Law:

Section:

Section 145, read with section 80HHC, of the Income-tax Act, 1961 - Method of accounting - Valuation of stock - Assessment years 1992-93 and 1993-94 - Assessee valued closing stock for first year at market rate at Rs. 130 per kg. while opening stock was valued at Rs. 90 per kg. - In second year, opening stock was valued at Rs. 130 per kg. and there was no closing stock, that resulted in abnormal gross profit ratio of 2054.60 per cent in first year and loss return in second year - Assessee's contention was that it was following same system of accounting for last several years - Held, yes - Whether since entire device adopted by assessee was to inflate deduction under section 80HHC in first year and to suppress profits in second year, Assessing Officer was justified in applying principle of 'lower of cost or market value' and valuing closing stock of 1992-93 and opening stock of 1993-94 at Rs. 90 per kg. - Held, yes FACTS The assessee-firm was engaged in manufacture and export of blankets. The Assessing Officer found that in the first year (assessment year 1992-93) the assessee had calculated the closing stock at Rs. 130 per kg. and the opening stock at Rs. 90 per kg. By calculating the closing stock at Rs. 130 per kg. the gross profit was shown as Rs. 7,13,03,219.99 and the gross profit ratio came to 2054.60 per cent. Consequently, the resultant deduction under section 80HHC was claimed. In the second year, i.e., the assessment year 1993-94, the assessee had increased the debits by calculating the value of the opening stock at Rs. 130. By that method, the assessee had increased the expenses in the next year. In the next year, there was no closing stock and the assessee had returned a loss of Rs. 54,420. The Assessing Officer concluded that the method followed by the assessee in valuing the closing stock at market rate gave a distorted picture in the sense that the assessee had artificially inflated the profits in order to get the benefit of deduction under section 80HHC. The Assessing Officer concluded that the entire device was to inflate deduction under section 80HHC in the first year and to suppress the profits in the second year. In the circumstances, the…

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