Law: Income Tax Act, 1961

Section: 145

(a) Income-tax---Valuation of stock---Principles---Valuation of stock has to be on cost or market value whichever is lower ---Assessee valuing stock only at actual cost of raw materials and not taking into account overhead charges---Not correct mode of valuation---Assessing Officer is entitled to add overhead charges. (b) Income-tax-- ---Method of accounting---Consistent practice should disclose true picture of profits and gains---If system adopted does not disclose true and proper income, Assessing Officer is entitled and has duty to adopt appropriate computation to determine true income.---[British Paints India Ltd. v. C.I.T. (1978) 111 ITR 53 reversed. The assessee, a company engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding. overhead expenditure. The justification for the practice, according to the respondent, was that the goods being paints had limited storage life and, if not quickly disposed of, were liable to lose their market value. For the assessment years 1963-64 and 1964-65, the Income-tax Officer held that there was no justification to recognise a practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (viz., raw material plus expenditure) or market price, whichever was lower. He, therefore, calculated the value of the opening and closing stocks by adding the overhead expenditure. The Appellate Assistant Commissioner confirmed that order. On appeal, the Appellate Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and that there was no justification for excluding the overhead expenditure in valuing the stock; and, if it was in the interest of the business to value stock solely with reference to cost of raw materials and without including overhead expenditure, such valuation was not appropriate to the computation of income chargeable under the Income-tax Act. The High Court, on a reference, reversed the decision of the Tribunal holding that, having regard to the consistent practice of…

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