The purpose of valuation of unsold stock is not to bring into charge any depreciation in the value of such stock, and the principle that the stocks should be valued at cost or market price, whichever is the lower, is not a rule of law but a working method suited with modification having regard to the particular business carried on by the assessee.

( 1 ) IN order to appreciate the question involved in this reference it would be necessary to narrate briefly the facts leading up to the making of this reference. The assessee is a company engaged in the business of manufacture and site of paints. This reference arises out of assessment orders for the years 1963-64 and 1964-65, for which the relevant accounting years ware the calendar years 1962 and 1963, respectively. The assessee had valued raw materials at cost in the closing stock inventory. However, the goods in process and the finished products had been valued at the cost of raw materials only, which, according to the assessee, formed 84. 49% representing overheads. The assessee had contended that it had been the practice to uniformly value the goods-in-process and the finished products at the cost of raw materials only. It was submitted that the paints had a limited storage life and if these were not sold within a certain period these lost their market value. The Income-tax Officer did not accept the said reasoning and contention. He was of the opinion that the basis of valuation of stocks, according to the well-known principles of accountancy, should have been, either cost or market price, whichever was less. The Income-tax Officer, therefore, valued such stock of goods-in-process and finished products at 100% of cost including the overheads as against 84. 49% as shown in the books of account of the assessee. On the aforesaid basis the Income-tax Officer revalued the closing stock and also the opending stock and made an addition of Rs. 1,04,417 in the assessment year 1963-64, and allowed a deduction of Rs. 3,338 in the assessment year 1964-65, by adjustment of valuation of stocks. There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, for the reasons mentioned in his order, upheld the Income-tax Officer's order.

( 2 ) THERE was a further appeal before the Tribunal. It was urged before the Tribunal that the basis of valuation adopted by the assessee was in accordance with the recognised, system of accounting. It was urged that the practice of valuing the closing stocks at only the value of raw material had been followed consistently over the years and, therefore, the same should not be disturbed by the departmental authority. Reliance was placed on certain books of accountancy in support of the method followed by the assesses. It, was reiterated that depending upon the life of a particular kind of paint which was described as "shelf-life ", that is to say, the period during which the paint could reasonably be stored without losing its quality, experience had shown that, irrespective of the actual cost, the writing down of it in the manner it was done was necessary for the purpose of balancing the profits on sale of such products. The. Tribunal was of the opinion that the goods-in-process as well as the finished products had been arbitrarily taken below the cost, that is, the cost of raw materials and other overheads. The Tribunal was of the opinion that in this case there was no evidence that the stocks had either become obsolete or slow-moving. In the premises there was, according to the Tribunal, no justification for writing down the value of the stocks. It was noted by the Tribunal that in none of these years the assessee had claimed deduction for depreciation of stocks remaining unsold over a stated period. The Tribunal, therefore, came to the conclusion that, apart from a mere possibility of the paint losing its quality, there was nothing to show that the goods-in-stock had actually deteriorated in value. The Tribunal noted that in this case it was not merely the cost of raw material that was debited in the account but the cost of overheads had also been debited in the account. The Tribunal thought that if the entire revenue expenditure was to be claimed as deduction, then, it could only be on the basis that either the sales were accounted f