High Court of Judicature at Allahabad
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CIT v. M/s Indian National Tannery - INCOME TAX REFERENCE No. 136 of 1986  RD-AH 1465 (22 November 2004)
I.T.R. 136 of 1986
The Commissioner of Income Tax, Kanpur
M/s. Indian National Tannery Pvt. Ltd., Kanpur.
Hon'ble R.K.Agrawal, J.
Hon'ble Prakash Krishna, J.
(Delivered by R.K.Agrawal,J.)
The Income Tax Appellate Tribunal, Allahabad has referred the following question of law under Section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.
"Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was correct in law in holding that the revaluation of the material and tanning charges on the 17408 hides of the closing stock is to be made after giving a set off of a similar revaluation of the 17238 hides as appearing in the opening stock and, accordingly, in effect, revaluing only balance 170 hides ( 17408-17238) in process?"
Briefly stated the facts giving rise to the present Reference are as follows:-
The present reference relates to the Assessment Year 1982-83. The respondent is a Private Limited Company and deals in tanning of raw hides. It use to purchase raw hides, process them and then sell them after converting it into leather. Its accounting year ends on 30th September of each year. The respondent had 17408 hides lying in the tanning yard. They were in the process of tanning and certain materials had also been spent on their tanning. The respondent had valued this material which amounted to work in progress at Rs. 3/- per hide only i.e. At Rs. 52,224/-. This method had been followed by the respondent since long. The Inspecting Assistant Commissioner found that the respondent was employing vegetable tanning method as against crome tanning method. The former took a longer time of 4 to 5 months for completion of the tanning. He also found that the tanning charges of the finished hide amounted to Rs. 100/- per hide in the year under referemce. On this basis, he was of the opinion that according to the respondent all the above hides could be deemed to have been tanned only to the extent of 3%. On enquiry this was found to be incorrect. He found that 3751 finished hides were sold in October, 1981, 3890 finished hides were sold in November and so on. Taking into account the fact that 4 to 5 months were required for completion of the entire tanning, he held that most of the hides included in 17408 were at the finishing stages and, therefore, the value of the tanning material used on them was much higher than that estimated by the respondent. After applying an average method taking into account the period of tanning, he had held that the value of the material used on 17408 hides could be estimated at Rs. 9,66,935/-. He substituted this amount for Rs. 52,224/- resulting in an addition of Rs. 9,14,711/-. In appeal, however, the Commissioner of Income Tax (Appeals) took the valuation of the material used in the tanning of hides which were in process stage at Rs.15 per piece i.e. At Rs. 2,61,120/- as against Rs. 52,224/- adopted by the respondent- assessee. The Revenue as well as the respondent assessee preferred separate appeals before the Tribunal. The Tribunal has held that the method adopted by the respondent is an arbitrary one and, therefore, requires revaluation of the closing stock but at the same time, the opening stock will also have to be adjusted in order to avoid the taxing of an income, which could not, otherwise, have been brought to tax. The Tribunal had found that there was opening stock of 17238 hides which were in the process of tanning. The tanning charges were valued at Rs. 3/- per hide at Rs. 51,714/- and, therefore, these hides will also have to be revalued. If there is no extra income to be added for 17238 hides there will remain only 170 hides in process and the value of tanning charges used on these hides will, therefore, alone require to be increased in the year under reference. The tribunal adopted the value of tanning charges at the rate of Rs.50/- per hide giving an addition of Rs. 8000/- in round figure.
We have heard Sri Shambhoo Chopra, learned standing counsel for the Revenue and Sri R.S.Agarwal, learned counsel for the respondent.
It is well settled that the value of stock in Trade at the beginning and at the end of the accounting year could be taken at the cost or market price, which ever is lower.
In the case of Ram Swarup Bengalimal vs. Commissioner of Income Tax [(1954) 25 ITR 17] this Court has held that two principles have now become well settled: (1) that that the assessee is entitled to value the closing stock either at cost price or market value, which ever is lower and (2) that the value of closing stock must be the value of opening stock in the succeeding year, that, is, an assessee cannot close his accounts and value his stock at a particular figure and the next morning on the first day of the next year he cannot value it at a different figure. This principle was also recognized by the Supreme Court in Chainrup Sampatram vs. Commissioner of Income Tax [(1953) 24 ITR 481] wherein the Apex Court has held that this is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy.
In the case of Commissioner of Income Tax vs. British Paints India Ltd. [(1991) 188 ITR 44] the Apex Court has held that for computation of the true profits of the year in the case of a trade or adventure, each year being a self contained unit, the value of the stock in trade at the beginning and at the end of the accounting year and by ascertaining the difference between them has to be taken into account. It has further held that it is a well recognized principle of commercial accounting to enter in the profit and loss account the value of the stock in Trade at the beginning and at the end of the accounting year at cost or market price, which ever is lower.
In the case of United Commercial Bank vs. Commissioner of Income Tax [(1999) 240 ITR 355] the Apex Court has held that for valuing the closing stock it is open to the assessee to value it at the cost or the market value which ever is lower.
In the case of Ram Luxman Sugar Mills vs. Commissioner of Income Tax, U.P. [(1967) 63 ITR 51] the facts were that the assessee had valued the closing stock on 30th September, 1947 at the market rate at the figure of Rs. 5,09,874/- and the next day on 1st October, 1947 the opening stock was also shown at the market rate at the same figure. The Income Tax Officer changed the figure in the value of the opening stock on 1st October, 1947 to Rs. 4,20,279/-. The result of the order of the Income Tax Officer is that the stock which was valued at Rs. 5,09,874/- at the cost of the earlier year came to have a lower value of Rs. 4,20,279/- the very next day on the 1st October, 1947, at the beginning of the succeeding previous year which means that by the course adopted by the Income tax Officer, the principle laid down that the value of the closing stock must be the value of the opening stock in the succeeding year was violated. This Court has held that the course adopted by the Income Tax Officer was not permissible in law. This Court has further held that there is no rule that opening stock and the closing stock of the same accounting year must necessarily be valued at one and the same basis.
In the case of Melmould Corporation vs. Commissioner of Income Tax [(1993) 202 ITR 789] the Bombay High Court has referred to a passage of the booklet titled 'Valuation of stock and Work-in-Progress-Normally Accepted Accounting Principles' brought out by Indian Merchants' Chamber Economic Research and Training Foundation and written by Shri G.P.Kapadia wherein there is a discussion about change from one valid basis to another valid basis in the following terms:
"2. Where a change from one valid basis to another valid basis is accepted, certain consequences normally followed. The opening stock of the base year of change is valued on the same basis as the closing stock. Whether the change is to a higher level or to a lower level, the Revenue normally does not seek to revise the valuation of earlier years. It neither seeks to raise additional assessments, nor does it admit relief under the 'error or mistake' provisions.
3. It is not possible to define with precision what amounts to a change of basis. It is a convenience, both to the taxpayer and to the Revenue, not to regard every change in the method of valuation as a change of basis. In particular, the Revenue encourages the view that change which involves no more than a greater degree of accuracy, or a refinement, should not be treated as a change of basis, whether the change results in a higher or a lower valuation. In such cases the new valuation is applied at the end of the year without amendment of the opening valuation." (underlining ours)
and has held that the value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year and if, instead, a procedure is adopted for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on. It has further held that the value of the opening stock of that year is not to be revised.
Applying the principles laid down in the aforesaid cases to the facts and circumstances of the present case, we find that the value of the closing stock for the earlier Assessment Year 1981-82 would be the value of the opening stock for the Assessment Year 1982-83 and any change in the valuation of the closing stock of the Assessment Year 1982-83 will have no effect on the value of the opening stock of the Assessment Year 1982-83. Thus, the Tribunal was not justified in applying the tanning charges of Rs. 47/- per hide only in respect of 170 hides and making adjustment of 17,238 hides being the opening stock of that year.
In view of the foregoing discussions, we answer the question referred to us in the negative, i.e. in favour of the Revenue and against the assessee. However, there shall be no order as to costs.
November 22, 2004
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