duty under any law will be allowed in the year in which the amount is actually paid irrespective of the method of accounting. The implication of this section is stated to be that for the assessment year 1984-85 and onwards fiscal levies will not automatically be treated as part of the cost of goods unless paid during the year. This means that the method of valuing the.closing stock followed by the assessee up to and including the assessment year 1976-77 and for the assessment year 1984-85 onwards will be treated as proper whereas for the intervening years the method suggested by the department will be applied. This is, according to the counsel for the assessee, clearly contrary to the provisions of section 145. Reference, in this context, is made to the determination of the value of the closing stock by Shri P. N. Shah, a senior chartered accountant, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the assessee's convenience, it has included the fiscal duties for the purpose of computing the cost. This is stated to be so with regard to the capital assets on which the assessee has claimed depreciation on the cost. 14. The contention of the assessee that they had ever since followed system of valuation of stock which has been accepted by the department is stated to be factually incorrect. The department never knew about the exclusion of fiscal duties by the assessee while valuing its closing stock. It was only in the annual report and accounts for the accounting year 1976-77 that the department came to know about the exclusion while valuing the closing stock. This was possible to detect from note No. 3 at page 13 being an annexure to the auditors' report. At no point of time earlier than the said report the assessee had ever indicated or disclosed to the department that while valuing the closing stock the assessee was excluding the fiscal duties. The allegation that the department knew about this method of valuation and accepted it is far from truth. In fact, the department was not even aware of the fact that the assessee was following a peculiar method of valuing its closi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od the assessee has been able to postpone taxation of the profits to the extent of Rs. 1 crore this year, in the next year the postponement will be of Rs. 1.25 lakhs. In the next following year, it may be Rs. 1.50 lakhs and so on and so forth. Such a method cannot certainly be said a proper method of valuing the closing stock. 17. I have heard the parties and have carefully gone through the orders of the learned Members, the orders of the Commissioner (Appeals), and the ITO as also the other material on record. I find that the learned Accountant Member has accepted the submissions made on behalf of the assessee to the effect that the assessee was following as particular method of valuing its closing stock since inception of the business, i.e., the year 1961, and that in their reports in some of the years in the past, the auditors had indicated the assessee's method of valuing its closing stock which the department had accepted with open eyes rather without verification. The conclusion of the learned Accountant Member is not correct inasmuch as in the course of the hearing before me the facts have been thrashed out and about which there is no dispute that the method of valuing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of their purchase, so that the canceling 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. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919 : 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure ... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods already sold. While the appreciation in the value of the closing stock may be ignored the depreciation in the value of the closing stock for any reason whatsoever may have to be taken care of provided the assessee is valuing its closing stock at cost or market price whichever is lower. It is also evident that under the Act, for the purpose of assessment, each year is a self-contained unit. 20. It may, however, be mentioned that though the method of valuing the closing stock adverted to in the above cases, is cost or market price whichever is lower, the Supreme Court has, in the case of Investment Ltd. v. CIT [1970] 77 ITR 533 held that the assessee is free to adopt a method of accounting only at cost instead of valuing the closing stock at cost or market price whichever is lower. 21. No doubt, section 145(1) provides for computation of income from business in accordance with the method of accounting regularly followed by the assessee which will of course include, as stated above, the method of valuing the closing stock. This, however, does not mean that the assessee has a license to adopt any method of valuing its closing stock. The sub-section has a proviso which authoris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich have been incurred in the normal course of the business in bringing the products, finished or in progress, to its present location and condition, is a well known concept. Reference in this context can usefully be made to Advanced Accounting by J. R. Batilboi, Eighth edn. pp. 46 and 47 and to Research Publication Series as 12 by G. P. Kapadia, pages 19-20, paragraphs 17 to 20 made Annexures to this order as Annexures 'A' and 'B', respectively. 24. No doubt, the cost method, particularly in the case of an assessee manufacturing goods out of various raw materials and in different stages is difficult of uniform application. For instance, the cost has to take care of direct labour and direct expenses, production overheads and other overheads besides fiscal levies, if any, suffered at different stages. To this extent the learned counsel for the assessee is right and I am in agreement with the view expressed in this regard by M. W. E. Glautier and B. Underdown in their treatise Accounting Theory and Practice at pp. 622-627. On carefully going through these pages, I find that the complication referred to by the learned authors pertains to production overheads and other overheads and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the accountancy practice and sanctioned by commercial practice. If, however, the method adopted does not result in the determination of the true and correct profits for tax purposes even of one year the department is entitled to reject such a method. In the case before me, the assessee is, admittedly, valuing its stock-in-trade at cost, which is one of the recognised methods of valuing the closing stock. However, while taking the cost of the closing stock what the assessee has done is, it has taken some of the components of the cost leaving quite a few important components, such as, fiscal levies and direct labour and expenses for bringing the closing stocks to their present location and condition. This is, certainly, not a proper method and, in any event, it is not a method which is recognised by the principled accountancy and sanctioned by commercial practice. It is like the assessee saying that is values its closing stock at cost but it will take the cost at 75 per cent of the actual cost. I do not think such a method can be accepted as a proper method fair both to the assessee and the Income-tax Department. If the opening stock and the closing stock were revalued at cost i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the Tribunal's order in the case of Goodlass Nerolac Paints Ltd. I, however, find that the case of Glaxo Laboratories (India) Ltd., does not support the assessee's case at all. Note 6 of the 'Notes to the Accounts', at page 18 of the printed accounts reads as under : "(6) In past years it has been the practice to charge the total expenses on excise duty to the profit and loss account and include the amount relating to the unsold stocks in the closing stock valuation. For the current year excise duty has been so charged as an expense only in respect of goods cleared and sold and the balance amount of Rs. 242.46 lakhs relating to goods manufactured and remaining unsold has been included under loans and advance is in Schedule 15. Had the previous year's practice been followed, the charge to excise duty and the value of closing stock would have been higher by Rs. 242.46 lakhs. However, this charge has no effect upon the profits for the year". It is evident the excise duty paid in respect of unsold goods was not debited to the purchase account or profit and loss account in this case. It was shown on the assets' side and, therefore, its non-inclusion as a part of the cost of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tock in process and manufactured goods at raw material cost) or market whichever is lower, as certified by a director." (p. 274) indicates that the method may have been accepted by the departmental authorities in good faith. For the intervening two year, i.e., assessment years 1977-78 and 1978-79, the assessee changed the method of valuation of closing stock and included the excise duty as part of the cost and this is reflected in the auditors' note in the accounts for the year ended 31-12-1976. The accounts for these years have to be taken as accepted by the department with full knowledge. For the assessment years 1979-80 and onwards, the company reverted to the old method which was rejected by the ITO as well as the Commissioner (Appeals). The Tribunal has, it is true, by its order dated 29-11-1984, accepted the change. It is also true that the Tribunal has observed in that case that the method resulted in the determination of true and correct profits of the year. However, it appears to me that to great extent, the Tribunal was influenced by factors, such as, (i) this very method was accepted in the past; (ii) the change was bona fide; and (iii) the amounts requiring addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock is to find out the amounts that have gone into the profit and loss account in respect of the stock remaining unsold. This would have served the assessee's purpose as well as resulted in true and correct profits of the year. The fact that the Company Law Board dropped the proceedings started against the assessee as a result of the auditors note with regard to the method of valuation of the closing stock adopted by the assessee and\or exonerated the assessee from the obligation of giving various details in its printed accounts, at best, shows the assessee's bona fides. However, there is no reason to accept that any method of determining the cost followed by the assessee, if bona fide, must be correct irrespective of its impact on the determination of the true and correct profits of the year. I, however, accept Shri Salve's submission that the auditors note cannot be treated as a qualification and that they have only highlighted the method followed by the assessee. That is why I have independently tried to appreciate the impact of the method of valuation of the closing stock adopted by the assessee. 28. The last argument advanced is that the valuation of the closing sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of one year to next year simpliciter. 29. During the course of the hearing, it was argued that debiting fiscal levies straight to the profit and loss account is convenient as it is not possible to envisage which goods will be exported and in respect of which goods the assessee will receive e the drawback. etc. Firstly, this was not one of the difficulties envisaged by the Institute of chartered Accountants otherwise, they would not have suggested the method of valuation. In any event, when almost all the companies are valuing their closing stock in the other manner, it is beyond at least my comprehension that the assessee would not have been able to find a way out for properly arriving at the cost of the closing stock. 30. As regards section 43B which has been introduced in the Income tax act with effect from 1-4-1984, according to me, it only means that the assessee cannot claim deduction without at least acknowledging the liability, if not actually making the payment. It is assumed that even now quite a of assesses pay tax as and when the liability arises. The effect of section 43B is going to be in the manner of computing the income for tax purposes. I have my doubts whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion, I am inclined to agree with the learned Judicial Member that the true and correct profits cannot be deduced by allowing the assessee to follow the method of valuing the closing stock it has adopted. I also agree with him that in this view of the matter, the order of the Commissioner [Appeals] requires to be set aside for the purpose of revaluation the closing stock and making a proper computation of the assessee's income for the year. My order will now go to the Division Bench for deciding the appeal according to the majority view. ANNEXURE 'A' Extract from ADVANCED ACCOUNTING. Eighth edn. by Shri J. R. Batliboi Raw Materials and Stores - In a manufacturing concern, this item would denote purchases of raw materials and stores and will appear on the debit of the manufacturing account. Freight, carriage or cartage and dock charges, if any, on the purchase of raw materials must also be shown in the manufacturing account. As raw materials and stores are held by a manufacturing concern not for the purpose of resale in their original condition, but to be utilised in the process of manufacture, the basis of valuation usually adopted is the cost price. The cost price for this p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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