Case: Commissioner of Income Tax, Udaipur Vs. M/S. Hindustan Zinc Ltd

At the relevant time respondent-assessee was a Government Company. In this civil appeal we are concerned with the assessment year 1996-97. Assessee was engaged in the business of producing zinc concentrate which was utilized by the assessee captively. During the assessment year 1996-97, zinc concentrate got accumulated to the extent of 84000 metric tones (approximately). It was not possible to consume the said quantity as the accumulated stocks contained low metal content and high impurity level of silica. Further, no other plant in India had the ability of producing zinc concentrate in a viable manner. Since domestic consumption of the accumulated stock was not possible the assessee decided to explore the possibilities of exporting the accumulated stock. Further in 1991, on account of economic reforms, globalization came to India. Therefore, the assessee-company took the decision in consultation with the Government to export the accumulated quantity of zinc concentrate. With the permission of the Government, the assessee decided to price "zinc concentrate" for the purpose of sale by adopting what is called as the London Metallic Exchange Price (for short, LME price) as on 31.3.1996 the LME price was lower than the Weighted Average Cost (for short, WAC) by Rs.27.08 crores. However, the A.O. took the view that during the financial year 1995-96 there was no export sale of zinc concentrate; that in the Auditors Report there was a categorical observation that the decrease in the value of inventory by Rs.27.08 crores was not in accordance with the accounting policy of the company and if the inventory would have been valued at the domestic price then the companys profit would have been higher than by Rs.27.08 crores. According to the A.O., in view of the above Auditors Report, an addtion was required to be made to the income of the assessee for the accounting year ending 31.3.96. According to the assessee-respondent, the allegation made by the A.O. that there was no export sale during the said year was not relevant as the goods were lying in stock and they were supposed to be sold out in the succeeding years. According to the assessee, the goods were actually exported out of India in subsequentby the order of the A.O. the assessee-respondent preferred an appeal before CIT (A) which was partly allowed. The assessee further carried the matter in appeal before the ITAT which deleted the additions made to the income of theby the decision of the ITAT, Department preferred an appeal before the Division Bench of the High Court which was of the opinion that no substantial question of law as suggested by the Department arose for consideration. Hence this civil appeal.

Court's reasoning:
The narrow controversy involved in the present case is whether the assessee was right in writing down the inventory (zinc concentrate) below the cost price by estimating its net realizable value at LME price and not by estimating its net realizable value at the domestic price. There is no dispute in the present case that as on 31.3.96 the international prices of zinc concentratres were lower than the domestic prices thereof. Further, in the past the assessee has been valuing zinc concentrates at net realizable value at the domestic prices. It is for this reason that Auditors in their Report have categorically stated that if the net realizable value stood estimated in accordance with the past accounting policy (at domestic prices) the profits of the company would have been higher by Rs.27.08 crores. This Report of the Auditors is not erroneous at it sought to be urged on behalf of the assessee. There is rectification of the said Report. In the case of British Paints (supra) it has been held by this Court that if the fall in the price has the effect of merely reducing the prospective profits (which appears to be the case if one looks at the Auditors Report) there would be no justification to discard the valuation at cost. Therefore, in our view, the present case is not the case of anticipated loss, it is the case of reduction in the prospective profits.