TMI Blog2002 (12) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ns the assessment year 1992-93 whereas, Appeal No. 10 of 2001 concerns the assessment year 1993-94. For the assessment year 1992-93, the assessee valued the opening stock at the market rate of Rs. 90 per kg. and they valued the closing stock at a higher market rate of Rs. 130 per kg. and, accordingly, for the assessment year 199394, the assessee valued the opening stock at Rs. 130 per kg. There was no closing stock for the assessment year 1993-94. Therefore, the main point which arises for determination is whether valuing the closing stock at a higher market price was done by the assessee to avail of excess deduction under section 80HHC for the assessment year 1992-93 and to suppress the profits of the subsequent assessment year 1993-94. Accordingly, the following questions of law arise for determination: "(a) Whether, on the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal was justified in holding that the higher market rate method of valuation of closing stock adopted by the assessee is correct, without appreciating that acceptance of the said method has resulted in a doctored abnormal gross profit ratio of 2054.60 per cent. which, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that in the subsequent assessment year 1993-94, the assessee had valued the opening stock at Rs. 130 per kg. and consequently, the assessee has filed a return of loss of Rs. 54,420. Therefore, the Assessing Officer concluded that the entire exercise was a device to avail of excess deduction in the first year and to suppress the profits in the second year. In the circumstances, the Assessing Officer computed the total income by applying the principle of "lower of cost or market value". Consequently, the Assessing Officer reduced the gross profits from Rs. 7,13,03,219.99 to Rs. 4,45,64,939 by valuing the opening stock at Rs. 90 per kg. for the assessment year 1992-93 and by valuing the closing stock also at Rs. 90 per kg. Accordingly, the value of the closing stock was reduced by the Assessing Officer from Rs. 8,69,13,158 to Rs. 6,01,71,130 and, consequently, the net profit was reduced by the Assessing Officer from Rs. 6,40,11,915 to Rs. 3,72,73,634 and profits from business at Rs. 3,78,01,032. For the sake of brevity we hereinafter refer the assessment year 1992-93 as the "first year" and the assessment year 1993-94 as the "second year". Consequently, the Assessing Officer restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the appeal of the assessee for the reasons given in its order for the earlier assessment year. Being aggrieved, the Department has come in appeal under section 260A of the Income-tax Act. Arguments: Mr. R.V. Desai, learned senior counsel appearing for the Department, contended that under the proviso to section 145(1), if the Assessing Officer in a given case finds distortion in income to be deduced, the Assessing Officer can certainly discard the system of accounting adopted by the assessee. He contended that the opening stock for the first assessment year was computed at the rate of Rs. 90 per kg. and the closing stock was computed at the rate of Rs. 130 per kg. That, in the first year this was done because, there were export sales whereas in the second year, there were no exports. Therefore, the entire device was to claim maximum deduction under section 80HHC in the first year and in the second year the attempt was to suppress the profits. He, therefore, contended that the Assessing Officer was right in valuing the closing stock of the first year at Rs. 90 per kg. as the opening stock was also valued at Rs. 90 per kg. Therefore, the Assessing Officer was right in valuing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessing Officer could not have insisted on valuing the closing stock at Rs. 90 per kg. and if the Assessing Officer was not so justified in valuing the stocks at Rs. 90 in the first year, he was also not justified in valuing the opening stock in the second year at Rs. 90. She further contended that in this case we are concerned only with finished goods and not raw materials. Findings: The basic point which we are required to consider is whether the method followed by the assessee has resulted in escapement of tax and whether the Assessing Officer was justified in insisting on the assessee valuing its closing stock at "lower of cost or market value". As stated above, for the assessment year 1992-93, the assessee valued the opening stock of finished goods at Rs. 90 per kg. However, they valued the closing stock for the same assessment year at Rs. 130 per kg. The reason was obvious. In the assessment year 1992-93, the assessee had earned export profits amounting to Rs. 7,07,88,773. Therefore, as per the computation of income filed by the assessee, the amount of profit under the head "Profits and gains of business" is shown at Rs. 6,40,11,915 in its returns. The office is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same assessment year. By valuing the closing stock at Rs. 90 per kg., the net profits came down to Rs. 3,78,01,032 from Rs. 6,45,39,313. Therefore, the Assessing Officer has rightly restricted the deduction under section 80HHC to Rs. 3,78,01,032 and, consequently, the Assessing Officer has rightly calculated the opening stock for the next assessment year 1993-94 at Rs. 90 per kg. In this case, we want to point out that in the second year, what the assessee had done is to inflate the debits by calculating the value of the opening stock at Rs. 130. By that method, the assessee has increased the expenses in the next year. In the next year, there is no closing stock and the assessee had returned a loss of Rs. 54,420 whereas if the value of the opening stock in the second year is calculated at Rs. 90 as done by the Assessing Officer then, there is income of Rs. 2,67,38,280, which arises on account of the differences in the rates of Rs. 130 and Rs. 90 per kg. Therefore, the Assessing Officer was right in adding back Rs. 2,67,38,281 to the income of the assessee for the assessment year 1993-94. Therefore, there is no merit in the argument of the assessee that by the method followed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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