The Commissioner of Income Tax vs Sri Visweswaradas Gokuldas

Alfred Henry Lionel Leach, C.J.—The assessee is a merchant dealing in metals. Up to the end of the samvat year 1994, that is up to 23rd

October, 1938, he adopted as the method of accounting for Income Tax purposes the practice of valuing his stocks at the cost price. Both at the

beginning and at the end of the year the cost price was taken. In respect of the, samvat year 1995 (20th October, 1938 to 11th November, 1939)

the assessee made a change. He opened the account with stocks valued at cost price and closed it with a valuation at the market price. The market

price was much higher than the cost price and this resulted in showing an increase in the profits to the extent of Rs. 24,797. The object of the

change in the method of accounting is not far to seek. The Excess Profits Tax Act had come into operation. It actually came into force on the 13th

April, 1940, but the Legislature applied its provisions from the 1st September, 1939. The Income Tax Officer accepted the assessee''s return for

the samvat year 1995, which corresponded to the year of assessment 1940-41. In the following year the Income Tax Officer discovered that he

had made a mistake in accepting the method of accounting which the assessee had adopted for the year 1940-41. Consequently for the samvat

year 1996 (1941-42) the Income Tax Officer assessed the assessee on the basis of the cost price of the stock. He took the cost price at the

beginning of the year and at the end of it, which meant the addition of Rs. 24,885 to the total income. The assessee objected and said that the

Income Tax Officer should have adopted the method which had been adopted for the previous year. He appealed to the Assistant Commissioner

of Income Tax without success, but on a further appeal to the Income Tax Appellate Tribunal, Madras Bench, he was successful. At the request of

the Commissioner of Income Tax, the Tribunal has referred to this Court u/s 66(1) of the Income Tax Act, the following question:

Whether in the circumstances of the case the assessment made by the Income Tax Officer for 1941-42 by adding the sum of Rs. 24,885 to the

total income of the respondent by revising valuations of the opening and closing stocks of samvat year 1996 on cost basis was legal.

Section 13 of the Income Tax Act, 1922, deals with the method of accounting. It says that income, profits and gains shall be computed for the

purposes of Sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee, provided that, if no method of

accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income Tax Officer, the income, profits and

gains cannot properly be deduced from it, then the computation shall be made upon such basis and in such manner as the Income-ta,x Officer may

determine. The proviso gives the Income Tax Officer full liberty of action if he is satisfied that the method adopted by the assessee does not allow

of a correct assessment of the profits. When he is of this opinion it is his bound en duty to adopt another method, a method which he considers will

permit of a satisfactory assessment. This was pointed out by the Privy Council in the Commissioner of Income Tax, Bombay v. Sarangpur Cotton

Manufacturing Co., Ltd., of Ahmedabad (1938) 1 M.L.J. 1 : L.R. 65 IndAp 1 : ILR 1938 Bom. 239 .

In the Commissioner of Income Tax Vs. Chengalvaroya Chetti and Another, , this Court held that it was an accepted rule that the assessee in

crediting the closing stock figure is to take either the cost price or the market price whichever be the less--a provision obviously intended to be in

favour of the trader and one which enables him more evenly to distribute his loss.

Taking the stock of the samvat year 1995-96 at the market price was not in accordance with the assessee''s regular method of accounting. His

regular method had been to take the cost price both at the beginning and at the end of the year. Moreover the market price was admittedly far

higher than the cost price. In these circumstances the'' Income Tax Officer took the proper course in valuing the stocks at the cost price, at the

same time offering to rectify the assessment for the previous year under the provisions of Section 35 of the Act. We hold that the Income Tax

Officer was in law entitled to adopt the course which he did in respect of the samvat year 1996 and accordingly we answer the question referred in

the affirmative.

The learned Counsel for the Commissioner of Income Tax has given an undertaking to the Court that the assessment for the year 1940-41 will

be revised. In respect of that year also the stock will be valued at the opening and at the close of the year at the cost price and the tax repayable to

the assessee on this basis will be adjusted.

The Commissioner of Income Tax is entitled to the costs of this reference, which we fix at Rs. 250.