KHANNA J. - This application has been filed under sub-section (2) of section 256 of the Income-tax Act, 1961, herein called 'the Act', by Messrs K. G. Khosla & Co. P. Ltd. herein in called 'the assessed', praying that the Income-tax Appellate Tribunal be directed to state the case and refer to this court, the following questions of law, said to have arisen out of its order :
'1. Is not the finding of the Tribunal vitiated by a wrong appreciation of the law and practice of valuation of closing stock
2. Was there any material on which the Tribunal could hold that the closing stock must necessarily include the customs duties and incidental charges
3. Was the Tribunal justified in law in holding that on no account the opening stock could be revalued to make it consistent with system adopted for valuation of closing stock
4. Was there any evidence on which the Tribunal could hold that the credit of Pounds 607 12s. 6d. had in fact been given by the foreign party from whom the purchases had been made even though the said party had reversed the entry in the statement of account submitted to the assessed
5. Was the Tribunal justified in law in valuing the credit of Pounds 607 12s. 6d. at the exchange rate of Rs. 21 per pound and not at the rate of Rs. 13.13 which was the rate prevailing at the date of the credit, namely 15th November, 1960
The assessed-company is engaged in the manufacture of air-compressors, garage equipment, hydraulic presses, etc., for which purpose it imports certain components and raw materials. Besides paying the invoice price, it incurs customs duty, freight and handling charges. Materials and components are also purchased from within the country, and the assessed incurs freight and other charges on this account as well. The accounting year under appeal is the calendar year ending on December 31, 1960. For the financial year ending on December 31, 1959, the value of the closing stock included an ad hoc amount for customs duty and other charges, although the opening stock as on January 1, 1959, and in the earlier years had been valued at the invoice cost without adding customs duty and other charges. The method of valuation of closing stock without adding customs duty, freight and handling charges for the year ending December 31, 1960, was considered to be defective by the department.
The Income-tax Officer came into possession of a photostat copy of a letter dated March 9, 1962, in which it was found that the foreign principals from whom the assessed purchased components and other materials had given a credit for Pounds 607 12s. 6d. in a statement of account sent by them to the assessed which had not been accounted for in the assesseds books. The Income-tax Officer, thereforee, asked the assessed-company to explain the above two discrepancies.
The assessed claimed that the closing stock of the imported items was valued at invoice cost plus appropriate customs duty and other charges thereon as at the close of the year ending on December 31, 1959, on an ad hoc basis and the same was brought forward as the opening stock on January 1, 1960. This was done on the suggestion of the auditors, who had made a remark to this effect in the balance-sheet. As the imported components and other materials were too numerous in number, it was not possible, according to the assessed, to allocate such charges correctly to each and every item. It was considered by it an impossible task to split up the said charges. The attempt made in 1959 by adding an ad hoc value for these charges is said to have been found extremely difficult which could not fully succeed. Since these components were only for the purpose of manufacture and consumption by the assessed itself, it made no practical difference in the ultimate analysis, explained the assessed, if these charges were not added in the trading account and were taken not of in the profit and loss account. It was, thereforee, considered by the assessed to be advisable to revert to the old system and since then it had adopted the same principle in the subsequent balance-sheets.
Regarding the credit of Pounds 607 12s. 6d. the assessed stated that the credit note in question has not been received by it. The assesseds receipt register did not show the receipt of any such credit note. The assessed pleaded ignorance about it.
These contentions were rejected by the Income-tax Officer, who made an addition of Rs. 1,00,000. In appeal, the Appellate Assistant Commissioner was of the view that the customs duty, freight and handling charges paid, ought to have been included in the value of the closing stock. He worked out the proportionate customs duty and incidental charges at Rs. 38,682 and felt that an addition of Rs. 40,000 towards the under-valuation of closing stock would be just. Out of Rs. 1,00,000, he apportioned Rs. 40,000 towards the under-valuation of the closing stock. The addition of the balance of Rs. 60,000 was also confirmed on the ground that all the credits on account of the purchases had not been accounted for. He, however, stated that the book results were not being rejected on the basis that the gross profit disclosed or the turnover returned did not compare favorably with either the past results or with other similar businesses.
In second appeal, the Income-tax Appellate Tribunal confirmed the decision of the Appellate Assistant Commissioner in respect of the under-valuation of the closing stock. The Tribunal observed that both the opening stock and the closing stock should be valued on the same principle, i.e. the market valued or the case, whichever was lower, and that the opening stock could not be valued in a manner different from the valuation of the closing stock. In respect of the addition on account of failure to account for the credit note Pounds 607 12s. 6d. the question, according to the Tribunal, was whether the original account given by the foreign party was to be believed or the subsequent account given by it, revising the earlier statement, was to be believed. Taking note of certain other correspondence, it did not accept the assesseds contention.
The assesseds application under sub-section (1) of section 256 of the Act for referring the aforesaid five questions to this court for its opinion was, thereforee, rejected on the ground that no question of law arose out of its order. It is under these circumstances that the present application has come up before us.
Mr. Karkhanis, appearing on behalf of the assessed, confined his arguments to questions Nos. 3 and 4 only out of the questions reproduced at the beginning of this judgment. According to him, the Tribunal was not justified in holding that the opening stock could not be revalued under any circumstances to make it consistent with the system adopted for the valuation of the closing stock. The principle that the valuation of the closing stock should be made either at the market price or at the cost price was not a rigid principle and the principle to be applied should, according to him, be the one that would be most appropriate on the facts and in the circumstances of a particular case.
In the present case, there is no controversy about the principle that the opening stock cannot be valued in a manner different from the valuation of the closing stock. Both have to be valued on the basis of the same principle. The opening stock for the year under references was loaded with the value of the proportionate costs of customs duty, freight and handling charges. The closing stock did not have such an addition made to it. In order to bring the two on the same level, it was necessary to disturb the valuation either of the opening stock or of the closing stock. The Tribunal preferred to disturb the closing stock by valuing it on the same principle according to which the opening stock was valued. Mr. Karkhanis suggested before us that the customs duty, freight and handling charges should have been deducted from the opening stock, to bring the principle of its valuation in accord with the principle which had been adopted for valuing the closing stock. The adoption of this procedure would have hardly brought about any change in the results and would not have adversely affected the interest of the revenue. It would, on the other hand, have given to the assessed the benefit of avoiding the inconvenience and difficulty of splitting up the charges in question, and allocating the same in proper proportions to the numerous components and materials. This would have regularized the assesseds balance-sheets in all the subsequent years. We are not expressing any opinion in favor of the one method of valuation of the closing stock or the other. But, we do think that the insistence of the department in disturbing the closing stock instead of the opening stock and the approval to this practice given by the Tribunal does give rise to a question of law, which could appropriately be referred to this court. We, however, find that this question does not arise from out of the order of the Tribunal, who never considered the merits or demerits of the alternative procedure of disturbing instead the opening stock on the same basis, on which the closing stock was valued. The suggestion made before the Tribunal on behalf of the assessed was to deduct the sum of Rs. 40,000 from the purchases. There was no suggestion to make a suitable deduction from out of the value of the opening stock, as now suggested and as envisaged in question No. 3. The Tribunal has not applied its mind to the suggestion of a deduction from the opening stock and has said nothing about this in its order. Question No. 3, as reproduced above, thereforee, cannot be said to arise out of the order of the Tribunal.
Realizing this difficulty, Mr. Karkhanis contended that reference of question No. 2 would be sufficient for his purpose. We are afraid, question No. 2 does not arise in the case. Mr. Karkhanis agrees that the opening stock includes customs duty and incidental charges. There was, thereforee, sufficient material for the Tribunal to hold that the closing stock must necessarily be valued likewise. Question No. 2, thereforee, is not a question which the Tribunal could refer to this court.
Regarding question No. 4, Mr. Karkhanis drew our attention to an observation made by the Tribunal in its order, to the effect that 'in the circumstances the Income-tax Officer should have probed the matter a little more in detail instead of relying on the first letter. The foreign party, if necessary, should have been addressed to find out the truth of the matter'. But the Tribunal further looked into two other letters dated March 8, 1962, and August 1, 1961, both written by the foreign party to the assessed. The Tribunal after going through the correspondence found that the assessed had not satisfactorily explained the credit note for Pounds 607 12s. 6d. dated November 15, 1960, and the failure to account for it in the account books. It also observed that if that credit note had wrongly been issued by the foreign party, it would not have borne a specific Seriall number, which it actually bore (No. 55966). The Tribunal thus came to its conclusions after assessing the evidence before it. It was competent to determine the sufficiency of the evidence before it. The inference drawn by the Tribunal from the evidence on record was a finding of fact, and its refusal to make a reference to us, as desired by the assessed, calls for no interference from us.
Under these circumstances, we do not find any merit in this petition, which, accordingly, is dismissed. There shall, however, be no order as to costs.