V. BHARGAVA C.J. - The question referred for our opinion by the Income-tax Appellate Tribunal is :
'Whether, in the circumstances of the case, the opening stocks have been, in law, rightly taken at cost resulting in an addition of Rs. 1,09,595 on account of the revaluation of the opening stock ?'
The brief facts relevant to answering this question are that the assessment year in respect of which this reference has been made to this court is the year 1949-50 for which the relevant previous year ended on the 30th September, 1948, and began on the 1st of October, 1947. The dispute relates to the valuation of the opening stock or sugar. For the earlier assessment year 1948-49, for which the relevant previous year closed on the 30th September, 1947, the closing stock of sugar was valued by the assessee at market rate at a figure of Rs. 5,09,974. The same amount was shown as value of the opening stock in the relevant previous year now in question on the 1st October, 1947. For the purpose of computing the profits for the assessment year now in question, the assessee chose to value his closing stock at the end of the previous year on September 30, 1948, at cost instead of the market rate. In the assessment proceedings, the Income-tax Officer held that the assessee was not entitled to value the closing stock of the previous year at cost since in the earlier year the closing stock had been valued at market rate as also the opening stock of this previous year. That decision of the Income-tax Officer was, however, set aside in appeal by the Appellate Assistant Commissioner who held that the assessee was entitled to value his closing stock at the end of the previous year on September 30, 1948, at cost rate. Thereupon, the Income-tax Officer, in making the reassessment after remand, decided to revalued the opening stock on the 1st October, 1947, and held that it should be valued at cost and not at market value. He thus worked out the value of the opening stock at Rs. 4,20,279. The value of the opening stock having thus been reduced, the difference of Rs. 1,09,595 in computation worked out as additional profit earned by the assessee during this previous year, and this amount was thus added to his taxable profits. The assessee appealed to the Appellate Assistant Commissioner and the Tribunal, but unsuccessfully. Hence this question has been referred to us at the instance of the assessee.
The answer to the question referred to us is very plain from the principles recognised by a Bench of this court in the case of Ramswarup Bengalimal v. Commissioner of Income-tax. In that case also, the question that came up for consideration related to the method of valuation of opening and closing stocks. This court held :
'Two principles have now become well settle : (1) that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and (2) that the value of the closing stock must be the value of opening stock in the succeeding year, that is, an assessee cannot close his accounts and value his stock at a particular figure and the next morning on the first day of the next year he cannot value it at a different figure.'
In the present case, the assessee followed the second of these two principles enunciated in that case. The closing stock on the 30th September, 1947, was valued at the market rate at the figure of Rs. 5,09,874, and the opening stock, the next day, on the 1st October, 1947, was also at the market rate at the same figure. What the Income-tax Officer has now done is to change the figure for the value of the opening stock on the 1st October, 1947, to Rs. 4,20,279. The result of the Income-tax Officer is that the stock which was valued at Rs. 5,09,874 at the close of the earlier year came to have a lower value of Rs. 4,20,279 the very next day on the 1st October, 1947, at the beginning of the succeeding previous year which is the relevant previous year to be considered by us. This means that, by the course adopted by the Income-tax Officer, the principle laid down by this court in the case cited above, that the value of the closing stock must be the value of the opening stock in the succeeding year, was violated. Consequently, it has to be held that the course adopted by the Income-tax Officer was not permissible in law. The Tribunal also committed an error of law in upholding that order of the Income-tax Officer.
In this connection it was urged by learned counsel for the department that, in judging the legality of the order of the Income-tax Officer and the Income-tax Appellate Tribunal, we should keep in view the fact that the closing stock for purposes of calculation of profits at the end of the previous year on 30th September, 1948, was valued at cost, and that method of valuation has now been permitted by the income-tax authorities, and has become final so far as these proceedings are concerned. It was urged that, if the closing stock is allowed to be valued at cost, it should be permissible to the department to revalued the opening stock and calculate its value at the same rate at which the closing stock is being valued. His submission was that for purposes of calculation of profit the rate which is to be applied must be the same for both the opening stock and closing stock. We do not think that there is any such principle in law which is necessarily enforceable. On the other hand, in the case cited above, it was already recognised by this court that an assessee has a right to value his stock at market price or cost price whichever is lower if he desires to do so. This principle was also recognised by the Supreme Court in Chainrup Sampatram v. Commissioner of Income-tax which was a case decided about 14 days after the case of this court cited above. In that case, after discussing the case-law, their Lordships held :
'This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and now it is generally accepted as an established rule of commercial practice and accountancy.'
It is to be noticed that their Lordships did not place any limitation, when expressing this opinion, that if the closing stock is valued at cost or market price, the opening stock must also be valued on the same basis. On the other hand, in the same case, their Lordships dealt with a decision of the Madras High Court in Commissioner of Income-tax v. Chengalvaroya Chetty and in that discussion indicated the true position of law in such cases. There was some stock which had been purchased at a cost price of Rs. 13-8-0 per piece in the year 1921. At the end of the year 1921, the market price of these goods fell to Rs. 6 a piece and, consequently, when closing the accounts for the year 1921, the closing stock was valued at this market rate of Rs. 6 a piece. Thereafter, the assessee valuing the opening stock for the year 1922, valued it at the cost rate of Rs. 13-8-0 and at the end of the year 1922, the unsold pieces were again valued at the market rate of Rs. 8-8-0 a piece. Their Lordships held that the income-tax authorities were right in holding that 'while the valuation of the unsold stock at the end of each year at market rate which was less than cost was accepted, the valuation of the unsold goods carried over as opening stock of 1922 at Rs. 6 a piece consistently with their valuation as the closing stock of 1921 was insisted upon in order to rectify the distorted picture of the trading results of 1921 which were not correctly reflected in the accounts by reason of the assessee having adopted the lower market rate instead of cost as the value of the closing stock in 1921.' They further held that 'if the market rate had risen to say, Rs. 15 instead of to Rs. 8-8-0 a piece at the end of 1922, then, on the principles indicated above, it would have been open to the assessee to value the closing stock at cost (Rs. 13-8-0), and the income-tax authorities could not have claimed to bring into the assessment the appreciated value of the unsold goods.' When dealing with this case their Lordships thus approved of the action of the income-tax authorities in insisting that the opening stock of 1922 must be valued at the same rate as the closing stock of 1921, and also expressed the further view that it would have been open to the assessee at the end of the year 1922 to value his closing stock at cost price at Rs. 13-8-0 a piece even though the opening stock had been valued at Rs. 6 a piece at market price. This principle, approved by the Supreme Court, thus makes it clear that there is no rule that the opening stock and the closing stock of the same account year must necessarily be valued on one and the same basis. In the case before the Supreme Court, what was considered permissible was to value the opening stock of 1922 at market rate and the closing stock of 1922 at cost price. This is precisely what the assessee did in the case before us. He valued his opening stock on 1st October, 1947, at market rate and his closing stock on 30th September, 1948, at cost price. The method adopted by the assessee was, therefore, correct and in line with the principle laid down by the Supreme Court also, so that the order made by the income-tax authorities by which a sum of Rs. 1,09,595 was added to the profits was not open to them and was not permissible in law.
Consequently, we answer the question referred to us in the negative and in favour of the assessee. The department will pay the costs of the assessee. Counsels fee is fixed at Rs. 200.
Question answered in the negative.