TMI Blog1992 (2) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... ce was amended whereby the assessee was obliged to export 50 per cent of the production of 45,000 metric tons per annum during the first ten years. It was stated that the total cumulative production up to the end of the previous year was 45,135 metric tons. Therefore, the assessee was required to export at least 23,067 metric tons but the assessee exported only 12,709 metric torts till the end of the previous year resulting in a cumulative shortfall of 10,358 metric tons. It is in respect of this export obligation, which remained unfulfilled, that the assessee has placed the value at Rs. 64,65,084 by debiting the profit and loss account. The assessee explained the basis of this valuation by its letter dated 2-10-1986, which contained the following :-- " As on 30th September, 1983, the stocks available with Uniferro International were 5,646.259 MT only. So we had valued the said stocks at the international prices (Rs. 2,846 per MT) and the value worked out to Rs. 1,60,69,253. For the balance quantity of 4,712.161 MT, we considered the difference between the international price and the cost of production/which worked out to Rs. 1,372 per MT (Rs. 4,218 - Rs. 2,846) and the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international price of Rs. 2,846 per metric ton. But the Assessing Officer has rejected this valuation and valued the entire closing stock at Rs. 4,218 per metric ton, which represents the cost price. According to the assessee, the goods were mainly meant for export purposes and it was justified in valuing the closing stock at the international market price, which was very much lower to the cost price. The Assessing Officer treated it as a change in the method of valuation of the closing stock. In the past, the assessee has valued the closing stock at cost or market price, whichever was lower. The market price was taken from the prevailing rate in the local market and international market rate was not taken at all. The Assessing Officer has also considered that most of the sales in subsequent year were in local market. By this, he did not accept the assessee's basis of the valuation of the closing stock. The difference in the basis of valuation resulted in an addition of Rs. 77,46,668. 3.2 The assessee objected to these determinations before the CIT (Appeals). 4. The Commissioner of Income-tax (Appeals) has dealt this issue in paragraphs 5 to 9 of his order, which are repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attached thereto dated 16th April, 1979 paragraph 5 of the said contract is significant which provided for liability in the case of failure to satisfy its obligations, it says-- 'It in any given year, the company fails and/or neglects or is not able to export 45,000 tonnes of its production of Ferro Manganese and Silico Manganese, then in such an event the company shall, on being called upon to do so by the Chief Controller of Imports and Exports, New Delhi, or Joint/Deputy Chief Controller of Imports Exports, by a letter, hand over within thirty days from the date of the said letter to the State Trading Corporation of India Ltd. or such other person, firm or body corporate as the Government or Chief Controller of Imports Exports, New Delhi, may nominate the difference between the stipulated annual commitment/obligation and actual exports of Ferro Manganese and Silico Manganese produced during the year (subject to a maximum of 45,000 tonnes of the production for that particular year) for export by the Agency at such price as it is able to obtain abroad. The company shall in addition pay simultaneously a sum equal to 5 per cent of the annual export obligation for every year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the above order and disputes the disallowance and addition made. The assessee has filed the first set of paper book containing 88 pages and, at our instance, has also filed second set of paper book containing the proceedings before the Jt. Chief Controller of Imports and Exports. The assessee, relying upon the paper book and the conditions of licensing filed in pages 14 and 19 of its paper book, contended that the assessee was under an obligation to export its production. Reliance was placed to pages 36 and 37, which relate to forfeiture order issued to the assessee by the Controller of Imports and Exports. Reliance was also placed on to the agreement dated 16th day of April 1979 between the assessee and the Government of India accepting the export obligations imposed under import licence for enabling the import of plant, machinery and equipment necessary for establishing the industrial unit. Such agreement is placed in pages 41 to 47 of the paper book. The decision of the Controller of Imports and Exports on the assessee's appeal in respect of the export obligations is also filed at page 48 of the paper book. The assessee has placed on record at page 49 the various authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice has only offered arbitrary basis for valuation of the closing stock. Such valuation, if accepted, will result in not appreciating the assessee's facts and the relevant market price in relation to the assessee's conditions of business. He heavily relied on the order of the CIT (Appeals) on the issue. According to him, the disallowance has been properly made so also the addition in respect of the undervaluation of the closing stock. 7. We have considered the rival submissions and perused the records. 7.1 We are unable to appreciate the assessee's contention. There was an obligation to export 100 per cent of its production. The licensing authority has reduced such obligation to 50 per cent of production. The assessee has been negotiating with the licensing authorities for mitigating the hardship caused to it in respect of export obligations. Clause 5 of the agreement entered into by the assessee with the Government of India, which is reproduced above, stipulates the consequences of the non-fulfilment of the export obligations. From the perusal of the above condition, the liability of the assessee is conditioned on being called upon to do so by the Chief Controller of Imports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the sale process credited in that year) and to carry to a separate account all expenses relating to goods not sold in that year as in suspense on account of the next year's trading. In practice, this course is inconvenient, for no one can say at the time of purchases when the unsold goods will be sold. The same effect, however, (viz. that of confining the trading profit to the sales of the year), is obtained by a contra entry representing the goods unsold at the end of the year....... " In view of the above considerations, the accountancy practice has devised sound methods of valuing closing stocks in order to arrive at the true results of the business, though there is nothing about this topic in the taxing statutes or in the Rule. This view is now approved by the Supreme Court in P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735. It is said that in computing the profits and gains for the purpose of income-tax, two general and fundamental common places have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from business during that year and the expenditure laid ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt sale in such market. The assessee, no doubt, was under an obligation to export its production and was bargaining for relaxation of such obligations for business considerations. The assessee's under-valuation of the closing stock in the event of an export performance is only anticipatory in nature and does not bear from the events that are present in the assessee's business. The present anticipatory loss on the closing stock held, in our view, is not properly arrived at considering the realities of the assessee's business and events after balance sheet date. In the facts before us, it is not the case of the assessee that the assessee has no local demand for its products or has left with only that market at whose rates its stocks are so valued, for the purpose of liquidation of stocks. The cases relied upon by the assessee do not squarely apply to the facts of the case. In our view, the valuation placed by the assessee is only arbitrary and does not find support by any recognised principle of accounting. In these circumstances, we are of the opinion the addition made by the tax authorities is reasonable and proper. An alternative ground that the assessee would be entitled to claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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