Addition for difference in closing stock upheld by Bombay High Court

Fact and issue of the case

This appeal pertains to the assessment for the Assessment Year 2009-2010. The Assessing Officer vide his order dated 29.11.2011, disallowed the loss of ₹ 3,02,29,477/- claimed by the Appellant-Assessee in the stock valuation and added the same to the total income of the Assessee.

The assessment order dated 29.11.2011 was upheld by the Commissioner of Income Tax (CIT)(Appeals) on 11.05.2015. The Assessee’s appeal to the Income Tax Appellate Tribunal (ITAT) was dismissed on 14.09.2015. Hence, the present appeal on the aforesaid substantial question of law.

Observation of the court

At the outset, we must note that from the perusal of the orders made by the Assessing Officer, CIT (Appeals), and ITAT, it does appear that the question which is now sought to be raised by the Appellant-Assessee was not clearly raised. At least, such a question in the form in which it is sought to be projected was not raised before the Assessing Officer or the CIT (Appeals). There is only a sentence to be found in the order made by the ITAT about a submission that the market price of the Assessee’s products during the end of the relevant assessment year i.e. March 2009, was ₹ 18,107/- whereas the average market price for the whole year was ₹ 24,721/-. However, except for this submission, such an issue in the form in which it is projected in this appeal does not appear to have been raised before the Assessing Officer or CIT (Appeals).

According to us, the findings recorded by the three authorities or the view taken by the three authorities cannot be styled as some perverse view or a view which no reasonable person, well instructed in the law, could have ever arrived at. Accordingly, there is no case made out to interfere with such concurrent findings recorded by all the authorities, in the exercise of the limited jurisdiction vested in us in this Second Appeal. Apart from producing an unsigned chart and raising vague pleas, no material was placed on record by the assessee to explain the variation in the cost price and the market price during the relevant assessment year. No case is therefore made out to interfere with the findings concurrently recorded by the three authorities.

In the present case, the Assessee, apart from submitting an unsigned chart, allegedly based on the books of account maintained by the Assessee, had failed to produce on record any material in support of the substantial variation between the cost price and the market price. In such a situation, there was nothing wrong with the approach of the Assessing Officer and the determination ultimately made by the Assessing Officer.

In British Paints India (supra), the Hon’ble Supreme Court has held that :

“Section 145 of the IT Act confers sufficient power upon the officer – nay, it imposes a duty upon him – to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the ITO to determine the taxable income by making such computation as he thinks fit. Any system of accounting which excludes, for the valuation of the stock-in- trade, all costs other than the cost of raw material for the goods in process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income.

Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus, showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assessee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income could not properly be deduced therefrom. It was, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, was the correct taxable income.

The Tribunal’s order, affirming that of the Assessing Officer, was based on findings of fact made on cogent evidence and in accordance with correct principles. The High Court was clearly wrong in interfering with those findings. Accordingly, the judgment of the High Court was to be set aside.”

According to us, the aforesaid observations in British Paints India (supra), assist the revenue in this matter.

For all the aforesaid reasons, we dismiss this Appeal by holding that substantial question of law as framed, does not arise in the matter or any case, based on the material on record, is required to be answered against the Appellant-Assessee.