M/S. SANJEEV WOOLEN MILLS vs. COMMNR. OF INCOME TAX, MUMBAI

C.A. No.-006735-006736 - 2003Supreme Court24 November 200510 pages
For Petitioner: BHARGAVA V. DESAIFor Respondent: RR-EX-PARTE
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that valuing closing stock at market value when it exceeds the cost price results in notional profits that are not taxable. The Court affirmed that the AO was justified in rejecting the assessee's method of accounting under Section 145 of the Act, as it did not reflect real income and was contrary to established accounting principles.

What were the facts?

The assessee, engaged in import and export of woolen blankets, consistently valued its closing stock at market price. For the assessment years 1992-93 and 1993-94, this method led to a significant increase in stock value due to currency devaluation, which the Assessing Officer (AO) deemed an artificial inflation of profits to claim benefits under Section 80HHC. The AO rejected the assessee's accounts and added a substantial amount to the total income.

What were the issues?

Whether valuing closing stock at market price, when it exceeds cost price, results in taxable income and if the Assessing Officer can reject such a method of accounting. The issue also involves the correct computation of income for claiming benefits under Section 80HHC.

Which sections of the Income-tax Act were involved?

Section 145,Section 80HHC

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Cause title — parties, addresses and appearances
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10 CASE NO.: Appeal (civil) 6735-6736 of 2003 PETITIONER: M/S. Sanjeev Woolen Mills RESPONDENT: Commissioner of Income-tax, Mumbai DATE OF JUDGMENT: 24/11/2005 BENCH: Dr. AR. Lakshmanan & P.P. Naolekar

JUDGMENT: J U D G M E N T P.P. NAOLEKAR, J.

The appellant, (hereinafter to be referred to as an ’assessee’) is a firm engaged in the imports of synthetic waste and manufacture and export of woolen blankets. Since the assessee had been in export, the economy of the business of the assessee worked out on the basis of U.S. $ price and for the purpose of stock valuation, the same was recorded in Rupees for which the prevailing exchange rate was applied. The assessee was maintaining books of accounts on a consistent method on mercantile basis right from the insertion of its business and Department has accepted the same for the purpose of income-tax except in the years in question. Since the Account Year, 1986-87, the assessee followed the method of accounting, and for which the stock of raw-material/semi- finished goods were valued at cost price and finished goods at the market price.

The order continues below.

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