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TMI Blog1993 (7) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits illegitimately and thereafter he proceeded to value the closing stock according to the FIFO system. This resulted in enhancement of the value of the closing stock by Rs. 80,89,150 which was added by him as concealed income of the assessee-company. 3. The matter was examined further by the CIT (Appeals). He observed that the first year of assessment of the assessee-company was assessment year 1988-89 and in the Audit Report attached with the return, the method of valuation of stock was shown as " at cost ". On the other hand the method adopted in the year under consideration was " at cost or market value, whichever was lower ". He mentioned that the assessee had differed with the earlier method of accounting in this year. 4. It was submitted before the CIT (Appeals) on behalf of the assessee that the closing stock had been valued at cost and each share was identifiable by its distinctive number. The assessee was stated to be following the specific identification method for working out the cost. The shares which remained in the closing stock were valued at their actual cost and the assessee was therefore following neither the FIFO (first in first out) method nor the LIFO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, where it was held that colourable devices cannot be part of tax planning. In the end the addition of Rs. 80,89,150 was upheld by him. The assessee is aggrieved by this decision and is now in appeal before us. 6. The learned counsel for the assessee submitted that the assessee was a dealer in shares of Reliance industries Ltd. only and the shares had been purchased in different years. The method of valuation of closing stock in this year was at cost or market value, whichever was lower. The cost was lower than the market value and therefore the shares had been valued at cost. The shares were fully identifiable because of their distinctive numbers and therefore the actual cost was known and had been adopted, whereas the Assessing Officer had adopted the FIFO method (first in first out) of valuing the shares at cost. There was therefore an assumption by the Assessing Officer that the sales had been made in the same order in which the shares had been purchased, which was contrary to fact. Our attention was invited to page 37 of the paper book showing valuation of closing stock at cost on specific identification method, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her that the method of accounting followed by the assessee disclosed the true picture of profits and gains and therefore the facts were distinguishable from the facts in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) where the method of accounting did not disclose true and proper income and therefore the Supreme Court held that the Assessing Officer was entitled and had a duty to adopt appropriate computation to determine the true income by applying the proviso to section 145(1) of the Income-tax Act. 11. The learned counsel stated in the end that the action of the Assessing Officer was not only not justifiable but also inconsistent. In this regard our attention was invited to the Profit and Loss account and Balance Sheet of the assessee company at pages 7 and 8 of the paper book, where the profit disclosed was Rs. 9,72,122. The Assessing Officer had started the computation of total income with some figure and made an addition of Rs. 80,89,150 for undervaluation of closing stock, apart from one more disallowable which was not in dispute. It was explained that the profit had been worked out in the Profit and loss account by adopting the cost price of the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses resulting from a year's trading and the generally accepted principles of commercial accounting allow an assessee to value the opening and closing stocks either (i) at cost or (ii) at market value or (iii) at cost or market value, whichever is lower. The Assessing Officer has not raised any controversy which of these methods should be followed. He has accepted that the closing stock has been rightly valued " at cost " but the dispute has arisen how the cost should be ascertained in the case of shares which have been purchased at different dates at different actual cost. The CIT (Appeals) has tried to bring in another dimension to the dispute by saying that in the preceding year i.e., the assessment year 1988-89 the method of valuation of closing stock was " at cost " whereas in the year under consideration i.e., assessment year 1989-90, the method has been changed to " at Cost or market value, whichever is lower " and has invoked proviso to section. 45(1) of the IT Act on the ground that true profits cannot be ascertained due to the change in the method of accounting. The learned departmental representative has also argued on the same lines. However, we do not propose to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shares, debentures and other securities held as stock-in-trade. (5) ........................................................................................................ (6) ..................... " 17. We also find that the learned counsel for the assessee has not referred to the above Accounting Standard in the arguments before us, with foresight, if we may say so, since the particular Accounting Standard is clearly not applicable to shares held as stock-in-trade. We do not propose to go further, but only note that the assessee does not derive any support from it. 18. We now come to the real dispute before us i.e. whether the cost of the shares should be determined by the specific identification method as was done by the assessee or by the FIFO method (first in first out) as was done by the Assessing Officer. In this connection it will be useful to refer to clause (1) of section 145 of the Income-tax Act, 1961, according to which the income from business shall be computed in accordance with the method of accounting regularly employed by the assessee. It is laid down in the first proviso that where the method employed is such that the income cannot properly be deduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their 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..." 20. In the case of Chainrup Sampatram, the Hon'ble Supreme Court went on to say that 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 and would normally represent the cost of goods, but adoption of market value is permissible, if that value is less than cost. While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account as no prudent trader would care to show increased profit before its actual realisation. On applying this test, we are of the opinion that the FIFO method followed by the Assessing Officer brings into account anticipated profit on shares which are still held in the closing stock. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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