Judgement

Appeal (No. 43 of 1929) from an order of the High Court at Bombay (February 28, 1928) upon a reference to the Court under s. 66, sub-s.2, of the Indian Income-tax Act, 1922.

The respondent company, which carried on business as merchants and manufacturers, made a return of their income for the year ending December 31, 1925 (being the date to which their accounts were made up annually) for the purpose of assessment to income-tax and super-tax for the financial year 1926-7, annexing the companys printed profit and loss account for the period. In this account the stock in hand at the end of the period, called the closing stock, was valued at a figure stated therein as " below cost." On this return the company was assessed at Rs.2.49.142, and the tax so assessed was paid. The income-tax officer afterwards found that the closing stock was greatly undervalued in the account. Accordingly he revalued it at its proper value, with the result that the assessment for the year was raised to Rs.7.66.450. The company appealed to the Assistant Commissioner, contending that if the closing stock was valued at its proper value the opening stock should be so valued also. It was stated that it was the companys practice to undervalue its stock in

Law. Rep. 57 Ind. App. 21 ( 1929- 1930) C ommr. of I.T. Bombay v. Ahmedabad New C otton Mills

196

hand as a safeguard against market fluctuations; the value at which the closing stock was brought into the companys account in any year was taken as the value of the opening stock in the next year. The Assistant Commissioner affirmed the assessment.

The Commissioner of Income-tax, at the request of the company, referred to the High Court under s.66, sub-s.2, the question of law stated in the judgment of the Judicial Committee.

The High Court (Marten C.J. and Kemp J.) in answer to the question referred held that the assessments should be varied by valuing at their true valuation the companys stocks at the beginning and at the end of the year in question and not only by revaluing the stock at the end of the year. The proceedings are reported at I. L. R. 52 B. 669, where the facts are more fully stated.

1929. Nov. 4. Dunne K.C. and Reginald Hills for the appellant.

Latter K.C. and Colombos for the respondent.

[Reference was made to Commissioners of Income-tax v. Chengalvaraya Chetti. (( 1925) I. L. R. 48

M. 836.)]

The judgment of their Lordships was delivered by

LORD BUCKMASTER. The question submitted for the opinion of the High Court is in the following terms " When the opening and closing stocks "—their Lordships think that there ought to be introduced "of a business "—" are both undervalued, whether the real profits of the company of a particular year can be ascertained by merely raising the valuation of the closing stock, not taking into consideration the similar undervaluation of the opening stock"; and the answer is that, in the opinion of the Board, they cannot.

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. It may, of course, be that in so adjusting the figures of stock there may be special cases in which the valuation is so treated as justly to cause it to be open to dispute. But their Lordships have nothing whatever to do with that in this particular case. They are asked to answer a perfectly simple question which, upon the face of it, in the opinion of the Board, should answer itself. If the method of altering both valuations is not adopted it