High Court Of Madras
CIT vs. Tamil Nadu Sugar Corpn. Ltd.
Sections 145
Asst. Year 1984-85
N.V. Balasubramanian & K. Raviraja Pandian, JJ.
TC No. 25 of 1999
31st December, 2002
Counsel Appeared
T. Ravikumar, for the Applicant : P.P.S. Janardhana Raja for Subbaraya Aiyar, for the Respondent
JUDGMENT
N.V. Balasubramanian, J. :
In compliance with the directions of this Court in TCP No. 165 of 1997 dt. 14th July, 1997, the Tribunal has stated a case and referred the following question of law for our consideration. “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to adopt the value of its closing stock at a rate which was prevalent on 25th Oct., 1983, whereas its previous year ended on 30th Sept., 1983 ?”
The assessee is a wholly owned undertaking of the Government of Tamil Nadu, and the assessment year with which we are concerned is 1984-85, with the relevant previous year ending on 30th Sept., 1983. The AO while completing the assessment, was of the opinion that there was an undervaluation of the closing stock of the free sugar held by it. The assessee valued the closing stock of the free sugar at Rs. 330 per quintal when its accounts were finalised on 25th Oct., 1983, but whereas the assessee closed its accounts for the assessment year in question on 30th Sept., 1983, and according to the AO, the assessee ought to have taken the selling rate of sugar prevailing on 30th Sept., 1983, which was Rs. 352 per quintal. The AO was of the opinion that there was an undervaluation of the closing stock of the free sugar at the rate of Rs. 22 per quintal and found that the assessee had 99,636 quintals of free sugar as the closing stock as on 30th Sept., 1983 and made an addition of Rs. 21,91,992 towards undervaluation of the closing stock of the sugar. The AO made an addition of the said sum and completed the assessment.
The assessee challenged the order of the AO before the CIT(A), Chennai, and the CIT(A) held that the assessee was not entitled to value the closing stock on the basis of the rate prevailing at some point of time or the other in the middle of the accounting year and it cannot adopt the market value prevailing on a date after the close of the accounting period. The Appellate CIT held that the valuation of the closing stock should be done on the market value of the stock prevailing at the end of the accounting year and accordingly, confirmed the addition of Rs. 22,91,992 towards the undervaluation of the closing stock of the free sugar.
The assessee carried the matter in appeal before the Tribunal. The Tribunal followed the decision of the Delhi High Court in the case of CIT vs. Mahalakshmi Sugar Mills Co. Ltd. (1993) 200 ITR 275 (Del) and held that the assessee had adopted the closing stock with reference to the selling price subsequent of the last date of the accounting year since it was nearer to the reality. The Tribunal also held that the assessee was following a recognised system of valuation of closing stock regularly and the system adopted by the assessee was a recognised one. The Tribunal therefore, held that there was no reason to disturb the valuation and deleted the addition and allowed the appeal preferred by the assessee.
As already stated, the Revenue approached the Tribunal to state the case, which was refused, and on the basis of the directions of this Court, the Tribunal has stated a case and referred the question of law set out earlier.
We heard the learned standing counsel for the Revenue and Mr. P.P.S. Janardhana Raja, learned counsel appearing for the assessee.
The short point that arises for consideration is whether the assessee is entitled to value its closing stock taking the value of the stock when it finalised its accounts i.e. on 25th Oct. 1983, though the accounts were closed on 30th Sept., 1983, and whether it is entitled to adopt the value of the closing stock as on 25th Oct., 1983, when its accounts were finalised though the relevant previous year ended on 30th Sept., 1983, and whether the assessee ought to take the value of the closing stock prevalent as on 30th Sept., 1983.
The Supreme Court in Chainrup Sampatram vs. CIT AIR 1953 SC 519 held that the true purpose of crediting the value of the unsold stock is to balance the costs of those goods entered on the other side of the account at the time of the purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year’s trading.
The recognised accounting practice was approved by the Supreme Court in Chainrup Sampatram’s case (supra) and it referred to in para 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919 which reads as follows : ‘As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure…..From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is “less” than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, its prices rise again, of attributing to the following year’s results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question (extracted in para 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951).”
10. The Supreme Court also held that the closing stock is to be valued at cost or market price at the end of the accounting year whichever is ‘lower’ and it is now generally accepted as an established rule of commercial practice and accountancy. In Whimster & Co. vs. IRC (1928) 12 Tax Cases 813, it was observed as follows : “Under this law (Revenue law) the profits are the profits realised in the course of the year. What seems an exception is recognised where a trader purchased and still holds goods or stocks which have fallen in value. No loss has been realised. Loss may not occur. Nevertheless, at the close of the year he is permitted to treat these goods or stocks as of their market value.”
11. The above passage was quoted with approval by the Supreme Court in Chainrup Sampatram’s case (supra). According to the above principle, the profits of the income-tax are to be computed in accordance with the ordinary principles of accountancy while anticipated profit is not taken into account. However, the anticipated loss is taken into account and that is the reason for the adoption of the principle that the closing stock is to be valued at cost price or market price whichever is lower at the end of the accounting year.
12. The assessee has not adopted the valuation of the closing stock of sugar at the end of the accounting period when it made up its accounts. We are of the view that the assessee is not entitled to value the closing stock on the date when its accounts are prepared and finalised and if the assessee is permitted to adopt such a system, then the profit of the accounting year would not be reflected and a portion of the profit, which was earned in one year, would be shifted to next year. The correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by the fall in the market price of the goods at the end of the accounting year. The AO has also a duty to see whether or not the books of account disclose the true state of affairs during the particular accounting year and whether the correct income earned in the year can be deduced therefrom.
13. The Supreme Court in CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC), after noticing the decision in B.S.C. Footwear Ltd. vs. Ridgway (Inspector of Taxes) (1972) 83 ITR 269 (HL) and the decisions rendered by the Privy Council as well as by the Supreme Court, laid down the law as under : “Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials 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 the 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 AO 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.”
14. This Court in Asher Textiles Ltd. vs. CIT (1952) 22 ITR 125 (Mad) held that it is a long established principle of accountancy that in order to arrive at the true profits of a business, the closing stock during that period should be valued either at the market value or at cost price whichever is lower at the end of the accounting year, at the option of the trader and the principle underlying is to provide a reserve for the loss which he is likely to incur during the period.
15. This Court also held that by giving the option to adopt the lower of the two valuations, the trader is protected from being taxed in respect of the profits which he did not actually earn. This Court also held as under : “… The rule of accountancy adopted all over England and as also adopted in India is to construe the cost price as ‘Original cost price’ and not a notional cost price and liberty should be given to the assessee to adopt either the original cost price or the market value. There is no authority in support of the position that the cost price means notional cost price…”
16. In Mahalakshmi Sugar Mills Co. Ltd.’s case (supra), the Bench of the Delhi High Court presided over by Hon’ble Mr. B.N. Kirpal, J. (as His Lordship then was) has considered the question whether the assessee was entitled to value the closing stock with reference to the selling price, subsequent to the last date of the accounting year. The Court held that the assessee in that case was adopting the selling price subsequent to the last date of the accounting year and the assessee was following this system consistently and there was also positive finding that the true profit could be ascertained from the method of accounting which was being followed by the assessee. The Delhi High Court, therefore, held that in view of the positive finding of fact by the Tribunal, the correct and true profit could be ascertained from the method of accounting which was followed systematically by the assessee, no addition could be made when the assessee valued the closing stock. This decision apparently supports the case of the assessee. But, on a closer reading, it does not support the case of the assessee. In the case before the Delhi High Court, no doubt it is true, the assessee adopted the market value prevailing subsequent to the last date of the accounting, but however, there was a finding by the Tribunal that the correct profit could be ascertained from the method of accounting systematically followed by the assessee.
17. On the other hand, on the facts of the case, though the Tribunal has found that the assessee was following the system regularly, there was no finding by the Tribunal that the profit of the year could be ascertained from the method of accounting followed by the assessee. In the absence of any such finding of fact that the profit of the year could be ascertained from the method of accounting followed by the assessee, the decision of the Delhi High Court in Mahalakshmi Sugar Mills Co. Ltd.’s case (supra), is not applicable to the facts of the case.
18. On the other hand, the learned counsel for the Revenue brought to the attention of this Court the revised statement of the accounting Standard IAS-2 issued by the Institute of Chartered Accountants and the said institute has prescribed the following principles of accountancy for the valuation of the closing stock. “22. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the balance sheet date to the extent that such events confirm the conditions existing at the balance sheet date. 25. An assessment is made of net realisable value as at each balance sheet date.”
19. The learned counsel appearing for the assessee has also drawn the attention of the Court to Text of International Accounting Standard-IAS-2 and the International Accounting Standard also prescribes the following principle : “Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made as to the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of period to the extent that such events confirm conditions existing at the end of the period.”
20. A careful reading of the principles laid down by the International Accounting Standard IAS-2 as well as the statement prepared by the Indian Institute of Chartered Accountants shows that it is open to take note of the events occurring after the balance sheet date to the extent that such events conform to the conditions existing at the balance sheet date. However, in the present case, the situation is that there is a wide fluctuation in the value of the sugar prevalent at the end of the accounting year from the value prevalent when its accounts were finalised. Therefore, it is not permissible to take note of the events after the end of the previous period as the value of the closing stock did not conform of the condition existing at the end of the balance sheet date. The standard principles of accountancy also does not help to the case of the assessee as there is a wide fluctuation of nearly Rs. 21,91,992, in the closing stock valuation. Further, if the submission of the learned counsel for the assessee is accepted, it will lead to a situation that the assessee may finalise its accounts on a convenient date subsequent to the end of the accounting year when the market value of the stock is at low ebb and thereby the income earned in one accounting year is not taxed which will be against the provisions of the IT Act, as it will be open to the assessee to finalise and close its accounts at its choice.
21. Learned counsel for the assessee submitted that the Tribunal has recorded the finding of fact that the assessee was following the recognised method regularly and therefore, this Court sitting in reference should not disturb that finding. Learned counsel referred the decision in CIT vs. J.V. Gupta & Sons (HUF) (2000) 158 CTR (Del) 177 : (2000) 241 ITR 861 (Del) and submitted that the powers of the Court under s. 256(1) of the IT Act, 1961 are advisory in nature and this Court has no power to reframe a question or consider new issue. We are unable to accept the said submission of the learned counsel for the assessee. We are not refraining any new question, nor are we disturbing the finding rendered by the Tribunal that the assessee was following the regular system. But, we have found that there was no finding of fact by the Tribunal that the system of accounting adopted by the assessee would disclose the true and correct profit of the year in question. Further, the Supreme Court in British Paints India Ltd.’s case (supra) has held that the ITO is not bound to accept the system merely because it is the system regularly employed by the assessee and the system of accounting adopted by the assessee must disclose the correct profits and gains earned by the assessee in an accounting year. Hence, both the conditions must be satisfied before accepting the accounts of the assessee.
22. On the facts of the case, it was found by the ITO that the assessee has not adopted the closing stock as on the date of his closing the account, but adopted the market value when the accounts were finalised and it is only on the premise that the account did not reflect the true profit during the year, the additions were made, which was confirmed by the first appellate authority. The Tribunal, however, has not determined the question whether the true profit could be ascertained from the method of accounting adopted by the assessee and in the absence of any such finding merely because the assessee has followed the system of accounting, the AO is not bound to accept the same.
23. Learned counsel for the assessee also pleaded that the matter may be remitted back to the Tribunal to consider the said question. However, we are not inclined to remit the matter as there is no positive finding by the Tribunal that the true profit could be ascertained from the method of accounting which was followed by the assessee. In the absence of any such finding, we hold that the Tribunal was not correct in directing the AO to adopt the value of the closing stock on the date which was prevailing subsequent to the end of the accounting year as the market value of the stock as at the end of the previous year. Accordingly, the question of law referred to us is answered against the assessee and in favour of the Revenue. No costs.
[Citation : 265 ITR 466]
