TMI Blog1952 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... and said that he did not wish to press the same and the statement in the order was not proved or shown to be incorrect, was it open to the Tribunal to disregard the statement in the Appellate Assistant Commissioner's order? (b) Whether in the circumstances of this case, particularly in view of the abandonment of the objection to it at the time of the hearing before the Appellate Assistant Commissioner, the adding back of ₹ 2,000 on account of shortage in tins can be said to be arbitrary? (c) Whether the question can now be reopened? (d) Whether the said adding back is correct? 2. The facts are short. 3. The assessee at whose instance this reference has been made is a public limited company with its place of business at Quilon and will hereafter in this judgment be referred to as the company. The company started business only in February, 1944. Its main business is the purchase of raw cashew nuts and after subjecting the stuff to certain processes sell the kernels by export to America. Whether the manufacture of kernels is against orders does not appear. It might be wholly or partly or to no extent against orders. The year of account is the first year of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to add back ₹ 2,000 was also confirmed on the basis of the aforesaid statement made before the Appellate Assistant Commissioner on behalf of the company. There was no ground taken in the memorandum of appeal challenging the truth of that record. Mr. George who is stated to have made the concession had sent in a statement in the form of, but without the formalities requisite for, an affidavit. There was thus no affidavit by Mr. George denying what he is stated to have said before the Appellate Assistant Commissioner. In its absence the Appellate Tribunal felt bound to accept the record made by the Appellate Assistant Commissioner as to what transpired before him and regarded the question as not open to be canvassed before it. 5. The first question that has been referred for decision has not, it seems, come previously before the Courts precisely in this manner. The principle of valuing stock as at cost or at market price whichever is lower for ascertaining the profits of a business for purposes of the trader or manufacturer is well-established. Its applicability for the ascertainment of profits for purposes of revenue, that is income-tax, is equally well-established. Inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to ascertain the profits. The liberty reserved to the assessee to choose his method of accounting by this section is not confined to adopting the mercantile or the cash basis but extends to adopting a method of valuation of the stock according to cost or market price whichever is lower for purpose of ascertaining the profits of the business. The word profit, I think, is to be understood in its natural and proper sense, in a sense which no commercial man would misunderstand. Profits and gains must be ascertained on ordinary principles of commercial trading said Lord Halsbury, Lord Chancellor, in Gresham Life Assurance Society v. Styles [1892] 3 Tax Cas. 185 at page 188. In the undertaking of a manufacturer the ascertainment of the average cost of raw materials purchased is necessary to determine the profits. Raw material would be purchased from day to day or at intervals at varying prices. The price at which the manufactured product is sold will depend upon the market or, if the manufacture is against a previous contract, on the terms thereof. An agreement, for instance, for supply of kernals to America for a period of 12 months in the future can be entered into only on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all of which would be stored in one lump or lot and issue thereout can be and would be made without regard to the date or the price of each purchase. It is unnecessary to multiply instances. It is sufficient to say that the point appears to be so obvious that a doubt was first entertained as to whether the point stressed by the Department was at all properly understood. 8. The fact that in the present case it has been possible to ascertain the actual cost of the closing stock, there having been no issue for processing during the period of the purchase of the said closing stock, and which accounted for the entire quantity of the closing stock, is an accident, a circumstance peculiar to this case. A principle or a rule or method of accounting cannot be built upon or deduced from such an accident or peculiarity. The method of accounting chosen by the assessee for valuing the stock at average cost during the period covered by the account which was less than the market price cannot be interfered with on account of the facility that exists in the particular year for ascertaining the actual cost of the closing stock. Suppose in the next year or the year after the next such facility do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates (page 98). To render the ascertainment of the profits of a business of practical use, it is evident that the assets, of whatever nature they may be must be represented by their money value. But as a rule these assets exist in the shape of things or rights and not in the shape of money. The debts owed to the company may be good, bad or doubtful. The figure inserted to represent stock-in-trade must be arrived at by a valuation of the actual articles. Property, of whatever nature it be, acquired in the course of the business has a value varying with the condition of the market. It will be seen, therefore, that in almost every item of the account a question of valuation must come in. In the case of a company like that with which we have to deal in the present case, this process of valuation is often exceedingly difficult, because the property to be valued may be such that there are no market quotations and no contemporaneous sales or purchases to afford a guide to its value. It is not to be wondered at, therefore, that in many cases companies that are ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court held that the assessee who was a dealer in dyestuffs was entitled to take the average cost or market value, whichever is lower, in respect of each separate article of stock, that is to say, he was entitled to apply the method of valuation item-war and was not obliged to apply the same method of valuation to all the various items he was dealing in. In that case the value that was fixed was the average cost of the purchase for the whole period of the account. 11. The answer to question (1)(a) therefore is that the stock may be valued at the option of the assessee at the average cost price of the entire stock purchased in the course of that year and need not be at the actual cost of the closing stock for the purpose of ascertaining the real profits earned during the year. 12. The answer to question (1)(b) follows and it is that the method of valuation of the stock adopted by the assessee company is correct on the facts and circumstances of this case. 13. The answer to question (2)(a) is obvious and it is that it is not open to the Tribunal to disregard the statement in the Appellate Assistant Commissioner's order. Reference may be made to T.V. Krishn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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