Case: Commissioner Of Income Tax, Calcutta Vs. British Paints India Ltd

These appeals by certificate arise from the judgment dated August 22, 1974 of the Calcutta High Court in I.T.R. No. 9 of 1970 concerning the assessment years 1963-64 and 1964-65, relevant to the accounting years ended December 31, 1962 and December 31, 1963. Answering the question referred to it in the negative and against the revenue, the High Court stated that the Income Tax Appellate Tribunal was not justified in rejecting the method of valuation of the goods in process and the finished products on the basis of the cost of raw materials after excluding altogether the overhead expenditure. The Tribunal had by its order dated February 27, 1969 upheld the findings of the Income Tax Officer, as confirmed by the Appellate Assistant Commissioner, that the assessees goods to process and finished products were liable to be valued at 100 per cent of the cost which included the overhead expenditure and not at 84.49 per cent as claimed by theThe 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 excluding overhead expenditure. 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 lose their market value. This contention of the assessee was rejected by the Income Tax Officer observing that at no time had the assessee claimed any deduction on account of deterioration or damage to goods. The officer held that there was no justification to recognise a practice, as claimed by the assessee, of valuing its stock otherwise than in accordance with the well recognised principle of accounting which requited the stock to be valued at either cost (raw material + expenditure) or market price, whichever was the lower. Recalculating the value of the opening and closing stocks by adding the overhead expenditure, the officer made an addition of Rs 1, 04, 417 for the assessment year 1963-64 and allowed a deduction of Rs 3338 for the assessment year 1964-65. These orders, as stated above, were confirmed by the Assistant Appellate Commissioner and by the Tribunal3. The Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and there was no justification for excluding the overhead expenditure in valuing the stock. If it was in the interest of the business to value stock solely with reference to the cost of raw materials and without including the overhead expenditure, such valuation was not appropriate to the computation of income chargeable under the Income Tax Act. The High Court noticed that there was no evidence of deterioration of the goods in stock. But after an exhaustive review of the case law on the question, the learned Judges came to the conclusion that, having regard to the consistent practice of the assessee, the Tribunal was not justified in rejecting the assessees method of valuation of itsThe computation made by the Income Tax Officer in making the addition and deduction for the respective years was in exercise of his power under Section 145 ofthe Income Tax Act, 1961. This provision, insofar as it is material,Method of accounting. - (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall be computed in accordance with the method of accounting regularly employed by the assesseeProvided that in any case where the accounts are correct and complete to the satisfaction of the Assessing [Ed. : Substituted for "Income Tax" by Act 4 of 1988, S. 2 (w.e.f. 1.4.1988)] Officer but the method employed is such that, in the opinion of the Assessing [Ed. : Substituted for "Income Tax" by Act 4 of 1988, S. 2 (w.e.f. 1.4.1988)] Officer, the income cannot properly be deducted therefrom, then the computation shall be made upon such basis and in such manner as the Assessing [Ed. : Substituted for "Income Tax" by Act 4 of 1988, S. 2 (w.e.f. 1.4.1988)] Officer may determine :...."The question to be determined by the Assessing Officer in exercise of his power under this provision is whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the officer and the income has been computed in accordance with the method of accounting regularly employed by the assessee. What is to be determined by the officer in exercise of his power is a question of fact, i.e., whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. In the words of Viscount Haldane "it is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business" (Sun Insurance Office v. Clark 1912 AC 443 : 104 LT 520]). Referring to Section 13 ofthe Income Tax Act, 1922, which corresponds to Section 145 ofthe Income Tax Act, 1961, this Court had stated in Chhabildas Tribhuvandas Shah v. CIT [ 1966 (59) ITR 733 "We may point out that we are not concerned with the correctness of the conclusion and we are only concerned with the question whether there is any material in support of the finding of the Appellate Tribunal. In cases involving the applicability of the proviso to Section 13, the question to be determined by the Income Tax Officer is a question of fact, namely, whether the income, profits and gains can or cannot be properly deduced from the method of accounting regularly adopted by the assessee. There is nothing special about this question of fact, and generally the only question of law that can possibly arise is whether there is any material for the finding....."The facts are not in dispute. It is the assessees case that the stock-in-trade has been valued at 84.49 per cent representing the actual cost of the raw materials. The overhead charges representing 15.51 per cent of the total cost have been admittedly excluded from the assessees valuation of the stock. But by the very method of accounting which the assessee has adopted, it is possible for the Income Tax Officer to make the necessary additions or deductions so as to arrive at the correct value of the stock for the purpose of determining the chargeable income. The correctness of the accounts maintained by the assessee is not in question; nor is the system adopted by the assessee, except insofar as the stock is valued without taking into account the production expenditure. The question, therefore, is whether or not the Assessing Officer is justified in holding that the stock-in-trade of the assessee has necessarily to be valued, for the purpose of computing the income, at 100 per cent of the cost, and not at 84.49 per cent, as the assessee has admittedly done

Court's reasoning:
20. Section 145 ofthe Income Tax Act, 1961 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 Income Tax Officer to determine the taxable income by making such computation as he thinksAny 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 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 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 taxableThe Tribunals order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was clearly wrong in interfering with those findings