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Commercial Ahmedabad Mills Company Limited Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberSpecial Civil Application No. 3386 of 1981
Judge
Reported in(1983)36CTR(Guj)187; [1983]144ITR839(Guj)
ActsIncome Tax Act, 1961 - Sections 147
AppellantCommercial Ahmedabad Mills Company Limited
Respondentincome-tax Officer
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate B.R. Shah and; G.N. Shah, Advs.
Cases ReferredDuple Motor Bodies Ltd. v. Ostime
Excerpt:
.....consistently ;casual departure from the regular basis of valuation cannot be permitted. since the method of valuation consistently adopted by the petitioner was already known to the respondent or the department, the petitioner cannot be found guilty of having failed to disclose this fact. 12. section 147(a) empowers the ito, subject to the provisions of sections 148 to 153, to assess or reassess income or recompute the loss or depreciation allowance, as the case may be, in any assessment year, if he has reason to believe that by reason of omission or failure on the part of the assessee to make a return under section 139, for any assessment year to the ito or to disclose fully and truly all material facts necessary for assessment for that year, the income chargeable to tax has escaped..........valuing yarn in process at the rate of 12 paise per kilogram describing the method of valuation as cost method. this method of valuing its stock at a fixed rate is followed since last many years. this is evident from the assessment order for the assessment year 1942-43, wherein it is stated as follows : ' the assessee is valuing the stock since years past at a fixed rateand hence it is no use disturbing the same as this method of valuingwas accepted by us.' 3. the income-tax department (hereinafter referred to as the 'department') as is pointed out in the assessment order for the assessment year 1942-43 had accepted the method of valuation adopted by the petitioner. same method which was accepted by the department was followed by the petitioner in valuing its stock in subsequent years.....
Judgment:

Mankad, J.

1. Petitioner, a public limited company carrying on business of manufacture of yarn and textiles, has filed this petition, challenging the validity of the notice, annex. I, dated March 28, 1981, issued by the ITO, Companies Circle B, Ahmedabad, having jurisdiction to assess the petitioner company to income-tax (the respondent herein) under Section 148 read with Section 147(a) of the I.T. Act, 1961 (hereinafter referred to as ' the Act'), initiating proceedings to reopen its income-tax assessment for the assessment year 1972-73, corresponding year of account being calendar year 1971.

2. Petitioner is valuing its stock of yarn, yarn in process and cloth at a uniform method over a number of years. The controversy which arises in this petition and as a result of which notice as aforesaid came to be issued by the respondent, is on account of the method of valuation followed by the petitioner in valuing the yarn for weaving process (shortly ' yarn in process'). Petitioner was valuing yarn in process at the rate of 12 paise per kilogram describing the method of valuation as cost method. This method of valuing its stock at a fixed rate is followed since last many years. This is evident from the assessment order for the assessment year 1942-43, wherein it is stated as follows :

' The assessee is valuing the stock since years past at a fixed rateand hence it is no use disturbing the same as this method of valuingwas accepted by us.'

3. The income-tax Department (hereinafter referred to as the 'Department') as is pointed out in the assessment order for the assessment year 1942-43 had accepted the method of valuation adopted by the petitioner. Same method which was accepted by the Department was followed by the petitioner in valuing its stock in subsequent years including the year in question, namely, assessment year 1972-73. The assessment for the assessment year 1972-73 was completed on the basis of valuation of stock disclosed by the assessee. TheITO, however, issued notice, annex. I, under Section 148 read with Section 147 of the Act to reopen the assessment for the assessment year 1972-73 on the ground that the petitioner had failed to disclose fully and truly all material facts necessary for its assessment for that year and as a result of such failure, the income chargeable to tax had escaped assessment for that year. Petitioner has filed this petition challenging the validity of the said notice mainly on the ground that there was no failure on its part to fully and truly disclose all material facts necessary for its assessment for that year and consequently there is no justification to reopen the assessment.

4. The respondent has placed on record the reasons recorded by him for reopening the assessment for the year 1972-73 and they are as follows ;

'During the course of assessment proceedings for A.Y. 1976-77, the assessee has furnished the working of actual cost of weaving at the end of the year. Such cost of weaving is worked out at 7.90 per kg. of yarn woven in A.Y. 1976-77. It is seen that for the purpose of valuation of stock, the assessee has been adopting the fixed rate of 12 np. per kg. of yarn in process. Due to adoption of incorrect fixed expenses at 12 np. per kg. there is undervaluation of stock of yarn in process by more than Rs. 10,000 for A.Y. 1972-73. Thus the assessee has furnished deliberately inaccurate particulars and thereby income of Rs. 10,000 or more has escaped assessment. I send proposal to the C.I.T. for reopening the assessment Under Section 148 of the I.T. Act. '

5. In the affidavit-in-reply the respondent has submitted that the value of 12 np. per kg. adopted by the petitioner for valuing its stock of yarn in process, was too low having regard to the increase in the cost. It is submitted that though such valuation was accepted by the Department in the past, it was still necessary to ascertain whether the method of accounting adopted by the assessee revealed the correct position about the financial affairs of the petitioner. If the value adopted is too low notwithstanding the increase in cost, the petitioner would be in a position to suppress profits. It is submitted that the petitioner had not filed the correct valuation of the closing stock and, therefore, at the time of passing of the original assessment order dated December 16, 1974, the Income-tax Officer assessing the petitioner could not have looked into the matter and decided the correct profit. According to the respondent, the petitioner had wrongly estimated the value of the yarn in process at 12 np. per kg. without furnishing a detailed working of the closing stock which resulted in a suppression of profit. It was in these circumstances, says the respondent, that the proceedings in question were initiated by issuing the notice at annex. ' I'.

6. Questions similar to those raised in this petition were raised in the case of Aryodaya Spg. & Wvg. Co. Ltd. v. ITO [Special Civil Application No. 1940 of 1979, decided on January 17,1983 ( : [1983]144ITR817(Guj) .] and, in our opinion, our decision in the said case would govern the present petition also. The learned counsel for the respondent, however, sought to distinguish the aforesaid case of Aryodaya Spg. & Wvg. Co. on the ground that in that case complete details of the working of the valuation of stock were stated in the statement filed along with the return, whereas in the instant case, the petitioner had not furnished any such details. All that was stated in the balance-sheet of the petitioner was that the stock was valued at cost, which statement, having regard to the method followed by the petitioner, was not correct. It was submitted that the petitioner had nowhere stated that it had valued its stock of yarn in process at 12 p. per kg. Therefore, the ITO who assessed it, could not have known that though the petitioner had stated that its stock was valued at cost, in fact, it was not so done. The learned counsel for the respondent submitted that the fact that the petitioner was valuing its stock of yarn in process at 12 p. per kg. was not known to the ITO. In the absence of the details showing the working of valuation or the method followed for valuation, the petitioner could not be said to have fully and truly disclosed all material facts necessary for its assessment. It was submitted that it was the duty of the petitioner to state that it had valued its stock of yarn in process at 12 p. per kg. and if it did not do so, the ITO was justified in initiating the proceedings for reopening its assessment for the year in question.

7. We are unable to accede to the submissions made by the learned counsel for the respondent. Petitioner has been consistently following the method of valuing its stock of yarn in process at the fixed rate of 12 p. for the last several years. This method of valuation followed by the petitioner has been accepted by the Department and the petitioner's assessable income has been computed on the basis of the valuation worked out by this method. If we consider the reasons recorded by the respondent for reopening the assessment and the statements made in his affidavit-in-reply, the conclusion that the above method of valuation followed by the petitioner over a number of years was known to the respondent or the ITO assessing it, is inescapable. But apart from that, it is now well settled that whichever basis of valuation of stock in hand is adopted, it must be adhered to consistently ; casual departure from the regular basis of valuation cannot be permitted. It is undoubtedly open to an assessee to make a clean change of the regular method of valuation, but if he does so, it is his duty to bring this change to the notice of the Department. However, if no change in the method of valuation is made,the question of drawing the attention of the taxing authorities, to the method consistently followed by it, does not arise. Unless it is stated by the assessee that he has made a change or departure in the method of valuation followed by him, it would be presumed that he has not made any change in the method of valuation which he had hitherto been following. In the instant case, the petitioner, while submitting its return for the assessment year in question did not notify any change of departure made by it in the method hitherto followed by it in valuing its stock. There is, therefore, a presumption that the petitioner had not departed from its past practice in valuing its stock. In other words, the respondent had to presume that the petitioner had valued its stock of yarn in process at 12 p. per kg. as in the past.

8. Petitioner had, in our opinion, disclosed all the primary facts necessary for its assessment. It was not necessary for the petitioner to disclose something which was known to the Department. As pointed out above, the method followed by the petitioner in valuing its stock at 12 p. per kg. by calling it a method of cost was known to the Department. This, as pointed out above, is evident from the reasons recorded by the ITO for reopening the assessment and the statements made in the affidavit-in-reply. Since the method of valuation consistently adopted by the petitioner was already known to the respondent or the Department, the petitioner cannot be found guilty of having failed to disclose this fact.

9. It was, however, urged that at item 6 of sub-part 'A' of Part I of annex. ' C ' of the return of income relating to the profits and gains of business or profession, the petitioner was required to state the method of stock valuation. It was urged that all that the petitioner stated in the said item 6 was ' vide balance-sheet ', In Sen. 7 of the balance-sheet for the year 1971, the petitioner stated the value of the yarn in process as follows :

' Process Stock (at cost) Rs. 13,16,690,'

10. In Schedule 8 relating to stocks of the said balance-sheet the petitioner stated the value of the yarn in process as follows:

' Stock-in-process--Rs. 8,68,829.'

11. It was urged that the above valuation given in the balance-sheet did not disclose that the stock of yarn in process was valued at 12 nP. per kg. Petitioner, therefore, could not be said to have disclosed primary facts necessary for assessment for that year. As discussed above, the method of valuation adopted by the petitioner over a number of years was known to the Department. Since no departure was made, it should have been presumed that when the petitioner stated that yarn in process was valued at cost; it had valued stock at 12 nP. per kg. as in the past. Itcould not, therefore, be said that the petitioner had not disclosed the primary facts. But apart from that, the petitioner was required to file the balance-sheet along with the return by virtue of the relevant provisions of the rules framed under the Act and that would mean that the balance-sheet so filed was part of the return itself. When the petitioner stated in the balance-sheet that the stock of yarn in process was valued at cost, the ITO should have been put on inquiry and it was his duty to find out what method the petitioner had followed in working out the cost of stock. As held by the House of Lords in Duple Motor Bodies Ltd. v. Ostime [1961] 39 TC 537, it is permissible to value stock at a figure higher or even lower than what is arrived at by showing cost method. Therefore, if, as urged on behalf of the Revenue, the method of valuation followed by the petitioner was not known to the ITO, assessing the petitioner to income-tax for the year under reference, it was his duty to investigate into the facts and find out what exactly was the method which was followed by the petitioner in valuing the stock and then to draw the correct inference on the basis of the facts found. On the facts and in the circumstances of the case, prima facie, the appendage of label which the petitioner gave to the method of valuation of stock of yarn, namely valuation of stock at cost, is not by itself a primary fact. But even assuming that the description accordingly given by the petitioner about the method of valuation constitutes a primary fact, it was the duty of the ITO to make an investigation into the facts and draw a correct inference from the facts found by him and to decide, inter alia, whether or not the stock can be said to have been valued at cost, as claimed by the petitioner having regard to the method adopted. It was not part of the duty or responsibility of the petitioner to advise the ITO with regard to the true and correct inferences which should be drawn from the primary facts as regards the method of valuation.

12. Section 147(a) empowers the ITO, subject to the provisions of Sections 148 to 153, to assess or reassess income or recompute the loss or depreciation allowance, as the case may be, in any assessment year, if he has reason to believe that by reason of omission or failure on the part of the assessee to make a return under Section 139, for any assessment year to the ITO or to disclose fully and truly all material facts necessary for assessment for that year, the income chargeable to tax has escaped assessment for that year. This provision operates to disturb the finality of the assessment already made and to reassess the income, etc., which has been received by or has accrued to an assessee in the previous year, relating to the assessment year in question. Such action is bound to result in considerable hardship to the assessee. The Legislature has, therefore, imposed two conditions, under which alone the ITO can reopen an assessment which is already completed, namely, (1) that the ITO must have reason to believe that income chargeable to tax has escaped assessment, and (2) that he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee, (a) to make a return under Section 139 for the assessment year to the ITO, or (b) to disclose fully and truly all material facts necessary for the assessment for that year.

13. In our opinion, having regard to what is discussed above, the present case would be directly covered by our decision in Aryaduya Spg.'s case decided on January 17, 1983 : [1983]144ITR817(Guj) , wherein we have dealt with in detail the various contentions raised on behalf of the Department. In our opinion, there are no features which distinguish the present case from the said case. In our opinion, the reasons recorded by us in Aryodaya Spg.'s case would govern the present case also. Therefore, for the reasons discussed above and the reasons recorded in our decision in Aryodaya Spg.'s case (Special Civil Application No. 1940 of 1979, decided on January 17, 1983 : [1983]144ITR817(Guj) ), this petition must succeed.

14. In the result, we allow this petition and quash and set aside the notice, annex. ' I ', dated March 28, 1982.

15. Rule made absolute with costs.


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