TMI Blog1983 (8) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... value 32,09,473 40,05,522 Other goods at cost 49,471 82,266 -------------------------------------------------------- 1,18,47,487 1,44,15,112 --------------------------------------------------------------------------------------------------------------------------------------------------- However, the assessee filed a revised return on July 25, 1972, showing the total income at Rs. 1,48,20,481. Along with its return, the assessee appended a letter to the effect that Rs. 17,80,329, the difference between Rs. 1,66,00,810 and Rs. 1,48,20,481, did not represent the profits of the assessee for the year ending August 31, 1970, as that sum represented part of the value of the closing stock of finished goods as on August 31, 1970. The ITO required the assessee to furnish information about the basis of the valuation of the closing stock. The assessee by its letter dated December 22, 1973, had stated that the basis of the valuation of the closing stock was as follows : 1. Raw materials at cost 2. Work-in-progress at direct cost 3. Finished goods at direct cost 4. Other goods at cost In that letter the assessee also pointed out that it has been following the merca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given by him may be given in his own words: "The assessee has been valuing the closing stock of finished goods and work-in-progress at full cost. In addition to the direct cost, production overheads were also taken into account in valuing the unsold stock. The opening stock of the previous year, therefore, includes such part of the production overheads incurred in the preceding previous years as it is attributable to the unsold stock and work-in-progress at the close of that previous year. The assessee has made a departure from the method regularly adopted in the earlier years and for the first time has valued the stock as on August 31, 1970, at part (sic) of the cost, (viz., direct cost). The undervaluation works out to Rs. 17,80,329 as pointed out by the company's auditors. In effect, the expenditure to the extent of Rs. 17,80,329, though attributable to the unsold stock, is being claimed by the assessee as relating to the goods sold. The valuation adopted this year regardless of the market value or full cost is not only arbitrary but is also inconsistent. By the adoption of the full cost method for valuing the opening stock and the partial cost method for valuing the clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod of valuation of the closing stock can be accepted. The Tribunal also upheld the contention of the assessee that it is entitled to adopt "direct cost" method only for the closing stock. Aggrieved by the decision of the Tribunal, the Revenue has sought and obtained reference on the following question of law to this court for its opinion I " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition of Rs. 17,80,329 representing the difference on account of revaluation of closing stock on direct cost basis for the assessment year 1972-73 ? " Thus, the ITO has proceeded on the basis that it is not open to the assessee to change the method of valuation for closing stock alone and, therefore, the closing stock should be valued at the same method as was applied to the opening stock. He, therefore, held that since the opening stock has been valued as per the total cost method, the same method should be adopted for closing stock also. The AAC, however, held that the assessee is entitled to change the method of valuation from " total cost " to " direct cost " but that he must adopt that valuation even for the opening stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is called upon to apply the new method of valuation to the opening stock of the accounting year as well, then, in consequence, the value of the closing stock of the year previous to the accounting year will also get altered and that will result in the modification of the assessment for the previous year. It is for this reason the Tribunal has stated that though by adoption of the new method of valuation for the closing stock alone the assessee may appear to get some unintended benefit, in course of time it will get adjusted and the Revenue will not be a loser. Even apart from this reason, if the Revenue's contention that the new method should be adopted both to opening stock and closing stock even in the first year of the introduction of the new method is accepted, then it will lead to the position that the assessee cannot at all change the method or the assessee has to revalue the closing stock of the previous year which will be the opening stock of this year, and such a revaluation on the new basis as per the assessee is not ordinarily possible. That when a new method of valuation of stock is adopted in any particular year, the assessee can on that basis leave intact the valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the changed method of valuation of closing stock attracted the proviso to s. 13, it was not a correct approach to see whether the losses of previous years would also enter into the claim made by the assessee for the accounting year and that notional or anticipatory loss resulting from a valuation of the closing stock, which an assessee was permitted to take into account in ascertaining his trading profits, stood on no different footing. In Ram Luxman Sugar Mills v. CIT [1967] 63 ITR 51, the Allahabad High Court has expressed the view that an assessee is entitled to value the closing stock of any account year either at cost price or market value, whichever is lower, that though the value of the closing stock must be the value of the opening stock in the succeeding year, the rate to be applied need not be the same for the opening stock and closing stock of the same accounting year and that the course adopted by the ITO in that case of revaluing the opening stock of 1949-50 at cost merely because the assessee had valued the closing stock at cost was not justified in law. In that case, the assessee had valued his closing stock for the assessment year 1948-49 at the market rate and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustoms duty and other charges on ad hoc basis, but valued its closing stock on December 31, 1960, without adding customs duty and other charges. In order to bring the two on the same level, proportionate customs duty and other charges estimated at Rs. 40,000 were added by the income-tax authorities to the value of the closing stock shown by the assessee and the Appellate Tribunal confirmed the addition. When the matter was taken up to the court, the Delhi High Court observed that they are not expressing any opinion in favour of one method of valuation of the closing stock or the other, that though the opening stock for the year under reference was loaded with the value of the proportionate costs of customs duty, freight and handling charges and the closing stock was not loaded with such costs, in order to bring the two on the same level, it is necessary to disturb the valuation either of the opening stock or of the closing stock. This decision which was relied on by the learned counsel for the Revenue should be confined to the facts of that case as the court refused to direct a reference on the ground that no question of law arose out of the order of the Tribunal. Kantilal Chandu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a total cost method, certain overheads are added while in the direct cost method the same overheads are excluded. It is not the contention of the Revenue that the adoption of the direct cost method in the valuation of the closing stock is not a sound commercial practice. As a matter of fact, the House of Lords in H. D. Ostime v. Duple Motor Bodies Ltd. [1961] 2 All ER 167, had recognised the " direct cost" method as one of the recognised methods in commercial practice. In that case in the computation of profits, for purposes of income-tax and the profits tax, of a company producing motor vehicle bodies to order, work-in-progress had been consistently valued by the company by the " direct cost " method since 1924 and that method had been accepted by the Inland Revenue. By "direct cost" method, the value of the work-in-progress comprised the direct cost of the materials and labour used in the work. In the assessment year 1951-52, the Inland Revenue claimed that the " on cost " method of assessing the work-in-progress should be employed. Under the "on cost" method, the value included a proportion of the indirect expenditure such as business overheads. In the year of assessment 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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