2008 (4) TMI 518 - HC - Income Tax

Valuation - valuation of the stock - Assessing Officer did not accept the value of closing stock by the assessee and changed the valuation no evidence that valuation not correct valuation not changed

Issues Involved:
1. Valuation of closing stock of two transformers.
2. Justification of market value adopted by the assessee.
3. Authority of the Assessing Officer to modify the valuation.
4. Impact of valuation on subsequent accounting periods.

Detailed Analysis:

1. Valuation of closing stock of two transformers:
The core issue revolves around the valuation of two transformers that were part of the closing stock of the assessee for the assessment year 1984-85. The assessee, a manufacturer of power transformers, had valued these transformers at Rs. 4,99,999 based on a quotation from M/s. Manish Electricals. The Assessing Officer, however, rejected this valuation and instead adopted a figure of Rs. 16,40,000, which was the tendered price at which the transformers were eventually sold to the Punjab State Electricity Board (PSEB).

2. Justification of market value adopted by the assessee:
The Tribunal found that the assessee had been following the correct method of accounting for valuation of closing stock but held that the manner in which the market value was determined was not justified. The Tribunal noted that there was no reliable and convincing market price for the transformers, as the quotation from M/s. Manish Electricals could not be considered a general market indicator. The Tribunal emphasized that the transformers were neither outdated nor damaged and thus their value being one-third of the sale price could not be justified.

3. Authority of the Assessing Officer to modify the valuation:
The Tribunal and the Commissioner (Appeals) both concluded that the value of the closing stock should be determined at cost price rather than the market value provided by the assessee. The Tribunal upheld the Commissioner (Appeals)'s direction to determine the value of the transformers at cost price, particularly because the writ petition was still pending, and negotiations for the sale of the transformers were ongoing. The Tribunal's stance was that the Assessing Officer is entitled to disturb the valuation if it does not reflect the correct cost or market value based on evidence. This principle was supported by the apex court's decision in CIT v. British Paints India Ltd., which allows the Assessing Officer to ensure that the taxable income reflects the correct trading profits.

4. Impact of valuation on subsequent accounting periods:
The Tribunal failed to appreciate that any disturbance in the valuation of the closing stock for the year under consideration would be reflected in the opening stock of the subsequent year. The Tribunal did not consider whether this adjustment would have any real effect on the profits, given that the same valuation would carry over to the next accounting period. The judgment emphasized that the purpose of valuing the closing stock is to balance the cost of unsold goods entered at the time of purchase, not to bring into charge any appreciation in value.

Conclusion:
The Tribunal's approach in disturbing the valuation of the closing stock was deemed unsustainable. The correct principle, as stated by the apex court, is that the valuation of unsold stock at the close of an accounting period is necessary to determine the trading results of that period. The question referred to the High Court was answered in the affirmative, in favor of the assessee, and against the Revenue. The reference was disposed of with no order as to costs.

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