KISHAN CHAND AND CO. vs. C.I.T.

IN THE PUNJAB & HARYANA HIGH COURT AT CHANDIGARH Date of Decision: 07.12.2011 (Assessment Year 1986-87) M/s Kishan Chand & Co. Oil Inds. Ltd. …Appellant Versus The Commissioner of Income Tax (Central), Ludhiana …Respondent ITR No.358 of 1995 (Assessment Year 1984-85) M/s Kishan Chand & Co. Oil Inds. Ltd. …Appellant Versus The Commissioner of Income Tax (Central), Ludhiana …Respondent ITR No.359 of 1995 (Assessment Year 1984-85) The Commissioner of Income Tax (Central), Ludhiana …Appellant Versus M/s Kishan Chand & Co. Oil Inds. Ltd. …Respondent ITR No.138 of 1999 (Assessment Year 1986-87) M/s Kishan Chand & Co. Oil Inds. Ltd. …Appellant Versus The Commissioner of Income Tax (Central), Ludhiana …Respondent ITR No.139 of 1999 (Assessment Year 1985-86) The Commissioner of Income Tax (Central), Ludhiana

…Appellant Versus M/s Kishan Chand & Co. Oil Inds. Ltd. …Respondent CORAM: HON’BLE MR. JUSTICE HEMANT GUPTA HON’BLE MR. JUSTICE G.S.SANDHAWALIA Present: M/s Akshay Bhan & Alok Mittal, Advocates, for the assessee. Mr. Rajesh Katoch, Advocate, for the Revenue. HEMANT GUPTA, J. (ORAL)

This order shall dispose of afore-mentioned five references pertaining to the assessment years as mentioned above and arising out an order passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short ‘the Tribunal’). The questions are identical and for facility of reference, the facts are taken ITR No. 358-359 of 1995. In the said case, the Tribunal has referred the following substantial question of law for the consideration of this Court: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in sustaining the addition of Rs.1,13,765/- made by the Assessing Officer on account of suppressed valuation of the closing stock, whereas the assessee was consistently following a particular method of accounting in the past for the purposes of the valuation of the stock?” The assessee earned its income from manufacture and sale of vegetable ghee out of edible oils purchased partly from the open market and partly from State Trading Corporation (STC). The assessee adopted the valuation of oil in process at cost price plus Rs.100/-for the purpose of closing stock value. The stand of the assessee was that it followed the said method of valuation of closing stock of oil in process for the last 15 years and any interference in the same would be unjustified and could amend all past assessments. The Assessing Officer found that the hypothetical figure of Rs.100/- for processing does not represent actual manufacturing expenses. The prices are increasing everyday and, therefore, the manufacturing expenses of the year under reference should have been considered. If the actual manufacturing expenses are not taken into consideration, the entire method of valuation would go wrong and if any wrong thing has been committed in the past, it can be amended in respective years. After returning such finding, an addition of Rs.1,13,765/- was made in the relevant assessment year. The Commissioner of Income-Tax, in appeal, deleted the said addition relying upon the order passed by the Commissioner of Income Tax in previous year i.e. 1983-84 for the reason that the assessee has consistently adopted the said method of valuation of closing stock and that the method of valuation adopted by the assessing officer is not a correct method, as this is only the valuation of stock in process and not the manufactured goods. However, the learned Tribunal in further appeal by the Revenue set aside the said deletion relying upon the judgment of Hon’ble The Hon’ble Supreme Court in the aforesaid judgment has held that any system of accounting which excludes, for the valuation of stock-in- trade, all costs other than the cost of raw-materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. It observed as under:

“21. Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus, showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced therefrom. It is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income.” In the present case, the assessee has not taken into consideration actual manufacturing expenses while valuing the closing stock. The assessee has been valuing the closing stock by adding Rs.100/- per ton for the last 15 years. Such method of valuation has not found favour with the Hon’ble Supreme Court in the aforesaid case. Still further, the Hon’ble Supreme Court in Britsh Paints India Ltd. case (supra) has also found that the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past, is not a ground to permit the assessee to continue with the valuation method. It observed as under:

“12. It is not only the right but the duty of the Assessing Officer to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters, and the officer is not bound by the method followed in the earlier years.” In view of the above, the findings recorded by the Tribunal are in accordance with the law declared by the Hon’ble Supreme Court. Therefore, the question of law, as framed by the Tribunal, is answered in affirmative against the assessee and in favour of the Revenue. (HEMANT GUPTA) JUDGE 07.12.2011 (G.S.SANDHAWALIA) Vimal JUDGE 5