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Kantilal Chandulal Dharia Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 54 of 1965
Judge
Reported in[1976]104ITR487(Bom)
ActsIndian Income Tax Act, 1922 - Sections 34, 34(1) and 34(2)
AppellantKantilal Chandulal Dharia
RespondentCommissioner of Income-tax
Appellant AdvocateV.H. Patil, ;S.P. Mehta and ;S.J. Mehta, Advs.
Respondent AdvocateR.M. Hajarnavis and ;R.J. Joshi, Advs.
Excerpt:
.....an addition of certain sum on account of under-valuation of closing stock for relevant assessment year - assessee himself filed revised return showing revaluation only of closing stock for relevant assessment year and in which he did not want to alter valuation of opening stock for that year - held, taxing authorities justified in making an addition of sum. - - 2014, relevant to the assessment year 1959-60, the income-tax authorities should have gone a step further and re-valued the opening stock as well. patil for the assessee has contended before us that since the closing stock for the assessment year 1959-60 had been revalued by the income-tax officer in the reassessment proceedings under section 34 for thesame year even the opening stock should have been revalued in order to..........were justified in making an addition of rs. 11,174 on account of under-valuation of the closing stock for the assessment year 1959-60?'2. the question relates to the assessment year 1959-60, the corresponding year being s.y, 2014. the assessee is an individual doing business in hardware. he started the business in s.y. 2011, and he was assessed for the assessment years 1956-57, 1957-58 and; 1958-59 in respect of the income from his said business. the assessment for the year 1959-60 was completed on 29th of july, 1961, on a sum of rs. 26,554. it appears that in the course of the assessment proceedings for the assessment year 1960-61, the income-tax officer found that the assessee had valued his stock neither at the cost nor at the market price, nor at 'cost or market price.....
Judgment:

Tuizapurkar, J.

1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee in which the following question has been referred to us for our determination :

'Whether, on the facts and in the circumstances of the case, the income-tax authorities were justified in making an addition of Rs. 11,174 on account of under-valuation of the closing stock for the assessment year 1959-60?'

2. The question relates to the assessment year 1959-60, the corresponding year being S.Y, 2014. The assessee is an individual doing business in hardware. He started the business in S.Y. 2011, and he was assessed for the assessment years 1956-57, 1957-58 and; 1958-59 in respect of the income from his said business. The assessment for the year 1959-60 was completed on 29th of July, 1961, on a sum of Rs. 26,554. It appears that in the course of the assessment proceedings for the assessment year 1960-61, the Income-tax Officer found that the assessee had valued his stock neither at the cost nor at the market price, nor at 'cost or market price whichever was lower'. For that assessment year an addition of a sum of Rs. 28,239was made to the closing stock and an addition of Rs. 10,485 to the opening stock so that the net addition made for that year was of Rs. 17,754. Obviously, the opening stock for the assessment year 1960-61 was necessarily the closing stock for the assessment year 1959-60, which in the original assessment was taken at the figure of Rs. 51,920. Since the Income-tax Officer took the view that the said closing stock for the assessment year 1959-60 had been under-valued, income had escaped assessment and, therefore, he issued a notice under Section 34(J)(b) and reopened the assessment and added Rs. 11,174 by way of adjustment of under-valuation of the closing stock. It may be stated that in pursuance of the notice issued under Section 34 the assessee himself had submitted a return showing this addition and the Income-tax Officer actually made assessment on the basis of that return.

3. The assessee appealed to the Appellate Assistant Commissioner and contended that the Income-tax Officer should have made a corresponding adjustment on account of under-valuation of the opening stock for the accounting year S.Y. 2014, relevant to the assessment year 1959-60, when he made the adjustment for under-valuation in the closing stock for the said year. The Appellate Assistant Commissioner rejected the contention mainly in view of the fact that the assessee himself had disclosed in his revised return the amount of under-valuation which, at no stage, was disputed before the Income-tax Officer, The assessee carried the matter to the Tribunal and it was contended that while adjusting the under-valuation of the closing stock in S.Y. 2014, relevant to the assessment year 1959-60, the income-tax authorities should have gone a Step further and re-valued the opening stock as well. The Tribunal; however, rejected the contention of the assessee on two grounds. It first took the View that in tracing the under-valuation to its original source there would be a difficulty of the bar of limitation prescribed by Section 34 and, secondly, it held that in the revised return, which was filed by the assessee before the Income-tax Officer pursuant to the notice under Section 34 of the Act, the assessee had merely revalued the closing stock and he himself had filed such a revised return which had been accepted by the taxing authorities. In other words, the' Tribunal held that the assessee could be said to have accepted the arrangement by revaluing the closing stock of the assessment year 1959-60 as fair and reasonable and, therefore, there was no reason to interfere with the arrangement that had been accepted by the assessee himself. At the instance of the assessee the question set out at the commencement of this judgment has, therefore, been referred to us for our opinion.

4. Mr. Patil for the assessee has contended before us that since the closing stock for the assessment year 1959-60 had been revalued by the Income-tax Officer in the reassessment proceedings under Section 34 for thesame year even the opening stock should have been revalued in order to arrive at a correct figure of profits made by the assessee during the said assessment year and in the absence of making necessary adjustment in the under-valuation of the opening stock in the revised return that was filed by the assessee, just or proper gross profits and net profits for the said year could not have been arrived at and, therefore, the assessee's claim in this behalf should have been accepted by the taxing authorities as well as by the Tribunal. In support of his contention he relied upon a decision of the Privy Council in the case of Commissioner of Income-tax v. Ahmedabad New Cotton Mills Co. Ltd., and pointed out that the bar of limitation, which was regarded by the Tribunal as an insuperable difficulty, did not arise at all in the instant case inasmuch as the reassessment that was made by the Income-tax Officer was for the assessment year 1959-60, and it was in respect of the opening stock of that very assessment year that an adjustment on account of under-valuation of the opening stock was sought by the assessee, It is not possible to accept this contention of Mr. Patil for the reasons we shall presently indicate.

5. There is no doubt that the correct position in law has been indicated by the Privy Council in its decision in Commissioner of Income-tax v. Ahmedabad New Cotton Mills Co. Ltd. . The principle has been enunciated by the Privy Council thus:

'When the opening and closing stocks of a business are both undervalued, the real profits of the company of particular year cannot be ascertained by merely raising the valuation of the closing stock without taking into consideration the similar under-valuation of the opening stock. '

6. There is no and there can be no dispute about the aforesaid principle which has been stated by the Privy Council in the aforesaid -terms and it cannot be disputed that in arriving at the real profits of the accounting period relevant for the assessment year 1959-60, as has been contended by Mr. Patil, not merely adjustment in respect of under-valuation of the closing stock for that accounting period should be made, but adjustment in respect of under-valuation of the opening stock for that accounting period will have also to be undertaken and there could be no quarrel about this contention of Mr. Patil. But the point is whether, having regard to the conduct of the assessee himself, the taxing authorities below and the Tribunal were justified in rejecting this contention urged on behalf of the assessee and, in our view, the contention was rightly rejected.

7. In the first place, this under-valuation of the closing stock came to light for the first time when the Income-tax Officer was dealing with the assessment of the income of the assessee for the assessment year 1960-61,when it was found that the assessee had valued his stock neither at cost nor at market price nor at 'cost or market price whichever is less ', and this was so both in regard to the opening stock as also the closing stock for the said period. When this aspect was noticed by him, the Income-tax Officer felt that income had escaped assessment for the assessment year 1959-60 inasmuch as the opening stock for the accounting period relevant to the assessment year 1960-61 would be the closing stock for the accounting period relevant for the assessment year 1959-60 and, therefore, he issued a notice under Section 34 of the Act to the assessee. It was in response to this notice that the assessee himself filed a revised return in which he accepted the aspect which was realised by the Income-tax Officer and himself revalued the closing stock for the assessment year 1959-60. It was, therefore, for the assessee himself to have filed a revised return showing even the opening stock for that year at its proper valuation. However, he did not do so and it was on the basis of such revised return that was filed by the assessee that the Income-tax Officer completed the revised assessment. No contention was urged before the Income-tax Officer that just as the closing stock was revalued, the opening stock also should be revalued. When the matter was taken in appeal a contention was, for the first time, raised before the Appellate Assistant Commissioner that even the opening stock should have been revalued and adjustment on account of under-valuation should be made there also. But that contention was rejected by the Appellate Assistant Commissioner on the ground that the assessee himself had filed a revised return in which he had not made any such re-valuation of the opening stock. Even the particulars on the basis of which re-valuation of the opening stock could be done were not furnished to the Appellate Assistant Commissioner and a statement giving analysis of valuation of the opening stock and closing stock for S. Ys. 2011 to 2014 (both inclusive) was, for the first time, filed before the Tribunal when this contention was again pressed into service. In other words, proper material was not put before the Appellate Assistant Commissioner and even before the Tribunal a statement giving analysis of valuation of the opening and closing stocks for three or four earlier years was filed before the Tribunal suggesting that the real under-valuation was in S. Y. 2011 which under valuation had progressively increased during the subsequent years. Since the revised return in which the assessee had shown revaluation of the closing stock for the accounting year relevant to the assessment year 1959-60 had been filed by the assessee himself, which was accepted by the lower authorities, we do not think that the assessee could have been allowed to raise this contention for the first time at the appeal stage and the Appellate Assistant Commissioner as well as the Tribunal, in our view, were right in rejecting that contention.

8. It was urged by Mr. Patil that the bar of limitation which has been indicated by the Tribunal in its order could not really apply to revaluation of the opening stock for the assessment year 1959-60. But that is merely stating the position as regards that year is concerned. If, as was clear from the statement which was filed before the Tribunal, the real under-valuation had commenced in S. Y. 2011, which progressively increased from year to year later on, in order to arrive at the real profits, adjustment on account of defective valuation of the stocks will have to be carried to the point where the under-valuation really began and it was in that context that the Tribunal observed that the bar of limitation would present some difficulty. It is true that for undertaking revaluation of the opening stock for the assessment year 1959-60, there will be no bar of limitation. But, as was fairly conceded by Mr. Patil, if such revaluation of the opening stock for the assessment year 1959-60 was undertaken, the profits for the relevant year would be nil and really, on account of such a conduct on the part of the assessee of undervaluing his stocks for the earlier years, the income of the assessee for those years would escape assessment. It is because of these circumstances that we are not inclined to accept the contention of the assessee that proper adjustment on account of under valuation of the opening stock for the relevant assessment year 1959-60 should have been allowed by the taxing authorities or by the Tribunal. Since, in our view, it was the assessee himself who had filed a revised return showing revaluation only of the closing stock for the assessment year 1959-60, and in which he did not want to alter the valuation of the opening stock for that year--which revised return was accepted by the Income-tax Officer as well as by the Appellate Assistant Commissioner--it is not possible for us to accept the contention urged by Mr. Patil. The taxing authorities, in our view, were, therefore, justified in making an addition of Rs. 11,174 on account of under-valuation of the closing stock for the assessment year 1959-60.

9. In the result, the question referred to us is answered in the affirmative and against the assessee. The assessee will pay the costs of this reference.


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