Supreme Court of India
Commissioner Of Income Tax, Calcutta vs British Paints India Ltd on 13 December, 1990
Equivalent citations: 1991 AIR 1338, 1990 SCR SUPL. (3) 525, AIR 1991 SUPREME COURT 1338, 1991 TAX. L. R. 322, (1991) 54 TAXMAN 499, 1992 (1) SCC(SUPP) 55, 1991 (1) UPTC 493, 1991 ALL TAXJ 569, 1991 KERLJ(TAX) 85, (1991) 1 COMLJ 187, 1991 UPTC 1 493, (1990) 4 JT 694 (SC), 1992 SCC (SUPP) 1 55, 1990 (4) JT 694, (1991) 5 CORLA 164, (1991) 188 ITR 44, (1991) 91 CURTAXREP 108
PETITIONER:
COMMISSIONER OF INCOME TAX, CALCUTTA
Vs.
RESPONDENT:
BRITISH PAINTS INDIA LTD.
DATE OF JUDGMENT13/12/1990
BENCH:
THOMMEN, T.K. (J)
BENCH:
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.
HEADNOTE:
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]
JUDGMENT:
