Shri P.amarnath Reddy v. The Deputy Commissioner Of Income-Tax,Central Circle-Iii (3)

CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MR.JUSTICE N.SATHISH KUMAR Tax Case (Appeal) No.979 of 2008 Judgment reserved on Judgment pronounced on 09.11.2018 19.11.2018 Shri P.Amarnath Reddy,No.1/1, Kothari Road,Nungambakkam,Chennai-600 034... Appellant -vs- The Deputy Commissioner of Income-tax,Central Circle-III (3),121, Mahatma Gandhi Road,Chennai-600 034... Respondent Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income-tax AppellateTribunal Chennai Bench “B”, dated 11.03.2008 inI.T.A.No.684/Mds/2007 for the assessment year 2000-01 againstthe order of the Commissioner of the Income Tax (Appeals)-II,Chennai, Nungambakkam, Chennai-34, dated 15.12.2006 made inAppeal No.CIT(A)/CHE/171/06-07 and against the order in theJoint Commissioner of Income Tax, Central Circle-III (3),Chennai, dated 31.3.2006 made in PANo/GI NO.AABR9639K, for theAssessment year 2000-01. This appeal, by the appellant/assessee under Section 260Aof the Income-tax Act, 1961 (hereinafter referred to as “theAct”), is directed against the order passed by the Income-taxAppellate Tribunal Chennai ‘B’ Bench (“the Tribunal” forbrevity) in I.T.A.No.684/Mds/2007, dated 11.03.2008, for theassessment year 2000-01. https://hcservices.ecourts.gov.in/hcservices/ 2. The appeal was admitted, by order dated 29.07.2008, onthe following substantial questions of law:-“(i) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in rejectingthe appellant's valuation of the closing stock ofshares on the basis of “since realized value”?(ii) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law in confirmingthe value of the closing stock determined by theCommissioner of Income Tax (Appeals)?” 3. The assessee is an individual, running aproprietorship concern, engaged in the manufacture and exportof leather products. On 22.01.2004, a search was conducted inthe residential premises of the assessee, pursuant to which, anotice under Section 153A of the Act was issued. In responseto such notice, the assessee filed return of income declaringa loss of Rs.3,39,93,012/-, apart from the agricultural incomeof Rs.2,31,203/-. 4. The assessee’s case is that during the previous year,relevant to the assessment year 2000-01, he had commencedbusiness of trading in shares, and throughout the year, therewas tremendous fluctuation in the value of shares due tohawala transaction, and only towards the end of the year, thevalue of shares stabilized. 5. The assessee would state that he was advised that thevaluation of closing stock of shares would have to reflect arealistic value and accordingly, the assessee valued theclosing stock of shares on the basis of “since realisedprice”. According to the assessee, if any other method ofvaluation is adopted, it would reflect a distorted or unrealvalue. 6. The assessee would further state that the 'sincerealised price' method of valuation is an accepted method, inaccordance with the Accounting Standard (AS) prescribed by theInstitute of Chartered Accountants of India (ICAI), andaccordingly, valued his shares at Rs.6,46,36,684/-. 7. The Assessing Officer, by order dated 31.03.2006,completed the assessment under Section 153A read with Section143(3) of the Act and while doing so, raised a query as to whythe valuation of the closing stock adopted by the assessee,was lower than the cost of the stock. The assessee explainedstating that on account of a scandal that had occurred duringthe relevant time, the prices of the shares had beenfluctuating inordinately and on account of difficulty inascertaining the true value of the share with the stock marketcrashing day by day, the assessee resorted to adopt the pricehttps://hcservices.ecourts.gov.in/hcservices/at which the stock was sold in the first month of the 7. The Assessing Officer, by order dated 31.03.2006,completed the assessment under Section 153A read with Section143(3) of the Act and while doing so, raised a query as to whythe valuation of the closing stock adopted by the assessee,was lower than the cost of the stock. The assessee explainedstating that on account of a scandal that had occurred duringthe relevant time, the prices of the shares had beenfluctuating inordinately and on account of difficulty inascertaining the true value of the share with the stock marketcrashing day by day, the assessee resorted to adopt the pricehttps://hcservices.ecourts.gov.in/hcservices/at which the stock was sold in the first month of the subsequent financial year. The Assessing Officer rejected thecontention raised by the assessee as regards the method ofvaluation and ascertained the market value of the stock as on31.03.2000 from the website of the National Stock Exchange anddetermined the market value of the closing stock atRs.13,43,22,426/-. 8. Aggrieved by the same, the assessee filed appeal beforethe Commissioner of Income Tax (Appeals)-II (“the CIT(A)” forbrevity) reiterating the stand that the “since realised value”is an approved method of valuation. In this regard, theassessee referred to Accounting Standard No.2, Item No.5 (iv),which defines net realisable value to mean actual/estimatedselling price. The CIT(A), by order dated 15.12.2006,rejected the contention advanced by the assessee and held thatthe valuation of the closing stock would have to be on “cost”or “market” basis and accordingly adopted the cost of theclosing of stock at Rs.11,52,00,401/-, which was lower thanthe market value of the stock as on 31.03.2000, i.e.,Rs.13,43,22,426/-. Consequently, the addition was reducedfrom Rs.6,96,85,741/- to Rs.5,05,63,716/-. 9. Aggrieved by such order, the assessee preferred appealto the Tribunal. The Tribunal agreed with the findings of theCIT(A) and in doing so, held that the assessee cannot re-writehis accounts on the basis of the events that occurred afterthe finalization of the same. Accordingly, the Tribunal heldthat the valuation of the closing stock would have to be madeon the basis of “cost” or “market” value, whichever is lower.Aggrieved by the same, the assessee is before us by way ofthis appeal. 10. We have heard Ms.Sree Lakshmi Valli, learned counselfor the appellant/assessee and Mr.T.Ravi Kumar, learned SeniorStanding Counsel for the respondent/Revenue. 11. The assessment order dated 31.03.2006, is sort ofunique in its narration. We say so because, the AssessingOfficer has posed certain questions to the authorizedrepresentative of the assessee, culled out answers from himand the assessment order proceeds on a question-answer basis. 12. Be that as it may, we are required to decide thequestion as to whether the assessee was justified in valuingthe closing stock of shares on the basis of “since realisedvalue”, which according to the assessee is the value actuallyrealised by the assessee on the sale of the stock during thefirst month after the end of the financial year. 13. The sum and substance of the finding of the AssessingOfficer in his lengthy 24 pages order is that the assesseedeliberately valued the closing stock of his stock of sharesfor the year ending 31.03.2000 by adopting an unconventionalhttps://hcservices.ecourts.gov.in/hcservices/method of accounting of valuation only to reduce the value of closing stock and the profit for the year ending 31.03.2000.According to the Assessing Officer, the method of valuation,adopted by the assessee, is wholly impermissible in the lightof the following decisions:- (i) CIT vs. Kamani Metals and Alloys Ltd., (1994) 208 ITR1017 (Bom.);(ii) CIT vs. Tamilnadu Sugar Corpn. Ltd., (2004) 265 ITR0466 (Madras); and (iii) K.Mohammed Adam Sahib vs. CIT, (1965) 56 ITR 0360 (Mad.). 13. The sum and substance of the finding of the AssessingOfficer in his lengthy 24 pages order is that the assesseedeliberately valued the closing stock of his stock of sharesfor the year ending 31.03.2000 by adopting an unconventionalhttps://hcservices.ecourts.gov.in/hcservices/method of accounting of valuation only to reduce the value of closing stock and the profit for the year ending 31.03.2000.According to the Assessing Officer, the method of valuation,adopted by the assessee, is wholly impermissible in the lightof the following decisions:- (i) CIT vs. Kamani Metals and Alloys Ltd., (1994) 208 ITR1017 (Bom.);(ii) CIT vs. Tamilnadu Sugar Corpn. Ltd., (2004) 265 ITR0466 (Madras); and (iii) K.Mohammed Adam Sahib vs. CIT, (1965) 56 ITR 0360 (Mad.). 14. After referring to the above decisions, the AssessingOfficer observed that the assessee is even entitled tovaluation of stock at NIL following the principle of “costprice” or “market price”, whichever is less, provided thatthere is no market for the goods/stock as on the date ofbalance sheet. It further held that it is not the case of theassessee that there was no market for the shares held by himas on 31.03.2000 and the shares were freely traded in themarket. Thus, he concluded that for income tax purposes, theAssessing Officer is required to ascertain the profit for aparticular financial/assessment year and not for any otherperiod and hence, it is necessary that the value of closingstock needs to taken as on the date of balance sheet,following the principle of “market price” or “cost price”,whichever is less to arrive at the correct profit earned bythe assessee in any financial/assessment year. With theseobservations, the Assessing Officer adopted the market valueof the shares and accordingly, made the addition. 15. On appeal before the CIT(A), while agreeing with theassessee that a business man dealing in shares has right to doprudential accounting particularly, in a crashing market, heldthat the assessee cannot re-write his accounts on the basis ofevents happening after the date of finalization of accountsand the assessee having adopted the value of the closing stockon the basis of actual sale made in the subsequent year, re-writing his accounts, and this is not permissible as per theprinciple of accountancy or under taxation law. Thus, the CIT(A) agreed with the Assessing Officer on the above lines but,chose to adopt the cost of the closing stock instead of themarket value, as it was lower than the market value. TheTribunal while affirming the order passed by the CIT(A),agreed with the assessee’s stand that a business man dealingin shares, does have a right to do prudential accounting but,cannot re-write his accounts. 16. Thus, we have to consider as to whether the valuationof the closing stock, based on the realised price disclosed inthe P & L account, is permissible; and whether the authoritiesbelow and the Tribunal were right in coming to the conclusionthat the method of accounting adopted by the assessee, is anunconventional method of accounting and an attempt to re-writehis accounts.https://hcservices.ecourts.gov.in/hcservices/ 17. In terms of Section 145(2) of the Act, the CentralGovernment may notify in the Official Gazette accountingstandards to be followed by any class of assessees or inrespect of any class of income. 17.1. Section 145A of the Act commences with a nonobstante clause stating that notwithstanding anything to thecontrary contained in Section 145, the valuation of purchaseand sale of goods and inventory for the purposes ofdetermining the income chargeable under the head “Profits andgains of business or profession” shall be in accordance withthe method of accounting regularly employed by the assessee. 17. In terms of Section 145(2) of the Act, the CentralGovernment may notify in the Official Gazette accountingstandards to be followed by any class of assessees or inrespect of any class of income. 17.1. Section 145A of the Act commences with a nonobstante clause stating that notwithstanding anything to thecontrary contained in Section 145, the valuation of purchaseand sale of goods and inventory for the purposes ofdetermining the income chargeable under the head “Profits andgains of business or profession” shall be in accordance withthe method of accounting regularly employed by the assessee. 18. In the case on hand, the Assessing Officer as well asthe CIT(A) have faulted the assessee in not adopting a uniformmethod of accounting. However, one important factor, what hasbeen lost sight of by the Assessing Officer is that theassessment year in question is the first year of theassessee’s business in stock. 19. In our considered view, this fact assumes importanceand therefore, the authorities were not justified in making anobservation that the assessee was adopting different methodsof accounting for different assessment years. In this regard,we may note Clause No.31 of Valuation of Inventories (AS-2)issued by the council of Institute of Chartered Accountants ofIndia. The said Clause states that consistency is generallyaccepted as a fundamental accounting assumption and any changein the accounting policy relating to inventories, which has amaterial effect in the current period or which is reasonablyexpected to have a material effect in later periods should bedisclosed. It further states that in the case of change inaccounting policy, which has material effect in the currentperiod, the amount by which any item in the financialstatements is affected by such change should also be disclosedto the extent ascertainable and where such amount is notascertainable, wholly or in part, the fact should beindicated. 20. As pointed out earlier, the year under question wasthe first year of business of the assessee trading in sharesand stocks and therefore, the question maintaining aconsistent accounting standard or that there was anyinconsistency, cannot arises. Therefore, such finding by theauthorities needs to be eschewed. 21. Accounting Standard-4 (AS-4) issued by the council ofInstitute of Chartered Accountants of India pertains tocontingencies and events occurring after the balance sheetdate. Contingency has been defined in sub-Clause 3.1 of AS-4to mean a condition or situation, the ultimate outcome ofwhich, gain or loss, will be known or determined only on theoccurrence, or non-occurrence, of one or more uncertain futurehttps://hcservices.ecourts.gov.in/hcservices/events. 21.1. Sub-Clause 3.2 deals with events occurring afterthe balance sheet date and it states that those aresignificant events, both favourable and unfavourable, thatoccur between the balance sheet date and the date on which thefinancial statements are approved by the Board of Directors inthe case of a company and two types of events have beenidentified viz., (a) those that provide future evidence ofconditions that existed at the balance sheet date; and (b)those that are indicative of conditions that arose subsequentto the balance sheet date. 22. In the Explanation, Clause 4 explains contingenciesand in terms of sub-Clause 4.1, it is stated that the term“contingencies” used in AS-4 is restricted to conditions orsituations at the balance sheet date, the financial effect ofwhich is to be determined by future events, which may or maynot occur. 23. Sub-Clause 4.2 states that estimates are required fordetermining the amounts to be stated in the financialstatements for many on–going and recurring activities of anenterprise. However, one must distinguish between an event,which is certain and one which is uncertain. 22. In the Explanation, Clause 4 explains contingenciesand in terms of sub-Clause 4.1, it is stated that the term“contingencies” used in AS-4 is restricted to conditions orsituations at the balance sheet date, the financial effect ofwhich is to be determined by future events, which may or maynot occur. 23. Sub-Clause 4.2 states that estimates are required fordetermining the amounts to be stated in the financialstatements for many on–going and recurring activities of anenterprise. However, one must distinguish between an event,which is certain and one which is uncertain. 23.1. Sub-Clause 4.3 states that uncertainty relating tofuture events can be expressed by a range of outcomes.23.2. Clause 5 deals with accounting treatment ofcontingent losses. 23.3. Sub-Clause 5.1 states that the accounting treatmentof a contingent loss is determined by the expected outcome ofthe contingency and if it is likely that a contingency willresult in a loss to the enterprise, then it is prudent toprovide for that loss in the financial statements. 23.4. Clause 8 deals with events occurring after thebalance sheet date and it contains six sub-clauses viz., sub-clauses 8.1 to 8.6 and all of other provide for contingencieswhich may indicate need for adjustments to the assets andliabilities as at the balance sheet date. 23.5. Sub-Clause 8.2 gives an illustration regardingadjustment to be made for a loss on a trade receivableaccount, which is confirmed by the insolvency of a customer,which occurs after the balance sheet date. 23.6. Sub-Clause 8.3 gives an illustration of decline inmarket value of investments between the balance sheet date anddate on which the financial statements are approved. 24. Reverting back to valuation of inventories (AS-2), insub-clause 6.9, net realisable value has been defined to meanthe actual/estimated selling price in the ordinary course ofbusiness, less cost of completion and cost necessarily to beincurred in order to make the sale. https://hcservices.ecourts.gov.in/hcservices/ 25. The assessee's case is that what has been shown intheir books of accounts is the actual price which the assesseerealised on the sale of the stock and the assessee has shownthe same as 'since realised price', which is nothing but, netrealised value as defined in sub-clause 6.9 of AS-2. 26. In Section 17 of AS-2, which falls under the chapter“valuation of inventories below historical cost”, it is statedthat the historical cost of inventories may at times not berealised e.g., if their selling prices have significantlydeclined, or if they become wholly or partially obsolete, orif the quantity of inventories is so large that it is unlikelyto be sold/utilized, within the normal turnover period and insuch circumstances, it becomes necessary to write down theinventory to 'net realisable value', in accordance with theprinciple of conservatism which requires that current assetsshould not be carried in the financial statements in excess ofamounts expected to be realised in the ordinary course ofbusiness. 27. While discussing about the accounting standard, wemay also refer to two notifications issued by the Income TaxDepartment in Notification Nos.9949 [F.No.132/7/95-TPL]/SO 69(E) and 31/2018: dated 25.01.1996 and 31.03.2005 respectively,issued in exercise of the powers conferred under sub-Section(2) of Section 145 of the Act notifying the accountingstandard to be followed by all assessees operating mercantilesystem of accounting. 27. While discussing about the accounting standard, wemay also refer to two notifications issued by the Income TaxDepartment in Notification Nos.9949 [F.No.132/7/95-TPL]/SO 69(E) and 31/2018: dated 25.01.1996 and 31.03.2005 respectively,issued in exercise of the powers conferred under sub-Section(2) of Section 145 of the Act notifying the accountingstandard to be followed by all assessees operating mercantilesystem of accounting. 28. Clause 4 of the said notification states thataccounting policies adopted by an assessee should be such soas to represent a true and fair view of the state of affairsof the business, profession or vocation in the financialstatements prepared and presented on the basis of suchaccounting policies. It identifies 3 major considerationsgoverning the selection and application of accountingpolicies, viz., (i) prudence; (ii) substance over form; and(iii) materiality. Thus, in terms of what has been said insub-Clauses 4(i) and 4(ii) of the notification, provisionsshould be made for all known liabilities and losses eventhough the amount cannot be determined with certainty andrepresents only a best estimate in the light of the availableinformation; and the accounting treatment and presentation infinancial statements of transactions and events should begoverned by their substance and not merely by the legal form. 29. The Revenue seeks to sustain the orders passed by theauthorities as confirmed by the Tribunal by reiterating theobservations contained therein and placing strong reliance onthe decisions in the case of Kamani Metals and Alloys Ltd.,(supra); Tamilnadu Sugar Corpn. Ltd., (supra); and CIT vs.Britsh Paints India Ltd., (1991) 54 Taxman 0499. https://hcservices.ecourts.gov.in/hcservices/ 30. In Kamani Metals and Alloys Ltd., (supra), one of thequestions which came up for consideration, was whether thereplacement cost for the purpose of valuing a closing stockfor the year ended 31.03.1974 has to be determined withreference to the price announced for the quarter ended31.03.1974 and not with reference to the price announced forthe quarter commencement on 01.01.1973. The Hon'ble HighCourt of Bombay upheld the order of the Tribunal holding thatthe closing stock has be valued on the last date of theaccounting year which in the said case was 31.12.1974 and theprice of the raw material on that date was the same as theprice prevailing on the date of purchase and the change tookplace only after the end of the accounting year i.e., on01.01.1975 and such change cannot affect the valuation of theclosing stock on 31.12.1974. 31. In our considered view, the facts of the case inKamani Metals and Alloys Ltd., (supra) are entirely differentfrom that of the assessee's case. The assessee's case restsupon the actual sale price realised by him on the sale of hisstock in the first month of the next financial year.Therefore, we are of the considered view, the decision inKamani Metals and Alloys Ltd., (supra) cannot in any mannerassist the case of the Revenue. 31. In our considered view, the facts of the case inKamani Metals and Alloys Ltd., (supra) are entirely differentfrom that of the assessee's case. The assessee's case restsupon the actual sale price realised by him on the sale of hisstock in the first month of the next financial year.Therefore, we are of the considered view, the decision inKamani Metals and Alloys Ltd., (supra) cannot in any mannerassist the case of the Revenue. 32. The next decision relied on by the Revenue is thecase of Tamilnadu Sugar Corpn. Ltd., (supra). The question,which was considered by the Hon'ble Division Bench of thisCourt, was whether the assessee was entitled to adopt thevalue of its closing stock at a rate which was prevalent on25[th]October 1983 whereas its previous year ended on30.09.1983. While answering the question, the Court held thatthe assessee has not adopted the valuation of closing stock ofsugar at the end of the accounting period when it made up itsaccounts and therefore, the assessee is not entitled to valuethe closing stock on the date when its accounts are preparedand finalized, and if the assessee is permitted to adopt sucha system, then the profit of the accounting year would not bereflected and a portion of the profit, which was earned in oneyear, would be shifted to next year. This finding cannot beapplied to the facts of the assessee's case. However, inparagraph 12 of the same judgment, the Division Bench pointedout that the correct principle of accounting is to enter thestock in the books of account at cost unless the value isrequired to be reduced by the fall in the market price of thegoods at the end of the accounting year. We bear in mind thisobservation made by the Division Bench. 33. The third decision, relied on by the Revenue is thecase of Britsh Paints India Ltd., (supra). Paragraph 10 ofthe said judgment was referred to, which reads as follows:-“10.Where the market value has fallen beforethe date of valuation and, on that date, the markethttps://hcservices.ecourts.gov.in/hcservices/value of the article is less than its actual cost, the assessee is entitled to value the articles atmarket value and thus anticipate the loss which hewill probably incur at the time of the sale of thegoods. Valuation of the stock-in-trade at cost ormarket value, whichever is the lower, is a matterentirely within the discretion of the assessee. Butwhichever method he adopts, it should disclose atrue picture of his profits and gains. If, on theother hand, he adopts a system which does notdisclose the true state of affairs for thedetermination of tax, even if it is ideally suitedfor other purposes of the business, such as thecreation of reserve, declaration of dividends,planning and the like, it is the duty of theAssessing Officer to adopt any such computation ashe deems appropriate for the proper determinationof the true income of the assessee. This is notonly a right but a duty that is placed on theofficer, in terms of the first proviso to s. 145,which concerns a correct and complete account, butwhich in the opinion of the officer, does notdisclose the true and proper income. 34. On a plain reading of the above decision, we are ofthe view that it supports the case of the assessee. What isrequired by the assessee to do is to disclose a true pictureof his profits and gains and it is the duty of the AssessingOfficer to adopt the computation as he deems appropriate forthe proper determination of the true income of the assessee.Equally, the observations in paragraph 16 would also enure infavour of the assessee, which is as follows:- 34. On a plain reading of the above decision, we are ofthe view that it supports the case of the assessee. What isrequired by the assessee to do is to disclose a true pictureof his profits and gains and it is the duty of the AssessingOfficer to adopt the computation as he deems appropriate forthe proper determination of the true income of the assessee.Equally, the observations in paragraph 16 would also enure infavour of the assessee, which is as follows:- “16.The IT Act does not contain any specificprovision for the valuation of stock. Income,profits and gains, must however, be computed inthe manner provided by the Act. It is the duty ofthe officer to determine the profits and gains ofa commercial venture according to the correctprinciple of accounting. In doing so, he might,dependent on the nature of the business and itsspecial character, allow certain adjustments buthis primary purpose and duty is to deduce thecorrect income, profits and gains, and this hecannot do without taking into account the value ofthe stock-in-trade at the beginning and at the endof the year and by ascertaining the differencebetween them.” 35. Mr.T.Ravi Kumar, learned Senior Standing Counselplaced reliance on the decision of the Hon'ble Supreme Courtin CIT vs. Woodward Governor India P. Ltd., [2009] 312 ITR 254(SC). This decision has been pressed into service to explainthat profits and gains of the previous year are required to becomputed in accordance with the relevant accounting standardhttps://hcservices.ecourts.gov.in/hcservices/and the basis on which stock-in-trade was valued is part of the method of accounting and it is well established that, ongeneral principles of commercial accounting, in the profit andloss account, the values of stock-in-trade at the beginningand at the end of the accounting year should be noted at thecost or market value, whichever is lower-the market valuebeing ascertained as on the last date of the accounting yearand not as on any intermediate date between the commencementand the closing of the year, failing which it would not bepossible to ascertain the true and correct state of affairs.The above decision lays down the legal principle which needsto be adopted not only by the assessee but, also the Revenueas well. 36. Thus, the question, which looms large forconsideration is whether the assessee should be precluded fromreflecting the actual realised cost of share and should afigure which obviously does not match with the sale pricerealised, be relied on for the purpose of making the amountaddition. 36. Thus, the question, which looms large forconsideration is whether the assessee should be precluded fromreflecting the actual realised cost of share and should afigure which obviously does not match with the sale pricerealised, be relied on for the purpose of making the amountaddition. 37. In CIT vs. Birla Gwalior (P.) Ltd., (1973) 89 ITR0266, the assessee had foregone an agency commission, whichwas claimed as a revenue expenditure. While testing thecorrectness of the order of the Tribunal, which allowed thesame as revenue expenditure under Section 10(2)(xv) of theAct, the Court examined the manner of accounting systemadopted by the said assessee. The assessee therein adoptedmercantile system of accounting and it gave up the agencycommission after the end of the financial year. The Revenuecontended that the commission had accrued before it was givenup and therefore, the assessee cannot state that they had notearned commission in question. The Revenue's contention wasrejected by the Hon'ble Supreme Court holding that thecommission receivable could have been ascertained only afterthe managed company made up its accounts, the assessee hadgiven up the commission even before the managed company madeup its accounts and merely because the assessee-company wasmaintaining its accounts on the basis of mercantile systemcannot lead to the conclusion that the commission had accruedto it by the end of the relevant accounting year. In supportof such finding, reference was made to the decision of theBombay High Court in H.M.Kashiparekh & Co. Ltd. vs. CITreported in (1960) 39 ITR 706 (Bom.). In the said decision,it was pointed out that it was the real income of theassessee-company for the accounting year that was liable totax and that the real income could not be arrived at withouttaking into account the amount foregone by the assessee. Itwas further pointed out that in ascertaining the real income,the fact that the assessee followed the mercantile system ofaccounting did not have any bearing. Further, the accrual ofthe commission, the making up of the accounts, the legalobligation to give up part of the commission, and the forgoingof the commission at the time of making up of the accountshttps://hcservices.ecourts.gov.in/hcservices/were not disjointed facts; they were dovetailing about them which could not be ignored. The Court also referred to theconcept of real income, which was expounded in the decision ofthe Bombay High Court in H.M.Kashiparekh & Co. Ltd. (supra),and explained in the following terms:- “The principle of real income is not to be sosubordinated as to amount virtually to a negationof it when a surrender or concession or rebate inrespect of managing agency commission is made,agreed to or given on grounds of commercialexpediency, simply because it takes place sometime after the close of an accounting year. Inexamining any transaction and situation of thisnature the Court would have more regard to thereality and speciality of the situation ratherthan the purely theoretical or doctrinaire aspectof it. It will lay greater emphasis on thebusiness aspect of the matter viewed as a wholewhen that can be done without disregardingstatutory language.” 38. As could be seen from the facts of the above case,the commission was foregone after the closing of the balancesheet yet the Court pointed out that the reality andspeciality of the situation should be given due regardrendering pure theoretical or doctrinaire aspect. 38. As could be seen from the facts of the above case,the commission was foregone after the closing of the balancesheet yet the Court pointed out that the reality andspeciality of the situation should be given due regardrendering pure theoretical or doctrinaire aspect. 39. In CIT vs. Shoorji Vallabhdas & Co. reported in(1962) 46 ITR 0144 (SC), the question was whether two sums areincome of the assessee for the previous year ended 31.03.1948.While answering the said question, it was pointed out that amere book-keeping entry cannot be income, unless income hasactually resulted, and where lesser income is actuallyreceived consequent to a subsequent agreement, only that partis taxable and not the entire income accounted in the books.Therefore, in our considered view, if the stand taken by theRevenue before us has to be accepted, it would be fallen foulof the law laid down by the Hon'ble Supreme Court in ShoorjiVallabhdas & Co. (supra). 40. In the case of CIT vs. Mahalaxmi Sugar Mills Co. Ltd.reported in (1993) 200 ITR 0275, the assessee reduced theclosing stock in respect of the stock earmarked for export onthe ground that it was constrained to earmark for export thesugar at prices lower than the market rate, the value of suchclosing stock was lesser than the aforesaid amount. TheAssessing Officer did not accept the contention of theassessee and added back the said sum to the adjusted value ofthe closing stock shown by the assessee. The assessee wasunsuccessful before the first appellate authority and carriedthe matter to the Tribunal. The Tribunal allowed theassessee's claim by examining the documents and found that theloss, in fact, was incurred and this is allowable as adeduction. The Tribunal pointed out that the method ofhttps://hcservices.ecourts.gov.in/hcservices/valuation of the closing stock, which was adopted by the assessee, was that it would not take the value of the closingstock on the last date of the accounting year but, it took theestimated realisable market value by adopting the price ofsugar subsequently realised or realisable before the balancesheet for the year in question was adopted. The Tribunalfound this method to be scientific and accordingly, allowedthe assessee's appeal. On appeal by the Revenue before theHigh Court of Delhi, it was pointed out that the assessee hadactually suffered a loss in the sale of sugar in the localmarket and any loss, which is suffered in connection therewithhas necessarily to be recorded as loss, which is incidental tothe business. Before the Court, the Revenue placed relianceon the decision in Britsh Paints India Ltd., (supra), andcontended that the principle of valuation of stock should bevaluation at cost or market value, whichever is lower on theclosing date and a different principle like the one followedby the assessee therein cannot be correct method of valuingthe closing stock. 41. Referring to the decision in Britsh Paints IndiaLtd., (supra), it was pointed out that the Court no doubt heldthat the ITO is not bound to accept a system of accountingmerely because it is regularly employed by the assessee.However, the system, which was adopted by the assessee mustdisclose the true state of affairs for determination of tax,if correct profits and gains could be deduced from theaccounts as maintained by the assessee, then the ITO was toaccept the same if the said system was being regularlyemployed. It was held that what was the profit of a trade orbusiness is a question of fact and it must be ascertained, asall facts must be ascertained with reference to the relevantevidence and not on doctrines or theories. 41. Referring to the decision in Britsh Paints IndiaLtd., (supra), it was pointed out that the Court no doubt heldthat the ITO is not bound to accept a system of accountingmerely because it is regularly employed by the assessee.However, the system, which was adopted by the assessee mustdisclose the true state of affairs for determination of tax,if correct profits and gains could be deduced from theaccounts as maintained by the assessee, then the ITO was toaccept the same if the said system was being regularlyemployed. It was held that what was the profit of a trade orbusiness is a question of fact and it must be ascertained, asall facts must be ascertained with reference to the relevantevidence and not on doctrines or theories. 42. Referring to the valuation of closing stock adoptedby the said assessee, the Court held that the system ofvaluing the closing stock with reference to selling price,subsequent to the last date of the accounting year has beenconsistently followed by the assessee and it has not been heldby the IT Authorities that correct profits and gains could notbe deduced from the accounts so maintained. Approving thefinding of the Appellate Authority in the assessee's case forthe earlier assessment year, it was held that the methodadopted by the assessee is in fact, nearer to the reality ofthe fact and as such could be treated as a correct and perfectmethod of valuation. 43. In our considered view, the decision in MahalaxmiSugar Mills Co. Ltd. (supra) would squarely apply to the caseon hand. The Assessing Officer or the CIT(A) does not disputethe fact with regard to the loss suffered by the assessee. Wesay so after going through the factual matrix of the case, norsuch a contention was advanced before us by the Revenue. https://hcservices.ecourts.gov.in/hcservices/ 44. The Revenue hinges upon the only issue that thecorrect method of valuation of closing stock should be thecost or market value, whichever is lower on the closing stock.However, one cannot ignore the fact that the assessee is dutybound to disclose the true state of affairs for determinationof the tax and if correct profits and gains could be deducedfrom the amounts maintained by the assessee, the AssessingOfficer cannot accept the same. In doing so, in the instantcase, we are required to examine the relevant evidence and notconfine ourselves to doctrines or theories. 45. The other contention of the Revenue is that theassessee was not consistent with his accounting standards. Wedo not agree with the said submission because, the assesseehas been maintaining mercantile system of accounting for allthe assessment years subsequent to the year underconsideration. Noteworthily, the year under consideration isthe first year of business of the assessee in trading ofstocks and shares. Thus, the Revenue is not justified inrejecting the assessee's stand on the ground of inconsistency.At best, the Revenue can pitch its case on the ground that theclosing stock cannot be valued as done by the assessee. 46. From the aforementioned decision, it is clear thatwhat is required to be ascertained is what was the profit ofthe trade or business which essentially is a question of factand this has to be decided with reference to the relevantevidence, which was provided by the assessee. 46. From the aforementioned decision, it is clear thatwhat is required to be ascertained is what was the profit ofthe trade or business which essentially is a question of factand this has to be decided with reference to the relevantevidence, which was provided by the assessee. 47. In the case of Commissioner of Income Tax vs. DeltaPlantation Ltd. reported in (1993) 71 Taxman 0329, thequestion which fell for consideration, was whether theaddition made by the Assessing Officer on account ofundervaluing of closing stock was justified. The assesseetherein was engaged in the business of cultivation,manufacture and sale of tea. The assessee used to value itsclosing stock of tea at the end of each year at selling priceand from the year 1981, it decided to change its basis ofvaluation of stock of tea and started valuing it at “sincerealised price” or the “estimated realisable value”. TheAssessing Officer did not allow the change in method ofvaluation of stock of tea at the end of the previous year andadded back the resultant loss. Before the CIT(A), theassessee contended that the stock valuation adopted by themwas a normal practice followed in the entire tea industry forvaluation of stock of tea at the end of the accounting yearand there was no reason why the Assessing Officer shouldrefuse to accept the change in method of stock valuationfollowed by the assessee. The CIT(A), while holding that theassessee was at liberty to change the method of valuation ofclosing stock, held that it cannot be allowed, if it resultsin loss of Revenue, and accordingly, confirmed the order ofthe Assessing Officer. https://hcservices.ecourts.gov.in/hcservices/ 48. On appeal to the Tribunal, the assessee succeeded,which order was questioned by the Revenue before the HighCourt of Calcutta. The Court referred to the accountingstandard more particularly, AS-2 on valuation of inventoriesand held that the assessee has changed its method of stockvaluation from “selling price” to “since realised price”and/or “estimated realisable value”, which is nothing but,“net realisable value”. It was pointed out that what isrelevant to consider is whether the method adopted is one ofthe recognised methods and further, whether the changed methodof stock valuation is followed consistently year after year.Further, it was pointed out that the change of method must bebona fide and must not be restricted to a particular year. 49. In the instant case, the bona fide of the assesseehas not been questioned by the Assessing Officer. No doubttrue that such procedure was not followed earlier or laterthan the assessment year under consideration and this is sobecause, the assessment year under consideration is the firstyear of business. The other aspect which the assessee hadstated is regarding the fluctuation in the market on accountof a scam which had occurred during the relevant time. Thefigures speak for themselves and they indicate the losssustained by the assessee. 50. Further, from the assessment order, it is seen thatfor the subsequent year also, the assessee had generated hugeloss from the share business and has settled all such loansfrom other incomes in various years. Thus, we are of theclear view that the 'since realised price', as adopted by theassessee, is the price realised by the assessee upon its saleand taking note of the law laid down in the aforementioneddecisions, we hold that the method of valuation of the closingstock adopted by the assessee cannot be stated to be lackingin bona fides and the value adopted by the assessee is thevalue realised by the assessee upon sale of the share and suchcontingencies are clearly covered in Clause 8 of AS-4, whichdeals with events occurring after the balance sheet date. 50. Further, from the assessment order, it is seen thatfor the subsequent year also, the assessee had generated hugeloss from the share business and has settled all such loansfrom other incomes in various years. Thus, we are of theclear view that the 'since realised price', as adopted by theassessee, is the price realised by the assessee upon its saleand taking note of the law laid down in the aforementioneddecisions, we hold that the method of valuation of the closingstock adopted by the assessee cannot be stated to be lackingin bona fides and the value adopted by the assessee is thevalue realised by the assessee upon sale of the share and suchcontingencies are clearly covered in Clause 8 of AS-4, whichdeals with events occurring after the balance sheet date. 51. In the light of the above discussion, we are of theclear view that the order passed by the Tribunal calls forinterference. In the result, the appeal, filed by theassessee, is allowed, the orders passed by the Tribunal andthe authorities below are set aside and the substantialquestions of law, framed for consideration, are answered infavour of the assessee. No costs. Sd/- Assistant Registrar(CS-VIII) //True Copy// Sub Assistant Registrar To 1. The Income-tax Appellate Tribunal Chennai Bench “B”.,Chennai. 2. The Commissioner of Income Tax, (Appeals)-II,Chennai. 3. The Joint Commissioner of Income Tax,Central Circle-III,(B)Chennai. 4. The Deptuy Commissioner at Income TAx Cental Circle IIII (A), Chennai. + 1 cc to Mr.G. Praskam, Advocate Sr.78952 + 1 cc to Mr. G. Ravikumar, Advocate Sr.78582 T.C.(A) No.979 of 2008 CP(CO) EU(06/12/2018)