COMMISSIONER OF INCOME TAX, CALCUTTAversusBRITISH PAINTS INDIA LTD

       COMMISSIONER OF INCOME TAX, CALCUTTA
                         v.                                                   A
             BRITISH PAINTS INDIA LTD.

                         DECEMBER 13, 1990

      [T. KOCHU THOMMEN AND M.M. PUNCHHI, JJ.]                                B

      Income Tax Act 1961: Section 145-,--Va/uation of stock-Prin-
ciple to be followed-Cost or market value-Whichever is lower-
Assessing officer-Whether entitled to add over head charges.

      Method of accounting-Consistent practice-To disclose true
picture of profits and gains-Assessing Officer-Entitled to and has C
duty to adopt apporpriate computation to determine true income.

       The respondent-assessee a limited liability company engaged in
the business of manufacture and· sale of paints, had a consistent practice
to value its goods in process and finished products exclusively at cost of D
raw materials and totally excluding overhead expenditure. The justifi-
cation for this practice, the assessee contended was that the goods
being paints had limited storage life and If not quickly disposed of were
liable to lose their market value.

      The Income Tax Officer rejected the aforesaid contention of the E
assessee observing that at no time had the assessee claimed any deduc-
tion on account of deterioration or damage to goods and that there was
no justification to recognise a practice as claimed by the assessee of
valuing its stock otherwise that in accordance with the well recognised
principle of accounting which require the stock to be valued at either
cost (raw material plus expenditure) or market value whichever was F
lower. Recalculating the value of the opening and closing stocks by
adding the overhead expenditure, the Income-tax Officer made an addi-
tion of Rs.1,04,417 for the assessment year 1963-64, and allowed a
deduction of Rs.3338 for the assessment year 1964-65. These orders
were confirmed by the Appellate Assistant Commissioner.
                                                                              G
      On appeal, the Income Tax Appellate Tribunal held that there
was no evidence to show that the goods in stock deteriorated in value
and that there was no justification for excluding the overhead expendi-
ture in valuing the stock; and If it was in the interest of the business to
value stock solely with refereilce to cost of raw materials and without
including the overhead expenditure, such valuation was not appro-             H

                                    525
    526         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

A priate to the computation of income chargeable under the Income Tax
  Act.

        The High Court, in a reference at the instance of the Revenue
  noticed that though there was no evidence of deterioration of the goods
  in stock, came to the conclusion that having regard to the consistent
B practice of the assessee, the Tribunal was not justified in rejecting the
  assessee's method of valuation of its stock-in-trade. It accordingly
  reversed the Tribunal's decision.

        In the appeals by the Revenue to this Court, it was contended on
  behalf of the assessee that for a number of years the Revenue did not
C question the method of accounting regularly employed by the assessee,
  that it was during the assessment years in question that the objection
  was raised for the first time on the ground that overhead expenditure
  was not included iu the value of the stock, that the Assessing Officer had
  exceeded his jurisdiction by adding the overhead expenditure to the cost
  of raw material, especially because of the short durability of paint and
D that the Assessing Officer has not appreciated that the method adopted
  by the assessee is a well recognised method among accountants of
  repute.

         Allowing the appeals and setting aside, the judgment of the High
    Court, this Court,
E
           HELD: 1. The Income Tax Act does not contain any specific pro-
    vision for the valuation of stock, Income, profits and gains must, how-
    ever, be computed in the manner provided by the Act. It is the duty of
    the Officer to determine the profits and gains of a commercial
    adventure according to the correct principle of accounting. In doing so,
F   he might, dependent on the nature of the business and its special
    character, allow certain adjustments, but his primary purpose and duty
    is to deduce the correct income, profits and gains, and this he cannot do
    without taking into account the value of.the stock-in-trade at the begin-
    ning and at the end of the year and by ascertaining the difference
    between them. [537G-538Bl
G
         P.M. Mohammed Meerakhan v. Commissioner of Income-Tax,
    Kera/a, [1969] 73 I. T .R. SC 735, referred to.

          2. The object of stock valuation is the correct determination of
    the profits and loss resulting from a year's trading. [5388]
H
                           C.I.T. v. BRITISH PAINTS                       527

      Whimster & Co. v. Commissioners of Inland Revenue,, [1926] 12
                                                                                 A
 Tax Cases 813, 827; Chainrup Sampatram v. Commissioner of Income-
 Tax, West Bengal, [1953] 24 I.T.R. 481, 485-486; Patrick (Inspector of
 Taxes) v. Broadstone Mills Ltd., [1954] 25 I.T.R. 377, 395; Russell v.
 Town & County Bank, [1888[ 13 App. Cas. 418, 424; 4 TLR. 500 and
 Minister of National Revenue v. Anaconda American Brass Ltd., [1956]
 A.C. 85; (1956) I.T.R. 84, 99, referrett to.                                    B

        3. 'Section 145 of the Income Tax Act, 1961 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
  advise in the interest of efficient administration of the company, it is the   c
  duty of the Income Tax Officer to determine the taxable income by
  making such computation as he thinks fit. [539E]

       4. Even if the assessee had adopted a regular system of account-
 ing, it was the duty of the Assessing Officer under section 145 of the          D
 Income Tax Act 1861, to consider whether the correct profits and gains
 could be deduced from the accounts so maintained. If he was of the
 opinion that the correct profits could not he deduced from the accounts,
 he was obliged to have recourse of the proviso to section 145 of the
 Income Tax Act 1961. [536C, G]
                                                                                 E
       Commissioner of Income-Tax, Bombay v. Sarangpur Cotton
 Manufacturing Co. Ltd., [1938] 6 ITR 36; Commissioner of Income-
 Tax, Madras v. A. Krishnaswami Mudaliar & Ors., [1964] 53 I.T.R.
 122, 128 and 132 ; Commissioner of Income-Tax v. Mc-Milan & Co.,
 [1958] 33 I.T.R. 182; S.N. Namasivayam Chettiar v. Commissioner of
 Income-tax, Madras, [1960] 38 I. T.R. 579, 588 and Commissioners of F
 Inland Revenue v. Cock, Russell and Co. Ltd., I1949] 29 Tax Cases 387,
 392,.referred to.                                         ·

      5. Any system of accounting which exi:ludes, 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 G
picture of the true state of the business for the purpose of computing the
charge~ble 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 H
     528          SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

A 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. [539F-G]

           6. Each year being a self-contained unit, and the taxes of a
     particular year being payable with reference to the income of that year,
13   as computed in terms of the Act, the method adopted by the assessee has
     been found to be such that the income cannot properly be deduced
     therefrom. It is, therefore, not only the right but the duty of the Asses-
     sing Officer to act in exercise of his statutory power, for determining
     what, in his opinion, is the correct taxable income. [539H-540A]

           7. The question to be determined by the Assessing Officer in
c    exercise of his power under section 145 is whether or not income can
     properly be deduced from the accounts maintained by the assessee,
     even if the accounts are correct and complete to the satisfaction of the
     Officer and the income has been computed in accordance with the
     method regularly employed by the assesse~. What is to be determined
D    by the Officer is a question of fact i.e. whether or not income chargeable
     under the Act can properly be deduced from the books of account, and
     he must decide the question with reference to the relevant material and
     in accordance with the correct principles. [531D-F)

           8. It is a well recognised principle of commercial accounting to
E    enter in the profit and loss account the value of the stock-in-trade at the
     beginning and at the end of the acconnting year at cost or market price,
     whichever is the lower. [533G-H)

           Whimsier & Co. v. The Commissioners of Inland Revenue, [1917-
     26] 12 Tax Cases, 813, 823 referred to.
F
        (9) Where the market value has fallen before the date of valuation
  and at that date the market value of the article is less than its actual
  cost, the assessee is entitled to value the articles at market value and
  thus anticipate the loss which he will probably incur at the time of the
  sale of goods. Valuation of the stock-in-trade at cost or market value,
G whichever is the lower, is a matter entirely within the discretion of the
  assessee, but whichever method he adopts, it should disclose a true
  picture of his profits and gains. If, on the other hand, he adopts a
  system which does not disclose the true state of affairs for the determi-
  nation of tax, even if it is ideally suited for other purposes of his busi-
  ness, such as the creation of a reserve, declaration of dividends, plan-
H ning and the like, it is the duty of the Assessing Officer to adopt any
                 C.l.T. v. BRITISH PAINTS [THOMMEN, J.]                 529

such computation as he deems appropriate for proper determination of
                                                                               A
the true income of the assessee. [534E-F]

      This is not only a right, hut a duty that is placed on the Officer, in
terms of the first proviso to section 145 which concerns a correct and
complete account, but which in the opinion of the Officer does not
disclose a true and proper income. [534G]                                      B

     B.S.C. Footwear v. Ridgway (Inspector of Taxes), [1971] 2
W .L.R. 1313, referred to.

      (10) It is not only the right, but the duty of the Assessing Officer
to consider whether or not the books disclose the true state of accounts
and the correct income can be deducted therefrom. It is incorrect to           C
say, as contended on behalf of the assessee, that the Officer is bound to
accept the system of accounting regularly employed by the assessee the
correctness -of which had not been quesiioned in the past. There is no
estoppel in these matters, and the Officer is not bound by the method
followed in the earlier years. [535G]                                          D

      ( 11) What is the profit of a trade or business is a question of fact
and it must be ascerb1ined, as all facts must be ascertained, with
reference to the relevant evidence, and not on doctrine or theories. [539C]

     CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.                           E
1918-19 of 1976.

      Appeals by Certificate from the Judgment and Order dated
22.8.74 of the Calcutta High Court in Income Tax Reference No. 9 of
1970.
                                                                               F
    B.B. Ahuja, Ranbir Chandra and Ms. A. Subhashini for the
Appellant.

      Raja Ram Aggarwal, S. Ganesh, Praveen Kumar and Darshan
Sin~h for the Respondent.
                                                                               G
      The judgment of the Court was delivered by

      THOMMEN, J. These appeals by certificate arise from the judg-
ment dated August 22, 1974 of the Calcutta High Court in I. T.R. No. 9
of 1970 concerning the assessment years 1963-64 and 1964-65, relevant
to the accounting years ended 31.12.1962 and 31.12.1963. Answering H
    530         SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

A the question referred to it in the negative and against the Revenue, the
  High Court stated that the Income Tax Appellate Tribunal was not
  justified in rejecting the method of valuation of the goods in process
  and the finished products on the basis of the cost of raw materials after
  excluding altogether the overhead expenditure. The Tribunal had by
  its order dated 27.2.1969 upheld the findings of the Income Tax
B Officer; as confirmed by the Appellate Assistant Commissioner, that
  the assessee's goods in process and finished products were liable to be
  valued at 100 per cent of the cost which included the overhead expen-
  diture and not at 84.49 per cent as claimed by the assessee.

        The assessee is a limited liability company engaged ih the busi-
C ness of manufacture and sale of paints. It contended before the
  authorities that it had been its consistent practice to value the goods in
  process and finished products exclusively at cost of raw materials and
  totally excluding overhead expenditure. The justification for this
  practice, according to the assessee, was that the goods being paints had
  limited storage life and, if not quickly disposed of, they were liable to
D loose their market value. This contention of the assessee was rejected
  by the Income Tax Officer observing that at no time had the assessee
  claimed any deduction on account of deterioration or damage to
  goods. The Officer held that there was no justification to recognise a
  practice, as claimed by the assessee, of valuing its stock otherwise than
  in accordance with the well-recognised principle of accounting which
E required the stock to be valued at either cost (raw material + expendi-
  ture) or market price, whichever was the lower. Recalculating the
  value of the opening and closing stocks by adding the overhead expen-
  diture, the Officer made an addition of Rs.1,04,417 for the assessment
  year 1963-64 and allowed a deduction of Rs.3,338 for the assessment
  year 1964-65. These orders, as stated above, were confirmed by the
F Assistant Appellate Commissioner and by the Tribunal.

        The Tribunal held that there was no evidence to show that the
  goods in stock deteriorated in value and there was no justification for
  excluding the overhead expenditure in valuing the stock. If it was in
  the interest of the business to value stock solely with reference to the
G cost of raw materials and without including the overhead expenditure,
  such valuation was not appropriate to the computation of income
  chargeable under the Income Tax Act. The High Court noticed that
  there was no evidence of deterioration of the goods in stock. But after
  an exhaustive review of the case law on the question, the learned
  Judges came to the conclusion that, having regard to the consistent
H practice of the assessee, the Tribunal was not justified in rejecting the
                   C.I.T. v. BRITISH PAINTS [THOMMEN, J.l              531

    assessee's method of valuation cif its stock-in-trade.
                                                                              A
            The computation made by the Income Tax Officer in making the
     addition and deduction for the respective years was in exercise of his
    .Power under section 145 of the Income Tax Act, 1961. This provision,
     in so far as it is material, reads:
                                                                              B
                "145.(1) Income chargeable under the head 'Profits and
                gains of business or profession' or 'Income from other
•               sources' shall be computed in accordance with the method
                of accounting regularly employed by theassessee:

               Provided that in any case where the accounts a.re correct
               and complete to the satisfaction of the Assessing Officer      c
               but the method employed is such that, in the opini0n of the
               Assessing Officer, the income cannot p[operly be deduced
               therefrom, then the computation shall be made upon such
               basis and in such manner as the Assessing Officer may
               determine: .... "                                              D

    The question to be determined by the Assessing Officer in exercise of
    his power under this provision is whether or not income can properly
    be deduced from the accounts maintained by the assessee, even if the
    accounts are correct and complete to the satisfaction of the Officer and
    the income has been computed in accordance with the method of E
    accounting regularly employed by the assessee. What is to J>e deter-
    mined by the Officer in exercise of his power is a question of fact, i.e.,
    wheiher or not income chargeable under the Act can properly be
    deduced froni the books of account, and he must decide the question
    with reference to the relevant material and in accordance with the
    correct principles. In the words of Viscount Haldane "it is plain that F
    the question of what is or is not profit or gain must primarily be one of
    fact, and of fact to be ascertained by the tests applied in ordinary
    business" [Sun Insurance Office v. Clark, [1912] A.C. 443]. Referring
    to section 13 of the Income Tax Act, 1922, which corresponds to
    section 145 of the Income Tax Act, 1961, this Court had stated in
    Chhabildas Tribhuvandas Shah and Others v. Commissioner of Income G
    Tax, West Bengal, [1966] 59 I.T:R. 733, 737:

                    "We may point out that we are not concerned with
               the correctness of the conclusion and we are only con-
               cerned with the question whether there is any material in
               support of the findmg of the Appellate Tribunal. In cases H
     532        SUPREME COURT REPORTS               [1990] Supp. 3 S.C.R.

               involving the applicability of the proviso to section 13, the
A
               question to be determined by the Income-Tax Officer is a
               question offact, namely, whether the income, profits and
               gains can or cannot be properly deduced from the method
               of accounting regularly adopted by the assessee. There is
               nothing special about .this question of fact, and generally
B              the only question of law that can possibly arise is whether
               there is any material for the finding ... "

        The facts are not in dispute. It is the assessee's case that the
  stock-in-trade has been valued at 84.49 per cent representing the            •
  actual cost of the raw materials. The overhead charges representing
  15 .51 per cent of the total cost have been admittedly excluded from the
c assessee's valuation of the stock. But by the very method of accounting
  which the assessee has adopted, it is possible for the Income Tax
  Officer to make the necessary additions or deductions so as to arrive at
  the correct value of the stock for the purpose of determining the
  chargeable income. The correctness of the accounts maintained by the
D assessee is not in question; nor is the system adopted by the assessee,
  except insofar as the stock is valued without taking into account the
  production expenditure. The question, therefore, is whether or not the
  Assessing Officer is justified in holding that the stock-in-trade of the
  assessee has necessarily to be valued, for the purpose of computing the
  income, at 100 per cent of the cost, and not at 84.49 per cent, as the
E assessee has admittedly done.

        It is contended on behalf of the assessee that for a number of
  years the Revenue did not question the method of accounting regularly
  employed by the assessee. It was during the assessment years in ques-
  tion that objection was raised for the first time on the ground that
p overhead expenditure was not included in the value of the stock. The
  Revenue has, however, not questioned the correctness of the
  accounts. The Assessing Officer, according to counsel, has exceeded
  his jurisdiction by adding the overhead expenditure to the cost of raw
  material, especially because of the short durability of point. The
  Officer has not appreciated that the method adopted by the assessee is a
G well recognised method among accountants of repute:

       The assessee's counsel places much reliance upon the decision of
  the House of Lords in Duple Motor Bodies Ltd. v. Inland Revenue
  Commissioners, [1961] 1 W.L.R. 739. That was a case where the asses-
  see carried on the business of building bodies for motor-coaches. At
H the end of each accounting period the assessee had in hand a number
                   C.I.T. v. BRITISH PAINTS [THOMMEN, l.l               533

    of unfinished bodies. In computing the value of work in progress for       A
    income-tax purposes the assessee adopted what is called the 'direct
    cost' method, on the basis of which only the direct cost of raw mate-
    rials and labour expended on the work was taken into account. The
    Revenue sought to value the work in progress on an 'on-cost' basis.
    The direct cost method, as adopted by the assessee in that case, takes     B
    into account monies spent solely for the purpose of the manufacture of
    the particular goods, whilst the on-cost method treats, as an additional
    item of cost, proportions of various items of expenditure incurred in
    connection with the manufacture of those goods as well as of other
    goods. The two principle elements in 'direct cost' , as adopted by the
    assessee in that case, are labour and raw-materials and that method is
    far more accurate in respect of the goods in progress which by their       C
    very nature have insignificant market value. On the other hand there is·
    much uncertainty in the 'on-cost' method. The House of Lords held
    that particularly in view of the fact that the direct cost method had
    been applied consistently in the past and being more accurate as a
    method of computation, the assessing authority was not justified in
                                                                               0
    discarding that method and adopting the 'on-cost' method, especially
    when great uncertainty was attached to it. The decision in that case
    turned .on .!he peculiar facts concerning. g?ods in progress .which by
    their very nature, being unfinished goods, had limited market value
    and to value them otherwise than by the direct cost method was uncer-
    tain and inaccurate and did not give a true value of the goods for the
                                                                               E
    purpose of computing the correct income .
•
          In the present case, what the assessee contends for is neither the
    'direct cost' method nor any other method which takes into account
    the actual or even part of the cost involved in the manufacture of the
    goods in process and finished products. What it contends for is valua-     F
    tion of the raw material without taking into account any portion of the
    cost of manufacture. No decision has been brought to our notice in
    support of such a contention. The question of fact which the Assessing
    Officer must necessarily decide is whether or not the method of
    accounting followed by the assessee discloses the true income.
                                                                               G
          It is a well recognised principle of commercial accounting to
    enter in the profit and kiss account the value of the stock-in-trade at
    the beginning and at the end of the accounting year at cost or market
    price, whichever is the lower. As stated by the Lord President in
    Whimster & Co. v. The Commissioners of Inland Revenue, [(1917-26)
    12 Tax Cases, 813, 823:]                                                   H
    534         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

               " .... In computing the balance of profits and gains for the
A
               purposes of Income Tax, ...... Two general and funda-
               mental common places have always to be kept in mind. In
               the first place, the profits of any particular year or account-
               ing period must be taken to consist of the difference bet-
               ween the receipts from the trade or business during such
B              year or accounting period and the expenditure laid out to
               earn those receipts. In the second place, the account of
               profit and loss to be made up for the purpose of ascertain-
               ing that difference must be framed consistently with the
               ordinary principles of commercial accounting, so far as
               applicable, and in conformity with the rules of the Income
               Tax Act, or of that Act as modified by the provisions and
c              schedules of the Acts regulating Excess Profits Duty, as the
               case may be. For example, the ordinary principles of
               commercial accounting require that in the profit and loss
               account of a merchant's or manufacturer's busirn~ss the val-
               ues of the stock-in-trade at the beginning and at the end of
D              the period covered by the account should be entered at cost
               or market price, whichever is the lower; although there is
               nothing about this in the taxing statutes ... "

         Where the market value has fallen before the date of valuation
  and at that date the market value of the article is less than its actual
E cost, the assessee is entitled to value the articles at market value and
  th us anticipate the loss which he will probably incur at the time of the
  sale of goods. Valuation of the stock-in-trade at cost or market value,
                                                                                 ·-
  whichever is the lower, is a matter entirely within the discretion of the
  assessee. But whichever method he adopts. it should disclose a true
  picture of his profits and gains. If, on the other hand, he adopts a
F system which does not disclose the true state of affairs for the determi-
  nation of tax, even if it is ideally suited for other purposes of his busi-
  ness, such as the creation of a reserve, declaration of dividends, plan-
  ning and the like, it is the duty of the Assessing Officer to adopt any
  such computation as he deems appropriate for proper determination of
  the true income of the assessee. This is not only a right, but a duty that
G is placed on the Officer, in terms of the first proviso to section 145
  which concerns a correct and complete account, but which in the opi-
  nion of the Officer does not disclose a true and proper income.

       The correct principle of accounting is to enter the stock in the
  books of accounts at cost unless the value is required to be reduced by
H reason of the fall of the market value of those goods below their
                 C.l.T. v. BRITISH PAINTS [THOMMEN, J.J                  535

 original cost. Ordinarily, therefore, the goods should not be written
                                                                                A
 down below the cost price except where there is an actual or anti-
 cipated loss. On the other hand, if the fall in the price is only such as it
 will reduce merely the prospective profit, there would be no justifica-
 tion to discard the initial valuation at cost. In B.S.C. Footwear v.
 Ridgway (Inspector of Taxes), [1971] 2 W.L.R. 1313, Lord Pearson,
 criticising the system adopted in the valuation of a retailer's stock,         B
 cbserved:

             "Then is the incorrectness of the stock valuations such as to
             be likely to distort the assessment of the profits and gains
             for the year? The system produces a comparatively low
             valuation of the opening stock at the beginning of the year        C
             and a comparatively low valuation of the closing stock at
             the end of the year and therefore a comparatively low
             difference between them ...... Then in a period of rising
             turnover and rising prices the difference is an element of
             profit, and by keeping down that difference the system
             diminishes the assessment of taxable profit for the year.          D
             Over a series of years there is a continuing deferment of tax
             liability. In my opinion, therefore, the system does produce
             some distortion of the assessment of taxable profits for any
             particular year."

  In that case, the House of Lords accepted the contention of the Inland        E
·•Revenue that, although the assessee's system of stock valuation had
  been accepted for tax purposes for many years upto 1959, it was liable
  to be rejected for the relevant and subsequent years as the system
  adopted by the assessee was likely to produce stock valuations which
  were seriously and substantially incorrect, thereby causing distortion
  of the assessment of the profits and gains for the year.                      f

       It is not only the right, but the duty of the Assessing Officer to
 consider whether or not the books disclose the true state of accounts
 and the correct income can be deduced therefrom. It is incorrect to
 say, as contended on behalf of the assessee, that the Officer is bound
 to accept the system of accounting regularly employed by the assessee G
 the correctness of which had not been questioned in the. past. There is
 no estoppel in these matters, and the officer is not tiound by the
 method followed in the earlier years.

      In Commissioner of Income-tax, Bombay v. Sarangpur Cotton
  Manufacturing Co. Ltd., [1938] 6 ITR 36 Lord Thankerton stated that           H
    536         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

    section 13 of the Income Tax Act, 1922 related to a method of
A
    accounting regularly employed by the assessee. The section postulated
    that such a method of accounting was the necessary basis of computa-
    tion, unless in the opinion of the Income Tax Officer, the income,
    profits and gains could not properly be deduced from such method.
    But it could very well be that, "though the profit brought out in the
B   accounts is not the true figure for income-tax purposes, the true figure
    can be accurately deduced therefrom .... " But it was not a correct
    view that the Income Tax Officer was "prima facie entitled" to accept
    the profits mentioned in the accounts where there was a method of
    accounting regularly employed by the assessee. "It is the duty of the
    Income-Tax Officer, where there is such a method of accounting to
    consider whether income, profits and gains can properly be deduced
c   therefrom, and to proceed according to his judgment on this question
     ... "(P. 43).

          In Commissioner of Income-Tax, Madras v. A. Krishnaswami
    Mudaliar and Others, [1964] 53 I.T.R. 122, 128, this Court, referring
D   to the earlier decisions on the point, observed:

               "Again as observed by this Court in .Commissioner of
               Income-Taxv. Mc-Milan and Co., [(1958) 331.T.R. 182)]the
               expression 'in the opinion of the Income-Tax Officer' in the
               proviso to section 13 of the Indian Income-Tax Act, 1922,
E              does not confer a mere discretionary power; in the context
               it imposes a statu~ory duty on the Income-Tax Officer to
               examine in every case the method of accounting employed
               by the asssessee and to see whether or not it has been
               regularly employed and to determine whether the income,
               profits and gains of the assessee could properly be deduced
F              therefrom."

    The Officer has to consider the material placed before him, and, if
    upon such consideration, he is of the opinion that correct profits and
    gains could not be deduced from the accounts, he would then be
    obliged to have recourse to the proviso. to section 145. (See the princi-
G   ple stated in S.N. Namasivayam Chettiar v. Commissioner of Income-
    tax, Madras, [(1960) 38 I.T.R. 579, 588.]

          For the computation of the true profits of the year in the case of a
    trade adventure, each year being a self-contained unit, the value of the
    stock-in-trade at the beginning and at the end of the accounting year
H   has to be taken into account. In Commissioners of Inland Revenue v.
                    C.l.T. v. BRITISH PAINTS [THOMMEN, J.J                537

    Cock, Russell and Co. Ltd., [1949] 29 Tax Cases 387, 392, Croom-
                                                                                 A
    Johnson, J. stated:

                "        there is no word in the statutes or Rules which
                deals with this question of valuing stock-in-trade. There is
                nothing in the relevant legislation which indicates that in
                compUting the profits and gains of a commercial concern         B
                the stock-in-trade at the start of the accounting period
                should be taken in and that the amount of the stock-in-
                trade at the end of the period should also be taken in. It
                would be fantastic not to do it: it would be utterly impossi-
                ble accurately to assess profits and gains merely on a state-
                ment of receipts and payments or on the basis of turnover.
                It has long been recognised that the right method of asses-
                                                                                c
                sing profits and gains is to take into account the value of the
                stock-in-trade at the beginning and the value of the stock-
                in-trade at the end as two of the items in the computation. I
                need not cite authority for the general proposition, which is
                admitted at the Bar, that for the purposes of ascertaining D
                profits and gains the ordinary principles of commercial
                accounting should be applied, so long as they do not conf-
                lict with any express provision of the relevant statutes."

    Referring to these observations, Shah, J., as he then was, in Commis-
    sioner of Income-tax, Madras v. A. Krishnaswami Mudaliar and                 E
    Others, [(1964) 53 !TR 122, 132] says:

                "We have already said that in England there is no provision
                which compels the tax officer to adopt in the computation
                of income the system of accounting regularly employed by
                the assessee. But whatever may be the system, whether it is      F
                cash or mercantile, as observed by Croom-Johnson J. in a
                trading venture it would he impossible accurately to assess
                the true profits wihtout taking into account the value of the
                stock-in-trade at the beginning and at the end of the year
                       "
                                                                                 G
         The Income Tax Act does not contain any specific provision for
    the valuation of stock. Income, profits and gains must, however, be
    computed in the manner provided by the Act. It is the duty of the
    Officer to determine the profits and gains of a commercial adventure
    according to the <¥;>rrect principle of accounting. In doing so, he might,
•   dependent on the nature of the business and its special character,           H
    538          SUPREME COURT REPORTS                  (1990] Supp. 3 S.C.R.

    allow certain adjustments, but his primary purpose and duty is to
A
    deduce the correct income, profits and gains, and this he cannot do
    without taking into account the value of the stock-in-trade at the be-
    ginning and at the end of the year and by ascertaining the difference
    between them: See P.M. Mohammed Meerakhan v. Commissioner of
    Income-tax, Kera/a, [1969] 73 I.T.R. SC735.
B
          The object of stock valuation is the correct determination of the
    profit and loss resulting from a year's trading. It is the true result of the
    trading activity of that year that must be disclosed by the books.

                " ...... the profits are the profits realised in the course of
                the year. What seems an exception is recognised where a
c               trader purchased and still holds goods or stocks which have
                fallen in value. No loss has been realised. Loss may not
                occur. Nevertheless, at the close of the year he is permitted
                to treat these goods or stocks as of their market value."
                Whimsier & Co. v .. Commissioners of Inland Revenue,
D               [1926) 12 Tax Cases 813, 827.

    As stated by Patanjali Sastri, C.J., in Chainrup Sampatram v. Com-
    missioner of Income-tax, West Bengal, [1953] 24 I. T .R. 481, 485-486:

                " ..... It is wrong to assume that the valuation of the clos-
E               ing stock at market rate has, for its object, the bringing into
                charge any appreciation in the value of such stock. The true
                purpose of crediting the value of unsold stock is to balance
                the cost of those goods entered on the other side of the
                account at the time of their purchase, so that the cancelling
                out of entries relating to the same stock from both sides of
F               the account would leave only the transactions on which
                there have been actual sales in the course of the year show-
                ing the profit or loss actually realised on the year's trading
                    "

    In the words of Singleton L.J. in Patrick (Inspector of Taxes) v. Broad-
G   stone Mills Ltd., [1954] 25 I.T.R. 377, 395:

                " ... (1) One cannot arrive at the profits of the year with-
                out taking into account the value of the stock one has at the
                beginning of, and at the end of, the accounting year. (2)
                The figures for stock are just as important as any other
H               figures. Values may have to be estimated when market
                C.l.T. v. BRITISH PAINTS [THOMMEN, J.]                  539

            price is taken, but any departure from accuracy is reflectd
                                                                               A
            in the trading account. (3) Stock should be taken either at
            cost price or at market price, whichever is the lower .... "

     Lord Herschell in Russell v. Town and County Bank, [1888] 13
App. Cas. 418, 424; 4 TLR. 500, observes:
                                                                               B
            "The profit of a trade or business was the surplus by which
            the receipts exceeded the expenditure necessary for the
            purpose of earning those receipts ... "

      What is the profit of a trade or business is a question of fact and it
must be ascertained, as all facts must be ascertained, with reference to
the relevant evidence, and not on doctrines or theories: "no assump-
                                                                               c
tion need be made unless the facts cannot be ascertained, and then
only to the extent to which they cannot be ascertained. There is no
room for theories as to flow of costs ...... " [Minister of National
Revenue v. Anaconda American Brass Ltd., (1956) A.C. 85; (1956)
l.T.R. 84, 99].                                                                D

      Section 145 of the Income Tax Act, 1961 confers sufficient power
upon the Officer-nay it imposes a duty upon him-to make such compu-
tation in such manner as he determines for deducing the correct profits
and gains. This means that where accounts are prepared without dis-
closing the real cost of the stock-in-trade, albeit on sound expert ad-        E
vise in the interest of efficient administration of the company, it is the
duty of the Income Tax Officer 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      F
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 show-
ing a comparatively low difference between the two. In a period of
rising turnover and rising prices, the system adopted by the assessee,         G
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           H_
    540         SUPREME COURT REPORTS              [1990] Supp. 3 S.C.R.

A   adopted by the assessee has been found to be such that income cannot
    properly be deduced therefrom. It is, 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, is ·the correct taxable income.

B         The Tribunal's order, affirming that of the Assessing Officer,
    was based on findings of fact made on cogent evidence and in accor-
    dance with correct principles. The High Court was clearly wrong in
    interfering with those findings.

        Accordingly, we set aside the judgment of the High Court and
C allow the appeals of the Revenue with costs throughout.

    N.V.K.                                                Appeals allowed.