Facts
The assessee is a limited liability company engaged in the business of manufacture and sale of paints. It contended before the authorities that it had been its consistent practice to value the goods in process and finished products exclusively at cost of raw materials and totally exclude overhead expenditure. The justification for this practice, according to the assessee, was that the goods being paints had limited storage life and, if not quickly disposed of, they were liable to lose their market value. This contention of the assessee was rejected by the ITO observing that at no time had the assessee claimed any deduction on account of deterioration or damage to goods. The officer held that there was no justification to recognize a practice, as claimed by the assessee, of valuing its stock otherwise than in accordance with the well-recognized principle of accounting which required the stock to be valued at either cost (raw material + overhead expenditure) or market price, whichever was the lower. The Tribunal rejected the assessee’s submission. High Court accepted the contention of the assessee. Department preferred an appeal before Supreme Court.
Issue
Whether the Assessing Officer was justified in rejecting the method of valuation of inventories?
View
Any system of accounting which excludes, for the valuation of the stock-in- trade, all costs other than the cost of raw material for the goods in process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus, showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly
be deduced therefrom. It is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income.
Held
Section 145 confers sufficient power upon the officer- nay, it imposes a duty upon him – to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the ITO to determine the taxable income by making such computation as he thinks fit. ITO was justified in rejecting assessee’s method of valuation and in holding that assessee’s products were liable to be valued at 100 per cent of cost along with overhead expenditure. (AY 1963-64, 1964-65) (CA No. 1918-19 of 1976
- 13-12-1990)
Editorial: British Paints India Ltd. v. CIT (1978) 111 ITR 53 (Cal) (HC) reversed. The requisite Accounting Standardsand Income computation and disclosure (ICDS) clarify the valuation of inventories.
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