COMMISSIONER OF INCOME TAX, CALCUTTA versus BRITISH PAINTS INDIA LTD

Citation: [1990] SUPP. 3 S.C.R. 525 · Decided: 13-12-1990 · Supreme Court of India · Bench: T.K. THOMMEN · Disposal: Appeal(s) allowed

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, CALCUTTA 
v. 
BRITISH PAINTS INDIA LTD. 
DECEMBER 13, 1990 
A 
[T. KOCHU THOMMEN AND M.M. PUNCHHI, JJ.] 
B 
Income Tax Act 1961: Section 145-,--Va/uation of stock-Prin-
ciple to be followed-Cost or market value-Whichever is lower-
Assessing officer-Whether entitled to add over head charges. 
Method of accounting-Consistent practice-To disclose true 
picture of profits and gains-Assessing Officer-Entitled to and has C 
duty to adopt apporpriate computation to determine true income. 
The respondent-assessee a limited liability company engaged in 
the business of manufacture and· sale of paints, had a consistent practice 
to value its goods in process and finished products exclusively at cost of D 
raw materials and totally excluding overhead expenditure. The justifi-
cation for this practice, the assessee contended was that the goods 
being paints had limited storage life and If not quickly disposed of were 
liable to lose their market value. 
The Income Tax Officer rejected the aforesaid contention of the E 
assessee observing that at no time had the assessee claimed any deduc-
tion on account of deterioration or damage to goods and that there was 
no justification to recognise a practice as claimed by the assessee of 
valuing its stock otherwise that in accordance with the well recognised 
principle of accounting which require the stock to be valued at either 
cost (raw material plus expenditure) or market value whichever was F 
lower. Recalculating the value of the opening and closing stocks by 
adding the overhead expenditure, the Income-tax Officer made an addi-
tion of Rs.1,04,417 for the assessment year 1963-64, and allowed a 
deduction of Rs.3338 for the assessment year 1964-65. These orders 
were confirmed by the Appellate Assistant Commissioner. 
G 
On appeal, the Income Tax 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 expendi-
ture in valuing the stock; and If it was in the interest of the business to 
value stock solely with refereilce to cost of raw materials and without 
including the overhead expenditure, such valuation was not appro-
H 
525 
526 
SUPREME COURT REPORTS 
[1990] Supp. 3 S.C.R. 
A priate to the computation of income chargeable under the Income Tax 
Act. 
The High Court, in a reference at the instance of the Revenue 
noticed that though there was no evidence of deterioration of the goods 
in stock, came to the conclusion that having regard to the consistent 
B practice of the assessee, the Tribunal was not justified in rejecting the 
assessee's method of valuation of its stock-in-trade. It accordingly 
reversed the Tribunal's decision. 
In the appeals by the Revenue to this Court, it was contended on 
behalf of the assessee that for a number of years the Revenue did not 
C question the method of accounting regularly employed by the assessee, 
that it was during the assessment years in question that the objection 
was raised for the first time on the ground that overhead expenditure 
was not included iu the value of the stock, that the Assessing Officer had 
exceeded his jurisdiction by adding the overhead expenditure to the cost 
of raw material, especially because of the short durability of paint and 
D that the Assessing Officer has not appreciated that the method adopted 
by the assessee is a well recognised method among accountants of 
repute. 
E 
Allowing the appeals and setting aside, the judgment of the High 
Court, this Court, 
HELD: 1. The Income Tax Act does not contain any specific pro-
vision for the valuation of stock, Income, profits and gains must, how-
ever, be computed in the manner provided by the Act. It is the duty of 
the Officer to determine the profits and gains of a commercial 
adventure according to the correct principle of accounting. In doing so, 
F 
he might, dependent on the nature of the business and its special 
character, allow certain adjustments, but his primary purpose and duty 
is to deduce the correct income, profits and gains, and this he cannot do 
without taking into account the value of.the stock-in-trade at the begin-
ning and at the end of the year and by ascertaining the difference 
between them. [537G-538Bl 
G 
H 
P.M. Mohammed Meerakhan v. Commissioner of Income-Tax, 
Kera/a, [1969] 73 I. T .R. SC 735, referred to. 
2. The object of stock valuation is the correct determination of 
the profits and

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