COMMISSIONER OF INCOME TAX, UDAIPUR versus M/S. HINDUSTAN ZINC LTD.

Citation: [2007] 7 S.C.R. 302 · Decided: 18-05-2007 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX, UDAIPUR 
v. 
MIS. HINDUSTAN ZINC LTD. 
MAY 18, 2007 
B 
[S.H. KAPADIA AND B. SUDERSHAN REDDY,JJ.] 
.Jncome Tax Act, 1961; 
Valuation of closing stock-Exporting of accumulated stock of zinc 
C concentrate by assessee-a. Government Company-Fixing of International 
Price lower than Weighted Average Cost/domestic price-Additions in income 
of the assesseefor the accounting year during which such stock accumulated-,-
Correctness of-Held: In the past c .~sessee has been valuing the commodity 
in question at net realizable value at the domestic prices-International 
D prices of the commodity were lower than the domestic prices-Under the 
circumstances, Auditor rightly observed in his report that had the net realizable 
value stood estimated in accordance with 1he past accounting policy, the 
profit of the Company would have been higher by certain amount-Besides, 
there is no anti..:ipated loss but. reduction in the prospective profit in the 
present case-Hence, Income Ta-c Appellate Tribunal erred in deleting the 
E additions made in the assessment in terms of auditors' report. 
Respondent-assessee, a Government Company, was engaged in the 
business of production of zinc concentrate and utilizing the same captively. 
During the assessment year 1996-97, a huge quantity of zinc concentrate 
got accumulated and it was not possible for the assessee to consume the 
F accumulated quantity. Since domestic consumption of the accumulated stock 
was not possible the assessee decided to explore the possibilities of exporting 
the accumulated stock. With the permission of the Government, the assessee 
decided to price "zinc concentrate" for the purpose of sale by adopting the 
London Metallic Exchange (LME;) Price as on 31.3.1996 however, the LME 
G price was lover than the Weighted Average Cost (WAC) by Rs. 27.08 crores. 
H 
Auditors also made certain recommendations, accordingly, the Assessing 
Officer made in addition to the income of the assessee for the accounting 
year ending 31.3.1996. Aggrieved by the order of the A.O. the assesse.e-
.respondent preferred an appeal before he appellate authorities, which was 
302 
COMMNR.OFINCOMETAX,UDAIPURv.HINDUSTANZINCLTD. 
303 
partly al.lowed by the authorities. The assessee preferred an appeal before A 
the IT AT which was allowed by the tribunal by directing Revenue to delete the 
additions made to the income of the assessee. Aggrieved, the Revenue 
preferred an appeal before the High Court which was dismissed by the High 
Court. Hence this appeal. 
Revenue contend that on the facts and circumstances of the case there B 
was no reason for the assessee to change the method accQunting; that in the 
... 
financial year ending 31.3.1996 there were no export sales, therefore, there 
...-
was no question of taking into account the factum of export sales in the next 
accounting year ending 31.3.97; that there was no allegation that the 
accumulated stock and zinc concentrate was a junk which had no market in c 
India; that the Auditors' Report clearly indicated that ifthe accounting policy 
of the earlier years was to be followed then in that event the profits would 
have increased by Rs. 27.08 crores; that in view of the Auditors' Report, 
Department was right in add back to the income of the assessee and that while 
valuing the closing stock it was not open to the assessee to say that the net 
realizable value estimated on the basis of LME price resulted in a loss that it D 
~· 
was lower than WAC and that there was reduction in value; and that even 
under the accounting principles though reduction in value was admissible, 
the same was possible only in the year in which the same took place and since 
in the present case there were no export sales in the financial year 1995-96, 
the assessee was not entitled to claim reduction in value on the basis of LME E 
price. 
On behalf of the assessee-respondent it was submitted that the 
accumulated stock had no market for sale in India; that the assessee was a 
Government company; that the accumulated stock of zinc concentrate had low 
metal content and it had high impurity level of silica and, therefore, it was F 
not fit for captive consumption; that under the circumstances with the 
permission of the Government, the assessee had to segregate the quantity 
which was capable of captive consumption and the balance of the stock which 
was not capable of captive consumption and which had to be sold; that, there 
were no bu

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