Janab K. Mohamad Adam Sahib vs The Commissioner of Income Tax

Srinivasan, J.—The Assessee carries on the business of purchase and sale of snake skins. On 3let March 1953, at the end of the account

year corresponding to the assessment year 1953-54, he held a certain stock of snake skins. Of these, some varieties, including crocodile skins,

were valued at Rs. 53,016. There were a number of other skins, cobra, virian, etc., which the Assessee did not value at all. These had been

purchased during the course of the account year. During that year, cobra skins found a market up to February 1953, but other varieties, of which

also the Assessees carried a stock but upon which he did not place any value, admittedly had virtually no sales at all. During the course of the

assessment proceedings, the Assessee explained that, all these varieties of skins, including cobra, virian and baby, were saleable only in America

and England, that they had no market whatsoever in India and that his foreign agents and representatives had informed him that there were no

buyers for these three varieties even abroad. He accordingly claimed that he was entitled to value this stock at nil. The income tax Officer,

however, rejected this plea. His view was that the Assessee had obtained overdraft facilities from the banks on the security of these skins as well

and that he further continued the purchase of these skins, though, according to him, the foreign market for these skins had either ceased to exist or

was not brisk. He purported to value these varieties of skins at a total of Rs. 96,028. The result was that there was an assessment on a larger

income.

This addition of Rs. 96,028, being the estimated value of unsaleable stock of snake skins, was objected to by the Assessee in his appeal before

the Appellate Assistant Commissioner. The Assessee reiterated his plea that he had to make the purchases of these skins in a lot along with other

skins, and pointed out that that was the practice in the trade. The Appellate Assistant Commissioner, however, took the view that though the

demand for a particular commodity may fall off temporarily, or even for a protracted period, it cannot be a sufficient reason to ignore the value of

the stock. He observed:

It is the time factor which determines the ultimate value of unsold stocks, and as the years go by, the value gets written off by the continuous

process of valuation at lower rates and still lower rates.

He also thought that the explanation that the Assessee was compelled to purchase these skins cannot be said to be satisfactory. He accordingly

sustained the addition.

In the further appeal to the Tribunal, it was pointed out that the accepted mercantile practice of valuing the closing stock at either the market rate

or cost, whichever was lower, had been ignored by the authorities below. It was also pointed out that the overdraft from the bank was on the

security not of these unsaleable skins but of the tannery, building, the closing stock, hides and skins etc., to the value of nearly rupees two lakhs.

Correspondence was produced before the Tribunal to show that there was no market for these varieties of skins definitely after February 1953.

The Tribunal accepted the Assessee''s case as true to a certain extent, for it found that the turnover of the Assessee had fallen from rupees twenty-

five lakhs to about rupees six lakhs. It also agreed that snake skins could not last indefinitely. Even if there was no market for these skins, the

Tribunal thought that the Assessee could not abruptly place nil valuation upon them. It proceeded to observe:

After some lapse of time, when it has become clear beyond reasonable doubt that these skins were only dead stock and would not move due to

falling off of demand in western countries, it would be open to the Assessee, on accepted principles of accountancy, to treat them at the proper

valuation at that time but even then, for treating it as having no value, there must be evidence to show that at the relevant time efforts were made to

sell the skins at least locally, find out market value and value the goods at that rate. Of course, it is difficult for a merchant who had great

expectations of profit by export to try to sell them locally either for cheap or nominal prices. This the Assessee had not done. To permit him to

precipitately say that they had no value on the 31st March, 1953...would open the door for showing these very goods as Obsolescent and then sell

them later without bringing the profit into the books...Even otherwise, if the Assessee had thought that on 31st March 1953 these had become

useless, in the normal parlance, he should have written it off. That he has not done so would support the view we have taken above....

The Tribunal thereafter proceeded to value the skins at somewhat lower rates than those adopted by the income tax Officer and determined the

value of this part of the closing stock at Rs. 43,708.

On the directions of this Court u/s 66(2) of the income tax Act, the following question stands referred to us.

Whether on the facts and in the circumstances of the case, the Tribunal was justified in valuing the closing stock of the unsold snake skins at Rs.

43,708 ?

It seems exceedingly difficult to accept the reasoning adopted by the Tribunal in justifying the addition. The Tribunal purports to hold that if the

Assessee had written off this stock, he would have been justified in doing so. It accepts also the position that the fancy market for snake skins had

disappeared, as is strongly supported by the circumstances that the turnover had fallen from rupees twenty-five lakhs to rupees six lakhs. Its

reference to well accepted principles of accountancy that the Assessee could reduce the value or place nil value only after some lapse of time when

it became clear that the skins were only dead stock, in fact, supports the very action taken by the Assessee. It has been found as a matter of fact

that in so far as virian and baby skins are concerned, during the whole of the previous year, only rupees twelve worth of the first variety and Rs.

112 worth of the second variety could be sold. In the case of cobra skins, against the total purchases of nearly two lakhs of skins, the Assessee

had been able to sell till February about 170,000 skins, and, according to the correspondence which he produced, there had been no demand for

these skins subsequently. It also seems to be accepted by the Tribunals below that there was no local market for snake skins of any variety. The

question is, whether, in these circumstances, the Assessee in the normal course of its accounting is not entitled to value the price of the skins at the

market price which, in the present case, happens, to be nil. We are also unable to see how Revenue is affected by this method of valuation. If these

skins which are valued at nil happen to find purchasers in the next accounting year, it is obvious that the entire sale value will figure as a profit in the

books and the Assessee would have to pay tax on the entire sale value and not only on the difference between the sale value and the purchase

value. Indeed, in the contingency of these skins, finding a sale, it is Revenue that would stand to gain. The observation of the Tribunal that this

method of permitting him to value the goods.

would open the door for showing these very goods as obsolescent and then all them off later without bringing the profits into the books

is wholly uncalled for. It seems to suggest that the Tribunal found the Assessee''s intention to be, to make a concealed profit by the sale of the

goods in subsequent years. It is unfortunate that the Tribunal should have indulged in such uncalled for aspersions on the Assessee''s integrity.

In Commissioner of income tax v. Chari and Ram ILR (1949) Mad. 559, it has been laid down that the accepted basis of valuation of stock is

cost or market value, whichever is lower. In that case, the method, followed by the Assessee was to take the average cost of market value in

respect of each separate article of the stock. The average cost of the opening stock was in respect of all the items lower than the market rate, and

so the Assessee valued the opening stock at the average cost-price. At the time of valuing the closing stock with regard to some of the articles, the

market rate was lower and with regard to others, the market rate was higher than the average cost. The Assessee took the average cost of these

classes of articles separately for the purpose of valuing the closing stock. In one case, he took the average cost where it was lower than the market

rate and in the other he adopted the market rate where it was lower than the average cost. This was objected to by the department. The learned

Judges upheld the Assessee''s contention. They pointed out that this was an accepted principle which was obviously intended to be in favour of the

trader in order to enable him to more evenly distribute his loss. In Ram Swarup Bangalimal Vs. Commr. of Income Tax, U.P. and V.P., Lucknow,

this right of the Assessee to value the closing stock either at cost-price or at the market price, whichever is lower, was affirmed. In that case, the

Assessee had been valuing his stock at cost price for several years. But in the assessment year which was under reference, he valued the stock at

the market rate, as it was lower than the cost price. It was pointed out that there was no proof that this was a variation of the method of accounting

which the Assessee had been following, and the decision in Commissioner of income tax v. Chari and Ram ILR (1949) Mad. 559 was followed.

In Chhaoni Lal Pragdas Vs. Commr. of Income Tax, this principle was again affirmed. While it was pointed out that the Assessee could not place

an arbitrary value on the stocks, it was held that stocks must be valued either at cost price or at market price.

There seems to be no quarrelling with the question of fact that there was no market for these skins either locally or abroad. Locally it is certain

there was at no time any market, and the observation of the Tribunal that the Assessee should have tried to sell them locally is certainly un-

understandable in the context of the evidence. It is for the trader to ascertain what avenues for the sale of the goods are open to him and if he

shows that as far as his connections establish, there was no prospect of the sale of the goods, for there was no demand, it is not for the income tax

department to order the mode of carrying on the business of the trader. For instance, when the only market for these snake skins was in the United

Kingdom and United States all these years and if that market fell off, the income tax Officer cannot ask the Assessee why he could not have sold

the skins in other foreign countries. That is virtually the stand taken by the Tribunal. As we have also pointed out, if the Assessee should gain an

initial advantage by valuing his closing stock at nil, he is bound to value these goods at the same value in his opening accounts of the succeeding

year of account, so that any sale of the goods, in that year would result in the entire sale price being treated as profit liable to tax, clearly an

advantage to Revenue. Even apart from that, it is settled law that the Assessee has a right to value his closing stock at cost price or market price,

whichever is lower, and in the present case, there is no doubt that the market price was nil.

The question is, therefore, answered in the negative and in favour of the Assessee, who will be entitled to his costs.