LexM/S. SANJEEV WOOLEN MILLS versus COMMISSIONER OF INCOME TAX, MUMBAI
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MIS. SANJEEV WOOLEN MILLS v. COMMISSIONER OF INCOME TAX, MUMBAI NOVEMBER 24, 2005 [DR. AR. LAKSHMANAN AND P.P. NAOLEKAR, JJ.J Income tax Act, 1961-Section 145-Assessee adopted the method of valuation of closing stock of finished goods at market price-Indian Rupee A B was devalued against U.S. Dollar in a particular assessment year-Assessee C disclosed huge gross profit in that year and claimed a benefit of deduction under the Act-Assessee disclosed loss in subsequent assessment year- Revenue rejected the method of accounting adopted by the assessee on the ground that income could not be properly deduced-Commissioner (Appeals) dismissed the appeal but the order was set aside by Appellate Tribunal- High Court allowed the appeal of the Revenue-Correctness of-Held, D Revenue has power under the Act to adopt a suitable method of accounting if it is of the opinion that income cannot be properly deducted from the method adopted by the assessee-On facts, assessee has not adopted the correct and established method of valuation of closing stock of finished goods at cost or market price, whichever is lower-Hence, the action of the E Revenue is justified. Appellant-assessee is engaged in import of synthetic waste and manufacture and export of woolen blankets. The appellant was maintaining books of account on mercantile basis. The closing stock of raw-materials/ semi-finished goods was being valued at cost price and finished gods at market F price. The market price of the finished goods in U.S. Dollars was being converted to Indian Rupees by applying prevailing exchange rate on the closing accounting date. During assessment year 1992-93, Indian Rupee was devalued against US Dollar. The price of one US Dollar as on 1.4.1991 and 31.3.1992 were Rs. G 18 and Rs. 31 respectively. Accordingly, the opening and closing stock of finished goods were valued at market price at Rs. 90 and Rs. 130 per kg respectively by applying the prevailing exchange rate. The appellant disclosed huge gross profit thereby and claimed benefit of deduction under section 459 H 460 SUPREME COURT REPORTS (2005) SUPP. 5 S.C.R. A 80HHC of the Income Tax Act, 1961. For the assessment year 1993-94, the appellant showed a loss by disclosing nil closing stock. The Revenue invoked Section 145 of the Act on the ground that income could not properly be deduced from the method of accounting adopted by the appellant and hence added an amount of Rs. 2,67,38,280 to the total income of the assessee for the assessment year 1993-94. The appeals by the appellant preferred before B Commissioner of Income Tax (Appeals) were dismissed but were allowed by Income tax Appellate Tribunal. The appeals preferred by tlie Revenue before High Court were allowed. In appeals to this court, the appellant contended that the Revenue has C no jurisdiction to invoke section 145 of the Act on the ground that the finished goods were valued at market price consistently from the year 1985-86 and accepted by the Revenue; and that the method of accounting cannot be questioned for the assessment year 1992-93 merely on the ground of claiming benefit under section 80HHC of the Act in that year. D Revenue contended that section 145 of the Act has been rightly invoked E F on the ground that the appellant did not adopt the well established method of accounting in valuing closing stock at cost or market price whichever is lower; that the appellant adopted the method of accounting in valuing closing stock at market price merely to claim maximum benefit under Section 80HHC of the Act in assessment year 1992-93 and for suppression of profit in the next assessment year; and that since each accounting year being a separate unit in itself, the acceptance of the method of accounting by the Revenue in the past would be no ground to prohibit invoking Section 145 of the Act. Dismissing the appeals, the Court HELD: 1. Under Section 145 of the Income Tax Act, 1961, the chargeable income has to be deduced from the accounts regularly employed by the appellant The assessing officer can apply a different method of accounting to deduce the income chargeable if he is of the opinion that from the method employed by the appellant, the chargeable income cannot properly be deduced. G The recognized and settled accounting practice of accounting with the closing stock in the accounts has to be valued at cost or market price whiChever is lower. In the present case,
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