Alfred Henry Lionel Leach, C.J.
1. The assessee is a merchant dealing in metals. Up to the end of the samvat year 1994, that is up to 23rd October, 1938, he adopted as the method of accounting for income-tax purposes the practice of valuing his stocks at the cost price. Both at the beginning and at the end of the year the cost price was taken. In respect of the, samvat year 1995 (20th October, 1938 to 11th November, 1939) the assessee made a change. He opened the account with stocks valued at cost price and closed it with a valuation at the market price. The market price was much higher than the cost price and this resulted in showing an increase in the profits to the extent of Rs. 24,797. The object of the change in the method of accounting is not far to seek. The Excess Profits Tax Act had come into operation. It actually came into force on the 13th April, 1940, but the Legislature applied its provisions from the 1st September, 1939. The Income-tax Officer accepted the assessee's return for the samvat year 1995, which corresponded to the year of assessment 1940-41. In the following year the Income-tax Officer discovered that he had made a mistake in accepting the method of accounting which the assessee had adopted for the year 1940-41. Consequently for the samvat year 1996 (1941-42) the Income-tax Officer assessed the assessee on the basis of the cost price of the stock. He took the cost price at the beginning of the year and at the end of it, which meant the addition of Rs. 24,885 to the total income. The assessee objected and said that the Income-tax Officer should have adopted the method which had been adopted for the previous year. He appealed to the Assistant Commissioner of Income-tax without success, but on a further appeal to the Income-tax Appellate Tribunal, Madras Bench, he was successful. At the request of the Commissioner of Income-tax, the Tribunal has referred to this Court under Section 66(1) of the Income-tax Act, the following question:
Whether in the circumstances of the case the assessment made by the Income-tax Officer for 1941-42 by adding the sum of Rs. 24,885 to the total income of the respondent by revising valuations of the opening and closing stocks of samvat year 1996 on cost basis was legal.
Section 13 of the Income-tax Act, 1922, deals with the method of accounting. It says that income, profits and gains shall be computed for the purposes of Sections 10 and 12 in accordance with the method of accounting regularly employed by the assessee, provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced from it, then the computation shall be made upon such basis and in such manner as the Income-ta,x Officer may determine. The proviso gives the Income-tax Officer full liberty of action if he is satisfied that the method adopted by the assessee does not allow of a correct assessment of the profits. When he is of this opinion it is his bound en duty to adopt another method, a method which he considers will permit of a satisfactory assessment. This was pointed out by the Privy Council in the Commissioner of Income-tax, Bombay v. Sarangpur Cotton ., of Ahmedabad (1938) 1 M.L.J. 1 : L.R. 65 IndAp 1 : I.L.R. 1938 Bom. 239 .
2. In the Commissioner of Income-tax, Madras v. Chengalvarqya Chetti : AIR1925Mad1242 , this Court held that it was an accepted rule that the assessee in crediting the closing stock figure is to take either the cost price or the market price whichever be the less--a provision obviously intended to be in favour of the trader and one which enables him more evenly to distribute his loss.
3. Taking the stock of the samvat year 1995-96 at the market price was not in accordance with the assessee's regular method of accounting. His regular method had been to take the cost price both at the beginning and at the end of the year. Moreover the market price was admittedly far higher than the cost price. In these circumstances the' Income-tax Officer took the proper course in valuing the stocks at the cost price, at the same time offering to rectify the assessment for the previous year under the provisions of Section 35 of the Act. We hold that the Income-tax Officer was in law entitled to adopt the course which he did in respect of the samvat year 1996 and accordingly we answer the question referred in the affirmative.
4. The learned Counsel for the Commissioner of Income-tax has given an undertaking to the Court that the assessment for the year 1940-41 will be revised. In respect of that year also the stock will be valued at the opening and at the close of the year at the cost price and the tax repayable to the assessee on this basis will be adjusted.
5. The Commissioner of Income-tax is entitled to the costs of this reference, which we fix at Rs. 250.