1965 (2) TMI 84 - HC - Income Tax

Method of valuing the slow moving and obsolescent stock at a price below the cost was a recognized method in India.

Summary

Issues: Valuation of closing stock for assessment year 1958-59 under section 66(2) of the Indian Income-tax Act.

Analysis:
The judgment concerns the valuation of certain motor spare parts for the assessment year 1958-59, focusing on the method adopted by the assessee for valuing their opening and closing stock. The assessee, a company taking over spare parts from General Motors, applied a method where the entire stock was valued at cost with deductions for slow-moving and obsolete parts. The Income-tax Officer added back the underpricing, considering the stock declaration to the bank and insurance company. The Appellate Assistant Commissioner deleted this addition, citing stock cards supporting the write-off. The Tribunal, however, reversed this decision concerning the slow-moving parts, noting profitable sales in subsequent years as evidence against declining market value.

The judgment delves into the application of section 13 of the Indian Income-tax Act, emphasizing that income, profits, and gains should be computed according to the method regularly employed by the assessee. The court highlighted that the method used by the assessee had been consistent over the years, even during General Motors' operations, and was not aimed at disguising income. The court rejected the revenue's argument that the method hindered profit determination, as the stocks were included in the inventory, and proceeds from sales were accounted for accurately.

Furthermore, the judgment discussed recognized methods of valuation and prevention of obsolescence, supporting the assessee's approach. The court noted the decline in demand due to import bans, justifying the valuation method adopted by the assessee. The judgment referenced prior court decisions emphasizing the acceptance of the regularly employed accounting method unless proven improper or false. The court concluded that the Income-tax Officer's rejection of the assessee's method based on a different calculation for the bank was unjustified, as it did not impact profit determination.

In conclusion, the court ruled in favor of the assessee, stating that the valuation method was valid under section 13 of the Act. The court highlighted the consistent application of the method, rejecting the revenue's objections and upholding the assessee's right to employ their preferred accounting method for profit computation.