Commissioner
of Income Tax, Calcutta Vs. British Paints India Ltd. [1990] INSC 387 (13 December 1990)
Thommen,
T.K. (J) Thommen, T.K. (J) Punchhi, M.M.
CITATION:
1991 AIR 1338 1990 SCR Supl. (3) 525 1992 SCC Supl. (1) 55 JT 1990 (4) 694 1990
SCALE (2)1261
ACT:
Income
Tax Act 1961: Section 145--Valuation of stock--Principle to be followed--Cost
or market value--Whichever is lower-Assessing officer--Whether enti- tled to
add over head charges.
Method
of accounting--Consistent practice--To disclose true picture of profits and
gains--Assessing Officer--Enti- tled to and has duty to adopt appropriate
computation to determine true income.
HEAD NOTE:
The
respondent-assessee a limited liability company engaged in the business of
manufacture and sale of paints, had a consistent practice to value its goods in
process and finished products exclusively at cost of raw materials and totally
excluding overhead expenditure. The justification for this practice, the assessee
contended was that the goods being paints had limited storage life and if not
quickly disposed of were liable to lose their market value.
The
Income Tax Officer rejected the aforesaid contention of the assessee observing
that at no time had the assessee claimed any deduction on account of deterioration
or damage to goods and that there was no justification to recognise a practice
as claimed by the assessee of valuing its stock otherwise that in accordance
with the well recognised prin- ciple of accounting which require the stock to
be valued at either cost (raw material plus expenditure) or market value
whichever was lower. Recalculating the value of the opening and closing stocks
by adding the overhead expenditure, the Income-tax Officer made an addition of
Rs.1,04,417 for the assessment year 1963-64, and allowed a deduction of Rs.3338
for the assessment year 1964-65. These orders were confirmed by the Appellate
Assistant Commissioner.
On
appeal, the Income Tax Appellate Tribunal held that there was no evidence to
show that the goods in stock dete- riorated in value and that there was no
justification for excluding the overhead expenditure in valuing the stock; and
if it was in the interest of the business to value stock solely with reference
to cost of raw materials and without including the overhead expenditure, such
valuation was not appro- 526 priate to the computation of income chargeable
under the Income Tax Act.
The
High Court, in a reference at the instance of the Revenue noticed that though
there was no evidence of dete- rioration of the goods in stock, came to the
conclusion that having regard to the consistent practice of the assessee, the
Tribunal was not justified in rejecting the assessee's method of valuation of
its stock-in-trade. It accordingly reversed the Tribunals decision.
In the
appeals by the Revenue to this Court, it was contended on behalf of the assessee
that for a number of years the Revenue did not question the method of
accounting regularly employed by the assessee, that it was during the
assessment years in question that the objection was raised for the first time
on the ground that overhead expenditure was not included in the value of the
stock, that the Assess- ing Officer had exceeded his jurisdiction by adding the
overhead expenditure to the cost of raw material, especially because of the
short durability of paint and that the As- sessing Officer has not appreciated
that the method adopted by the assessee is a well recognised method among
account- ants of repute.
Allowing
the appeals and setting aside, the judgment of the High Court, this Court,
HELD:
1. The Income Tax Act does not contain any specif- ic provision for the
valuation of stock, Income, profits and gains must, however, be computed in the
manner provided by the Act. It is the duty of the Officer to determine the
profits and gains of a commercial adventure according to the correct principle
of accounting. In doing so, he might, dependent on the nature of the business
and its special character, allow certain adjustments, but his primary pur- pose
and duty is to deduce the correct income, profits and gains, and this he cannot
do without taking into account the value of the stock-in-trade at the beginning
and at the end of the year and by ascertaining the difference between them.
[537G-538B]
P.M. Mohammed Meerakhan v. Commissioner of Income-Tax, Kerala, [1969] 73 I.T.R.
SC 735, referred to.
2. The
object of stock valuation is the correct determi- nation of the profits and
loss resulting from a year's trading. [538B] 527 Whimster & Co. v. Commissioners of Inland Revenue,, [1926] 12 Tax
Cases 813, 827; Chainrup Sampatram v. Commis- sioner of IncomeTax, West Bengal, [1953] 24 I.T.R. 481,485- 486;
Patrick (Inspector of Taxes) v. Broadstone Mills Ltd., [1954] 25 I.T.R. 377,
395; Russell v. Town & County Bank, [1888] 13 App. Cas. 418, 424; 4 TLR.
500 and Minister of National Revenue v. Anaconda American Brass Ltd., [1956]
A.C. 85; (1956) I.T.R. 84, 99, referred to.
3.
Section 145 of the Income Tax Act, 1961 confers sufficient power upon the
officer-nay it imposes a duty upon him-to make such computation in such manner
as he determines for deducing the correct profits and gains. This means that
where accounts are prepared without disclosing the real cost of the
stock-in-trade, albeit on sound expert advise in the interest of efficient
administration of the company, it is the duty of the Income Tax Officer to
determine the taxable income by making such computation as he thinks fit.
[539E]
4.
Even if the assessee had adopted a regular system of accounting, it was the
duty of the Assessing Officer under section 145 of the Income Tax Act 1861, to
consider whether the correct profits and gains could be deduced from the
accounts so maintained. If he was of the opinion that the correct profits could
not be deduced from the accounts, he was obliged to have recourse of the
proviso to section 145 of the Income Tax Act 1961. [536C, G] Commissioner of
Income-Tax, Bombay v. Sarangpur Cotton Manufacturing Co. Ltd., [1938] 6 ITR 36;
Commissioner of IncomeTax, Madras v. A. Krishnaswami Mudaliar & Ors.,
[1964] 53 I.T.R. 122, 128 and 132; Commissioner of Income- Tax v. Mc-Milan
& Co., [1958] 33 I.T.R. 182; S.N. Namasiva- yam Chettiar v. Commissioner of
Income-tax, Madras, [1960] 38 I.T.R. 579, 588 and Commissioners of Inland
Revenue v. Cock, Russell and Co. Ltd., [1949] 29 Tax Cases 387, 392, referred
to.
5. Any
system of accounting which excludes, for the valuation of the stock-in-trade,
all costs other than the cost of raw material for the goods in process and
finished products, is likely to result in a distorted picture of the true state
of the business for the purpose of computing the chargeable income. Such a
system may produce a comparatively lower valuation of the opening stock and the
closing stock, thus showing a comparatively low difference between the two.
In a
period of rising turnover and rising prices, the system adopted by the assessee,
as found by the Tribunal, is apt to diminish the assessment of the taxable
profit 528 of a year. The profit of one year is 'likely to be shifted to
another year which is an incorrect method of computing profits and gains for
the purpose of assessment. [539F-G]
6.
Each year being a self-contained unit, and the taxes of a particular year being
payable with reference to the income of that year, as computed in terms of the
Act, the method adopted by the assessee has been found to be such that the
income cannot properly be deduced therefrom. It is, therefore, not only the
right but the duty of the Assessing Officer to act in exercise of his statutory
power, for determining what, in his opinion, is the correct taxable income.
[539H-540A]
7. The
question to be determined by the Assessing Offi- cer in exercise of his power
under section 145 is whether or not income can properly be deduced from the
accounts main- tained 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 regularly employed by the assessee. What is to be
determined by the Officer 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. [531D-F]
8. It is
a well recognised principle of commercial accounting to enter in the profit and
loss account the value of the stock-in-trade at the beginning and at the end of
the accounting year at cost or market price, whichever is the lower. [533G-H] Whimster
& Co. v. The Commissioners of Inland Revenue, [191726] 12 Tax Cases,
813,823 referred to.
(9)
Where the market value has fallen before the date of valuation and at 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 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 gains. If, on the other
hand, he adopts a system which does not disclose the true state of affairs for
the determination of tax, even if it is ideally suited for other purposes of
his business, such as the creation of a reserve, declaration of dividends,
planning and the like, it is the duty of the Assessing Officer to adopt any 529
such computation as he deems appropriate for proper determi- nation of the true
income of the assessee. [534E-F] This is not only a right, but a duty that is
placed on the Officer, in terms of the first proviso to section 145 which
concerns a correct and complete account, but which in the opinion of the
Officer does not disclose a true and proper income. [534G] B.S.C. Footwear v. Ridgway
(Inspector of Taxes), [1971] 2 W .L.R. 1313, referred to.
(10)
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 deducted therefrom. It is incorrect to say, as con- tended 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. [535G]
(11)
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 evi-
dence, and not on doctrine or theories. [539C]
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