The central legal point established in the judgment is the application of the principle of valuing closing stock at cost or market price, whichever is lower, and the distinction between anticipated losses and reduction in prospective profits.

Judgment

S.H. KAPADIA, J. - A short question which arises for determination in this civil appeal is whether ITAT was justified in law, on the facts and circumstances of this case, in holding that the method adopted by the assessee for valuation of closing stock of "zinc concentrate" at the international rate, was in order, particularly when there was no export during the financial year ending 31 - 3 - 1996 and particularly when in the past the assessee has been valuing the closing stock of zinc concentrate for captive consumption at the weighted average cost. The facts giving rise to this civil appeal briefly are as follows.

2. At the relevant time the respondent assessee was a government company. In this civil appeal we are concerned with Assessment Year 1996 - 97. The assessee was engaged in the business of producing zinc concentrate which was uti Ii sed by the assessee captively. During Assessment Year 1996 - 97, zinc concentrate got accumulated to the extent of 84,000 metric tonnes (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, globalisation 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 AO took the view that during 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 by Rs 27.08 crores. According to the AO, in view of the above auditors report, an addition was required to be made to the income of the assessee for the accounting year ending 31 - 3 - 1996. According to the respondent assessee, the allegation made by the AO 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 subsequent years.

3. Aggrieved by the order of the AO the respondent assessee preferred an appeal before CIT(A) which was partly allowed. The assessee further carried the matter in appeal before ITAT which deleted the additions made to the income of the assessee.

4. Aggrieved by the decision of ITAT, the 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.

5. Mr P.P. Malhotra, Additional Solicitor General, appearing on behalf of the Department submitted that on the facts and circumstances of the case there was no reason for the assessee to change the method of accounting. It was urged that in the financial year ending 31 - 3 - 1996 there were no export sales and, therefore, there was no question of taking into account the factum of export sales in the next accounting year ending 31 - 3 - 1997. Learned counsel submitted that in the present case there was no allegation that the accumulated stock of zinc concentrate was junk which had no market in India. Learned