Vithal Reddy Rangareddy vs Hyd. Govts

This is a petition under Sub-section (3) of Section 48 of the E. P. T. Regulation for directing the Commissioner to state a case upon the following two questions:

Whether the Assessee is not entitled to put the market price on his closing stock and declare a loss if the market price showed a fall from the purchase price and whether it can be rejected by the Excess Profits Deputy Commissioner as notional?

Whether the Excess Profits Tax Officer & the Deputy Commissioner can estimate the profit on improper grounds and guess work and impose a flat rate ignoring evidence on record?

The learned Advocate for the Petitioner wishes to press only the first of these questions, as such this order will be confined only to that question.

It is admitted by both sides that certain cotton seeds were purchased by the Assessee prior to the v. C. A. P. which was valued at the close of the IV C. A. P. at cost price. In the v. C. A. P. the stock was opened accordingly at the cost price and the Assessee valued the closing stock at the market rate which was lower than the cost price. The Excess Profits Tax authorities disallowed this method of valuation in view of the fact that in the previous C/A. P. the method adopted by the Assessee was to value the opening and closing stock at cost price. Section 9, Hyderabad Excess Profits Tax Act, corresponding to Section 13, Indian Income Tax Act, states that

profits shall be computed for the purpose of this Act in accordance with the method of accounting regularly employed by the Assessee.

If a particular method of accounting has been employed by the Assessee, the Excess Profits Tax authorities are bound to accept that method of accounting unless by that method the true income, profits and gains cannot be arrived at. Having adopted a regular method of accounting the Assessee cannot be allowed to change it or depart from it for a particular year or for part of that year or in respect of a particular transaction, AIR 1933 198 (Privy Council) . It was stated by Sir Coutts Trotter C.J., in the case of � Commissioner of Income Tax Vs. Chengalvaroya Chetti and Another, that the accepted rule is that the Assessee in crediting the closing stock figure is to take either the cost price or the market value whichever be the less�a provision obviously intended to be in favour of the trader and which enables him more evenly to distribute his loss. Lord Buckmaster in the case of � AIR 1930 56 (Privy Council) made certain pertinent observations which explain fully the basis upon which the opening and closing stock has to be dealt with. He observed:

The method of introducing stock into each side of a profit and loss account for the purpose of determining the annual profits is a method well understood in commercial circles and does not necessarily depend upon exact trade valuations being given to each article of stock that is so introduced. The one thing that is essential is that there should be a definite method of valuation adopted which should be carried through from year to year, so that in case of any deviation from strict market values in the entry of the stock at the close of one year it will be rectified by the accounts in the next year If the method of altering both valuations is not adopted it is perfectly plain that the profit which is brought forward is not the real one. It may be more or it may be less, but it has no relation to the true profit if the stock is valued on one basis when it goes out without considering the value of the stock when it comes in. When, therefore, there is undervaluation at one end, the effect is to cause both a smaller debit in respect of the stock introduced into the next account and a larger sum for profits realized by the sale, change in market values being immediately reflected in the price obtained for the goods that are sold; in these circumstances to contend that there should be undervaluation at one end and not at the other is to raise an argument which their Lordships cannot accept.

In the case of � In Re: Chouthmal Golapchand, Derbyshire C.J., who was delivering the judgment of the Bench after citing the above observations of Lord Buckmaster, held that when an Assessee had adopted a system of valuation at cost price at the end of every year and opening of the next year the cost price of the assets must be taken to have been their value at the beginning of the account year. He further observed:

In my opinion, as this stock was at all previous times valued at cost price and was brought into the balance sheet at the beginning of the year at its cost price, then when it was taken out of the assets of the company, it also should be valued in the same way at the cost price, The system of valuation which the Assessees contend for would, it appears to me, have the effect of bringing into the accounts of the year a loss in respect of this stock which had not occurred during the year.

Lionel Leach C.J. and Patanjali Sastri J., in The Commissioner of Income Tax Vs. Sri Visweswaradas Gokuldas, and Rajamannar C.J. and Yahya Ali J. in � Commr. of Income Tax and Excess Profits Tax, Madras v. Messrs. Chari and Ram AIR 1949 Mad 580 (F) have also held similarly. In the former case the Assessee, a merchant, 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. In the Samvat year 1995 the Assessee opened the account with stocks valued at cost price and closed it with a valuation at the market price which was much higher than the cost price. The Income Tax Officer first accepted it for the said year, but later having discovered his mistake revised the valuation and assessed the Assessee on the basis of the cost price of the stock both at the beginning and at the end of the year, which resulted in the addition of Rs. 24,855/-to the total income. It was held on these facts that in the circumstances of the case, the revision of the closing stock on the basis of the cost price, which was the method adopted by the Assessee, was legal. In the recent case of Asher Textiles Ltd., Tiruppur Vs. Commr. of Income Tax and Excess Profits Tax, Madras, , Satyanarayana Rao and Rajagopalan JJ., have further reinforced the same view.

It is well to remember that the value of unsold stock in trade is necessary for the computation of profits or losses for any particular period for which such profits or losses are computed. The established principle of commercial accounting requires that in the profit and loss account of a merchant or in a manufacturer''s business, the value of trading stock in hand at the beginning and at the end of the accounting year should be entered at cost or market price whichever is lower. It is obvious that the closing stock of a year is the opening stock of the next year and the Assessee is free to adopt his own method of accounting. He may instead of valuing the stock at cost price or market price whichever is lower, regularly employ the method of valuing at cost both at the beginning and at the end of every year, irrespective of any fluctuations in the market value or only at market value irrespective of the question whether such valuation is higher than the cost. In our view it is quite certain and indeed clear law that if a trader puts into his account one value at the end of any accounting year, he should open the next year with the same value, as otherwise, a true state of affairs cannot be ascertained. The Petitioner''s Advocate seeks to draw a distinction on the facts of this case and contends that since the Excess Profits Tax Act was not extended beyond the v. C. A. P. the Assessee was entitled to close the stock at the market value, notwithstanding the fact that in the previous years he had valued the opening and closing stock at cost price. This according to him is a question of law upon which we should ask the Commissioner of E. P. T. to state a case. The distinction which is sought to be drawn by him is a distinction without a difference. Once it is admitted that the method of accounting which has been followed, is the one upon which the assessment has been based, then the question whether the v. C. A. P. is the last taxable year or the E. P. T. Act has not been extended further, is not material and does not in any way affect the manner of computation of profits. Where on undisputed facts the proposition of law arising therefrom is well settled, it, would, in our view, be otiose to direct the Commissioner to state a case. In this view of the matter, we think no useful purpose will be served by directing the Commissioner to state a case. The application is, therefore, dismissed with costs.