Income Tax Appellate Tribunal - Madras
Inspecting Commissioner Of Income-Tax vs Vummidi Bangaru Chetty And Co. on 11 March, 1988
Equivalent citations: [1988]27ITD561(MAD)
ORDER
D.S. Meenakshisundaram, Accountant Member
1. This is an appeal by the Revenue. The assessee is M/s Vummidi Bangaru Chetty & Co., Madras, a partnership firm carrying on business as dealers in silverwares and in silver, television sets, watches, grinders, etc., during the previous year ended 31-3-1982 relevant for the assessment year 1982-83. While completing the assessment of the assessee under Section 143(3) for this year, the IAC (Assessment), Range-IV, Madras, made an addition of Rs. 7,51,629 on account of undervaluation of closing stock of silverware and raw silver. The asses-see's case was that it was valuing the base stock of silverware and raw silver at Rs. 694 and Rs. 550 per kg. respectively for the past few years and that it had valued the base sto9k of raw silverware and raw silver on the same basis and that the same should be accepted. The IAC did not accept this method of valuation made by the assessee-firm as he was of the view that there was no basis for adopting the same value in respect of the base stock of silverware and raw silver for all the time. He further held that there was no conclusive evidence to show that the base stock of silverware and raw silver referred to by the assessee remained in the closing stock of these years and were not disposed of. He further pointed out that during the previous year there was a change in the constitution of the firm necessitated by family disputes and that, therefore, ascertainment of the rights and liabilities of the outgoing partners could not be made and was not possible without arriving at the correct value of the base stocks at the relevant time. For this reason also he held that the value per kg. of the base stock adopted by the assessee in this year could not be accepted. He, therefore, revalued the silverwares and raw silver in base stock at the rates adopted by the assessee for valuing other stocks of silverwares and raw silver, which resulted in an addition of Rs. 7,51,629.
2. When the assessee took up the matter on appeal, the CIT (A) accepted the assessee's contentions and deleted this addition. He held that the assessee has been following this method of valuationof closing stock on the basis of base stock from the assessment year 1974-75, that when the ITO proposed to disturb the said method of valuation of the closing stock for the assessment year 1975-76, the assessee objected to the same and on a consideration of its objection, the IAC directed the ITO to accept the assessee's valuation in his proceedings under Section 144B of the Act. The CIT (A) pointed out that ever since then the same method of valuing the closing stock was being followed by the assessee and accepted by the department. The CIT (A) was of the view that the IAC (Asst.) had not given any reasons for rejecting the assessee's method of valuing the base stock. He further held that there was only a change in the constitution of the firm as evidenced by the partnership deed dt. 27-1-1982 as per which six partners retired from the firm while the remaining partners continued the business and, therefore, the IAC (A)'s observations that there were some family disputes which necessitated settlement of accounts among the partners was factually incorrect. The CIT (A) pointed out that there was no question of dissolution of the firm or termination of the business and thus there was no circumstance necessitating a revaluation of the stock-in-trade and in a continuing business the method of valuation of closing stock regularly adopted could justifiably be continued to be adopted. He, therefore, held that the enhancement made to the valuation of closing stock of Rs. 7,51,729 was not justified and accordingly deleted the said addition. The Revenue feels aggrieved by this order of the CIT (A) and has come up in appeal to the Appellate Tribunal.
3. Shri K.L. Tilakchand, the learned departmental representative, relied on the findings of the IAC (A) in the assessment order for the year under appeal as well as the reasons recorded by the IAC for the assessment year 1983-84 wherein he had made a similar addition on account of undervaluation of closing stock amounting to Rs. 7,74,317. The learned departmental representative argued that the Annexure-A to the assessment order for the year 1983-84 would show that the assessee was valuing the base stock of silverwares and base stock of raw silver at the same rate of Rs. 694 and Rs. 550 per kg. respectively from the assessment years 1974-75 to 1984-85, that the acceptance of this method of valuation of closing stock in the earlier years would not stand in the way of the department examining the correctness of this method in the year under appeal and arrriving at an independent conclusion as to whether by this method of valuation of closing stock the income, profits and gains of the business of the year under appeal were truly reflected by the assessee's method of accounting, and that if it did not reflect the true income, profits and gains of the year under appeal, it would be open to the ITO to make the necessary adjustments under the proviso to Section 145(1) of the IT Act, 1961. The learned departmental representative pointed out that there was no dispute about the quantity of the base stock of silverwares and raw silver and that there was also no dispute that such base stock was always replenished from the market purchase from time to time so as to keep an imprest of base stock. The learned departmental representative pointed out that the price of raw silver had risen to Rs. 2,678 per kg. as on 31-3-1982 as against the rate of Rs. 834 per kg. as on 31-12-1973. He submitted that it was not a case of a constant, steady, and fixed price of raw material which did not fluctuate or increase in the course of years. On the contrary, the price of silver has been steadily increasing year after year. Consequently, the price of silverwares were also increasing as could be seen from the rates adopted by the assessee itself for silverwares at Rs. 3,066 per kg. in the year under appeal. He, therefore, submitted that the method of valuation adopted by the assessee for valuing a portion of its closing stocks of raw silver and silverwares on the basis of base stock method was erroneous and unsustainable, as it did not reflect the true income, profits and gains of business of the assessee for the year under appeal. In this connection, Shri Tilakchand referred to the discussion at page 3447 of Volume IV of A.C. Sampath lyengar's Law of Income-tax, 7th Edition.
4. The learned departmental representative further relied on the fact referred by the IAC (Asst.) in the assessment order regarding the disputes among the partners as a result of which there was a change in the constitution of the firm. The learned departmental representative argued that at the time of settlement of accounts, the parties must have valued even the base stock at the market rates to settle the accounts of the outgoing partners and that, therefore, the departmental authorities were justified in rejecting this method of valuation of closing stock adopted by the assessee as regards the base stock of silverwares and raw silver in the year of account.
5. In support of his submissions Shri Tilakchand, the learned departmental representative, relied on the following decisions:
(a) Patrick (Inspector of Taxes) v. Broadstone Mills Ltd. [1954] 25 ITB 377 (CA).
(b) C1T v. Chari and Ram [1949] 17 ITR 1 (Mad.).
(c) CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC).
(d) Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC).
(e) Asher Textiles Ltd. v. CIT [1952] 22 ITR 125 (Mad.).
(f) B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1972] 83 ITR 269 (HL).
(g) G.R. Ramachari & Co. v. CIT [1961] 41 ITR 142 (Mad.). (h) A.L.A. Firm v. CIT [1976] 102 ITR 622 (Mad.).
6. Shri V. Jagadisan, the learned Chartered Accountant for the assessee first met the last contention urged by the learned departmental representative by pointing out that there was no dissolution of the assessee-firm during the previous year but there was only a change in the constitution of the firm on account of the retirement of six of the partners, that there were no family disputes as assumed by the IAC (Asst.) and that, therefore, there was no question of valuation of the stocks including the base stock at the time of settlement of accounts. He, therefore, urged that the two decisions of the Madras High Court in G.R. Ramachari & Co.'s case (supra) and A.L.A. Firm's case (supra), which related to cases of dissolution of partnerships, would not be applicable to the present case.
7. The learned Chartered Accountant next submitted that the figures of base stock of raw silver and silverwares as set out in Annexure-A to the assessment order for 1983-84, which was relied on by the learned departmental representative, would clearly establish that the quantity of the base stock of raw silver and silverwares were kept at the same figure, vis., 267.637 kgs. for base stock of silverware and 55.088 kgs. for base stock of raw silver. He further pointed out that there was also base stock of old silver about the valuation of which there was no dispute between the parties. Shri Jagadisan, therefore, submitted that it has been established that the assessee was holding on to these base stock of silverwares and raw silver as a fact and this factual position has been accepted by the department right from the assessment years 1974-75 to 1984-85. He next pointed out that the assessee was adopting the same value of Rs. 694 per kg. for the base stock of silverware and Rs. 550 per kg. for the base stock of raw silver. He submitted that this method of valuation of closing stock on the base stock method of valuation was examined by the departmental authorities in the assessment year 1975-76 when the ITO sought to disturb the same but accepted by the ITO on the instructions issued by the IAC under Section 144B of the Act.
8. Shri Jagadisan argued that the valuation of base stock of raw silverware and raw silver adopted by the assessee was not a notional value but was strictly in conformity with the accounting standards and was a recognised system of accounting. In this connection Shri Jagadisan relied on the passage at page 7 of the 'Accounting Standard - Valuation of Inventories' published by the Institute of Chartered Accountants of India in June 1981 and pointed out that base stock system of accounting was a recognised system of accounting and there was nothing wrong or false in this method of accounting which was adopted by the assessee right from the assessment year 1974-75 and accepted by the department all these years.
9. Shri Jagadisan contended that the argument of the Revenue that there was distortion of profits and gains of this year, could not constitute a valid reason for rejecting the assessee's method of valuation of closing stock or system of accounting. He further submitted that the fact that the assessee was replenishing the base stock from time to time by market purchases, would not alter the cost factor of the base stock. He submitted that though the base stock was always replenished by purchases from the market from time to time, such base stock was being maintained as an imprest of the minimum stock required for carrying on the assessee's business activities. Shri Jagadisan argued that the income, profits and gains of the business was always determined with reference to the quantity of the goods sold by an assessee during an year and that there was no profit embedded in the stocks held by the assessee. He, therefore, submitted that the fact that the assessee made periodical purchases from the market from time to time at higher prices to replenish and keep an imprest of base stock of raw silver and silverware, would not alter or affect the cost or the value of the closing stock of such base stock. He, therefore, submitted that the decisions relied on by the learned departmental representative would not apply to the facts of the present case as there was nothing wrong or patently false in the method of accounting regularly employed and followed by the assessee and accepted by the department in all these years and that, therefore, there was no justification for the addition made by the IAC (Asst.) on account of undervaluation of closing stock only with reference to the base stock in the year under appeal. He, therefore, submitted that the CIT (A) was right in deleting this addition as otherwise the addition would result in a distortion of assessment of profits in one year.
10. In the alternative Shri Jagadisan submitted that if the base stock of silverware and raw silver were to be valued at the same rates as other silverware and raw silver in closing stock, then there should be a revaluation of the said base stock which was also included in the opening stock on the same basis and if such an adjustment by re-valuation of the opening stock was also made, the addition that could be made, would not exceed a sum of Rs. 92,499. In support of this submission, Shri Jagadisan filed detailed working statements to show that the addition due to re-valuation of opening stock would amount to Rs. 6,59,130 as against the addition of Rs. 7,51,629 to the closing stock made by the IAC (Asst.).
11. In support of his submission, Shri Jagadisan, relied on the following decisions:-
(a) British Paints India Ltd. v. CIT [1978] 111 ITR 53 (Cal.)
(b) India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.)
(c) Chari and Ram's case (supra)
(d) Chainrup Sampatram's case (supra)
(e) CIT v.Ahmedabad New Cotton Mills Co. Ltd. 4 ITC 245 (PC)
(f) Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC).
In the decision of the House of Lords reported in B.S.C. Footwear Ltd.'s case (supra), the learned Chartered Accountant relied on the minority judgment as laying down the law correctly, as it did not disturb the computation of profits for income-tax purposes. The learned Chartered Accountant further submitted that the decision of the Court of Appeal in the case of Broadstone Mitts Ltd. (supra) should be confined to the facts of the said case.
12. The learned departmental representative in his reply relied on the decision of the Bombay High Court in Ahmedabad Mfg. & Calico Printing Co. Ltd. v. CEPT [1950] 18 ITR 727 and contended that the department was entitled to disturb the valuation of closing stock if the method of accounting regularly followed by the assessee did not reflect the true income, profits and gains of the assessee's business.
13. We have carefully considered the arguments urged on both sides in the light of the authorities relied on by them.
14. In the present case, the assessee does not dispute the factual position that the base stock of silverware and of raw silver has been valued at Rs. 694 per kg. and Rs. 550 per kg. respectively irrespective of the cost at which such base stock of silverware and raw silver were replenished by it from market purchases from time to time. There is also no dispute that the post at which such base stock of silverware or base stock of raw silver were replenished during the year under appeal was more than the values adopted by the assessee for purposes of valuation of closing stock and that further their market value would be still higher having regard to the rise in the price of silver over the years.
15. The main plea of the assessee is that as this base stock of raw silver and silverware are valued at the same rate both for opening and closing stock as done in the assessment year 1974-75 and as there is also no variation in the quantity of these stocks held in base stock, there would be no distortion in the profits and gains of business in the year under appeal and that, therefore, the department is not entitled to reject the same or disturb the same as this regular system of accounting followed by the assessee has been accepted by them right from the assessment year 1974-75 onwards. The department contends to the contrary.
16. The first authority that is cited by the learned Chartered Accountant for the assessee is from the "Accounting Standard-Valuation of Inventories", published by the Institute of Chartered Accountants of India in 1981. At page 7 of the book the base stock method is explained in paragraph 10 in the following words:
The base stock formula proceeds on the assumption that a minimum quantity of inventory (base stock) must be held at all time in order to carry on business. Inventories up to this quantity are stated at the cost at which the base stock was acquired. Inventories in excess of the base stock are dealt with on some other basis, e.g., any one of the above mentioned formula. The base stock formula requires a clear existence of the circumstance that a minimum level of inventory must be held at all times and therefore has a limited application. Most enterprises customarily maintain certain minimum stock level at all times but that is not by itself a justification for use of base stock method because there must exist clear circumstances to permit use of base stock method.
This was the passage relied on by the learned Chartered Accountant to contend that the base stock formula is a well recognised method of valuation of stock and, therefore, it should be accepted. We may mention here that in paragraph 26.5 (at page 8) of the same publication it is mentioned as follows:
The 'base stock' method may be used in exceptional circumstances only.
17. Of the various decisions that have been cited on both sides, we find that the decision of the Court of Appeal in Broadstone Mills Ltd.'s case (supra) directly deals with the base stock system of accounting. That was a case of a cotton spinning company which had for many years consistently employed for all purposes the base stock system of accounting. Under it, the raw cotton actually on the machines (fixed process stock) appeared in the balance sheet but did not appear in the trading account at all, while an agreed weight of the cotton standing by the machines (spare process stock) was included in the trading account at a fixed or arbitrary figure. At a period when the price of cotton was rising considerably, the company was assessed to income-tax for the year 1948-49 on the basis that all the fixed and spare process stock was brought into the trading account at a price representing the cost of the raw cotton plus the cost of processing it. The company appealed against that assessment to the Special Commissioners who found that the base stock method was one of the methods recognised in the trade and was, as a method for computing the profits, in accordance with the sound commercial practice; and they allowed the appeal. On appeal by the Crown by case stated Vaisey, J., held that the method was not appropriate for assessment to income-tax since it did-not afford a true picture of the profits in any one year of charge. On appeal by the company, the Court of Appeal held on an analysis of the results that the finding at which the Commissioners must be taken to have arrived to the effect that the base stock method was appropriate for assessment to income, was wrong in law since under that method the raw cotton was not treated as a stock to be valued for income-tax purposes at the beginning and end. of the relevant accounting year at either cost or market price, whichever was the lower and the profits from the trade for the year of assessment were thus not correctly shown. Their Lordships, therefore, dismissed the company's appeal. At page 395 of the reports, the following general propositions were summarised by Lord Justice Singleton:
I would state these general propositions: (1) One cannot arrive at the profits of the year without taking into account the value of the stock one has at the beginning of, and at the end of, the accounting year. (2) The figures for stock are just as important as any other figures. Values may have to be estimated when market price is taken, but any departure from accuracy is reflected in the trading account. (3) Stock should be taken either at cost price or at market price, whichever is the lower. The company's method of accounting does not meet these requirements for the relevant year. They have more stock, purchased out of income, than their trading account shows, and. other stock is not taken at the right figure. It seems to me that the submission of Sir Andrew Clark that there can be only one answer to the Crown's third contention is established.
18. The next case we would like to refer is the decision of the Privy Council in Anaconda American Brass Ltd.'s case (supra). In this case, the question was what was the method to be adopted for valuation of closing stock, vis., the system of First-in-first-out (FIFO) method or Last-in-first-out (LIFO) method. The assessee in the said case had been following consistently the LIFO method but the Revenue authorities of Canada adopted the FIFO method, which was upheld by the Privy Council as correct. At the end of the judgment, their Lordships have referred to the decision of the Court of Appeal in Broadstone Mills Ltd.'s case (supra) and also a decision of the U.S. Supreme Court in Lucas v. Kanas City Structural Steel Co. [1930] 281 US 264 and held as follows at pages 99 and 100 of the reports:
The history of the adoption of the Lifo method in Canada by the company and presumably by other companies is of some interest. The method appears to have originated in the USA and there too have been adopted by an American Corporation which was the parent of the respondent company some time before 1938. But it was only by an amendment of the existing revenue law that it was in that year permitted to be adopted for tax purposes. In 1939 further amendments were made and the method is now permitted subject to statutory conditions which are summarised in the judgment of Estey, J. in the Supreme Court. The many differences which exist between the revenue laws of the USA and Canada do not permit too much weight to be given to the fact that it is sought to do in Canada without legislation what in the USA is only permissible with statutory safeguards. But it at least supports the view that new theories of accountancy, though they may be accepted and put into practice by businessmen, do not finally determine a trading company's income for tax purposes. Again, though their Lordships recognised that this appeal must be determined by reference to Canadian law, they notice that in the USA in a case in which the so-called 'base stock' method was under discussion, Brandeis, J. used words which are apt to describe the Lifo method also. 'In years of rising prices, the 'base stock" method causes an understatement of Income; for it disregards the gains actually realised through liquidation of low price stock on a high price market. . . . This method may, like many reserves which businessmen set up on their books for their own purposes serve to equalise the results of operations during a series of years. . . .' (see Lucas v. Kansas City Structural Steel Co.). In this passage the distinction is nicely made between what is permitted for tax purposes and what prudent businessmen may think fit to do. So also, in the United Kingdom an attempt has been vainly made to uphold the base stock method for income-tax purposes. In the recent case of Patric v. Broadstone Mills Ltd., Singleton, L.J. in words that are equally apt if applied to Lifo method, declined to accept the base stock method as conformable to income-tax law, though it might be approved by accountancy practice.
This decision shows that the base stock method of valuation, though a recognised system of accounting, has not been accepted as reflecting the true income, profits and gains of business for purposes of tax both in England and in USA.
19. The decision of the House of Lords in the case of B.S.C. Footwear Ltd. (supra) wa.s also a case of valuation of closing stock. But it was not on the basis of base stock method but on the basis of replacement value which the assessee had been following for nearly 30 years and which method had been accepted by the Inland Revenue until 1959. Dismissing the assessee's appeal for the year 1960-61, when the Inland Revenue followed the principle of valuation of stock-in-trade on the basis of cost or market value whichever is less, the House of Lords held by a majority, that in the phrase "cost of market value whichever is lower", "market value" meant the price at which the stock could be expected to be sold in the market in which the trader sold; in the case of a retail trade that market must be retail market. The learned Law Lords further held that if a method had been consistently applied in the past, it should not be changed unless there were good reasons sufficient to outweigh any difficulties; that there was such a reason in that case, vis., that the method consistently applied prior to 1959, however commercially sensible, did not reproduce the profits and gains for a particular year taken in isolation. This decision supports the contention of the Revenue for interfering with the question of valuation of closing stock even though it had accepted the method from 1974-75 to 1981-82. The learned counsel for the assessee relied on the dissenting speeches of the learned Law Lords - Lord Reid and Lord Viscount Dilhorne. We are unable to accept this submission, for we should always go by the majority view expressed in a judgment.
20. In Chan and Ram's case (supra), their Lordships of the Madras High Court held that stock-in-trade in hand is an essential item in the computation of profits for a period and that the accepted basis of valuation of stock is the cost or market value whichever is lower at the date to which the accounts for the period are made up. Their Lordships further held that under Section 13 of the Indian IT Act, 1922, an assessee is entitled to compute the income, profits and gains in accordance with the method of accounting regularly employed by him, and ordinarily this method must be accepted by the department in the absence of anything to suggest that it is improper or patently false.
21. This decision of the Madras High Court was followed in the case of Asher Textiles Ltd. (supra) by the same High Court. In this case it was held that when valuing the closing stock of a trader according to the market value or cost price, whichever is lower, at the option of the trader, the cost price should be taken as meaning "original cost price" and not a notional cost price. Their Lordships also held that the market value means the market value at the commencement of the year when the opening stock has to be valued and at the close of the year when the closing stock has to be valued and not any intermediate valuation. In our view, these two decisions of the Madras High Court completely answer the contentions urged on behalf of the assessee and support the stand of the Revenue.
22. In A. Krishnaswamy Mudaliar's case (supra), the Supreme Court considered the question of valuation of closing stock of a cinematograph film, which was a wasting asset under the cash system of accounting and held that the ITO was entitled to apply the proviso to Section 13 of the Indian Income-tax Act, 1922 and add the value of the unexploited rights of the film at the end of the period to the amount disclosed by the firm. Their Lordships observed that the expression "in the opinion of the Income-tax Officer" in the proviso to Section 13 of the Indian Income-tax Act, 1922 did not confer a mere discretionary power; that in the context it imposed a statutory duty on the ITO to examine in every case the method of accounting employed by the assessee and to see whether or not it has been regularly employed and to determine whether the income, profits and gains of the assessee could properly be deduced therefrom. Their Lordships further held that Section 13 did not compel the ITO to accept a balance sheet of cash receipts and outgoings prepared from the books of account but that he has to compute the income in accordance with the method regularly employed by the assessee.
22A. After explaining the two principal systems of book-keeping that are current among Indian businessmen at page 129 of the reports, their Lordships held as follows at page 130 of the reports:
But whichever method of book-keeping is adopted in the case of a trading venture, for computing the true profits of the year the stock-in-trade must be taken into account. If the value of stock-in-trade is not taken into account, in the ultimate result the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year. It must be remembered that under the Income-tax Act, tax is levied on income, profits and gains, and not on receipts; taxable profits therefore cannot ordinarily be deduced from cash receipts alone; if in the computation of profits of a trading venture, only the cash receipts and outgoings are taken into account, in substance the profits would be deferred, till the firm's capital outlay is completely recouped, thereby transforming what in truth are profits of the business into capital, by book-keeping entries.
A perusal of this judgment would show that their Lordships have quoted with approval the decision of the Madras High Court in the case of Chari and Ram (supra), which we have referred to above. The passage quoted above from the judgment of the Supreme Court would show the object and purpose of including and properly valuing the closing stock of stock-in-trade whatever may the method of accounting followed by an assessee.
23. In our view, these three decisions - one of the Supreme Court and two of the Madras High Court - taken along with the three English decisions referred to earlier, fully support the contentions of the Revenue for rejecting the assessee's method of accounting as the valuation of stock adopted by the assessee on the base stock system in respect of base stock of raw silver and silverware did not reflect the true income, profits and gains of business of the year under appeal. There is no dispute about the quantity of the base stocks of raw silver and silverware. The dispute is only in regard to the valuation of these stocks. The rates adopted for valuation of these stocks are admittedly not the cost of these stocks but some notional value because on the assessee's statement that it had replenished its base stock from time to time by market purchases, the rates cannot be the same as that which prevailed during the accounting year relevant for the assessment year 1974-75. We are, therefore, unable to agree with Mr. Jagadisan, the learned Chartered Accountant,. that the rates adopted by the assessee are not notional for purposes of valuation of these base stocks, particularly in the light of the rates adopted by the assessee for valuing the remaining stocks of raw silver and silverware in its closing stock.
24. It was argued by Shri Jagadisan that there could be no profits arising by mere valuation of closing stock and in support of this, the decision of the Supreme Court in the case of Chainrup Sampatram (supra.) was relied on. In this case the Supreme Court has held that The true purpose of crediting the value of unsold stock is to balance the cost of these 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.
Again at page 486, the Supreme Court held as follows:
This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower and it is now generally accepted as an established rule of commercial practice and accountancy.
The sentence relied on by the learned counsel for the assessee occurs at page 487 of the reports and it reads as follows:
Again, it is a misconception to think that any profit 'arises out of the valuation of closing stock' and the situs of its arising or accrual is where the valuation is made.
In our view. we should read this sentence along with other sentences which follow in the same paragraph, which read as under:
As already stated, valuation of unsold stock at the close of an accounting period is a necessary part of the process of determining the trading results of that period, and can in no sense be regarded as the 'source' of such profits. Nor can the place where such valuation is made he regarded as the situs of their accrual. The source of the profits and gains of a business is indubitably the business, and. the place of their accrual is where the business is carried on. An such profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading' account his closing stock wherever it may exist, the whole of the profits mast be taken to accrue or arise at the place of carrying on the business.
The above passages of the Supreme Court decision will show that the rule for valuation, of closing stock is at cost or market price whichever is lower and not some arbitrary notional value which has no relation to the true cost of the goods lying in closing stock, whether they be base stock or any other stock. Therefore, we are unable to accept this submission of the learned counsel for the assessee.
25. The decision in British Paints India Ltd.'s case (supra) relied on by the assessee's counsel, far from supporting the assessee's case, is in favour of the Revenue. That was a case of valuation of paints by a manufacturer of paints having short shelf life. In that case, the assessee had asserted that the paints manufactured by it had very short shelf life and, therefore, had adopted the method of valuing these finished products and the goods in process at the cost of raw materials only which practice had been accepted by the department in all the earlier years. These facts pleaded by the assessee were not denied by the Revenue, viz., that the stocks which had remained unsold for a period, used to become unsaleable and. had not been sold by the assessee because of its reputation in the market. It was not established that the method followed by the assessee was with any ulterior purpose. In the present case before us it can hardly be the case of the assessee that the value of raw silver and silverware in its base stock had become useless or had depreciated, in any manner. Therefore, this decision of the Calcutta High Court is clearly distinguishable on facts. Further, this decision supports the Revenue's case as their Lordships of the Calcutta High Court have held that if the method adopted and regularly followed by the assessee, does not result in the determination of the true profits even for one particular year or there is some other good reason, the Revenue is entitled to reject the method followed and value the stock on such basis as will result in the determination of true profits. In fact, this decision follows a similar principle laid down by the Madras High Court in India Motor Parts & Accessories (P.) Ltd.'s case (supra) which was a case of valuation of obsolete spare parts and slow moving spare parts which were valued by the assessee at 100 per cent and 50 per cent less than their cost price. Therefore, these two decisions of the Calcutta and Madras High Courts are inapplicable to the facts of the present case.
26. For the reasons discussed above we would respectfully follow the decision of the Supreme Court - A. Krishnaswamy Mudaliar's case (supra) - and the two decisions of the Madras High Court in Chari and Ram's case (supra) and Asher Textiles Ltd.'s case (supra) as well as the three English decisions referred to above and hold that the departmental authorities were justified in rejecting the assessee's method of valuation of closing stock in respect of the base stock of silverware and raw silver as this method of the assessee did not reflect the true income, profits and gains of the assessee for the year under appeal. We, therefore, agree with the contentions of the Revenue and reverse the findings of the CIT(A) on this point.
27. However, the assessee's alternative submission is that the opening stock of base stock of silverware and raw silver should also be similarly revalued in order to arrive at the true income, profits and gains arising to the assessee in the year under appeal. In support of this, the learned counsel of the assessee has filed statements showing the working according to which the addition could not exceed a sum of Rs. 92,499 in paragraph 10 supra. On principle, we find considerable force in this submission of the learned counsel for the assessee. We, therefore, accept the same and direct the IAC (Assessment) to verify the correctness of the workings furnished by the assessee's learned counsel and add the difference only in accordance with law, after giving an opportunity to the assessee to prove the correctness of the said statements.
28. The two decisions of the Madras High Court in G.R. Ramachari & Co.'s case (supra) and AIA Firm's case (supra), relied on by the Revenue are inapplicable to the facts of the present case as there was no dissolution of the partnership business as a result of which there was a closure of the business of the firm. On the contrary, there was only a change in the constitution of the firm after which the remaining partners continued to carry on the business of the firm during the previous year. It is not, therefore, necessary for us to examine in detail the contentions raised by the Revenue on the basis of these two decisions.
29. In the result, the Revenue's appeal is to be treated as partly allowed.