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.\u00a0 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\u00a0 lose their market value. This contention of\u00a0 the assessee was rejected\u00a0\u00a0 by the ITO observing that at\u00a0 no\u00a0 time had the\u00a0 assessee claimed any\u00a0 deduction\u00a0 on account of deterioration or damage to goods. The officer held that there was\u00a0\u00a0\u00a0\u00a0 no justification to recognize a practice, as\u00a0 claimed by\u00a0 the\u00a0 assessee, of\u00a0 valuing\u00a0 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\u2019s submission. High Court accepted the contention of the assessee. Department preferred an appeal before Supreme Court.<\/p>\n
\u00a0<\/p>\n
Whether the Assessing Officer was justified in rejecting the method of valuation\u00a0\u00a0\u00a0 of inventories?<\/p>\n
\u00a0<\/p>\n
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\u00a0 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<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
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.<\/p>\n
\u00a0<\/p>\n
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\u00a0 he thinks fit. ITO was justified in rejecting assessee\u2019s method of valuation and in holding that assessee\u2019s 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<\/p>\n
Editorial: British Paints India Ltd. v. CIT (1978) 111 ITR 53 (Cal) (HC) <\/em><\/strong>reversed. The requisite Accounting Standardsand Income computation and disclosure (ICDS) clarify the valuation of inventories.<\/p>\n \u201cEvery moment of your life is infinitely creative and the universe is endlessly bountiful. Just put forth a clear enough request, and everything your heart desires must come to you.\u201d<\/em><\/p>\n – Mahatma Gandhi<\/p>\n<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":" S. 145: Method of accounting – Valuation of inventories \u2013 Finished goods – Goods valued below cost \u2013 Stock in trade- Rejection of method of valuation is held to be justified .<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13427","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3uz","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13427","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13427"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13427\/revisions"}],"predecessor-version":[{"id":13428,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13427\/revisions\/13428"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13427"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13427"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13427"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}