SANJEEV WOOLEN MILLS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The appellant, (hereinafter to be referred to as an assessee) is a firm engaged in the imports of synthetic waste and manufacture and export of woolen blankets. Since the assessee had been in export, the economy of the business of the assessee worked out on the basis of U.S. $ price and for the purpose of stock valuation, the same was recorded in Rupees for which the prevailing exchange rate was applied. The assessee was maintaining books of accounts on a consistent method on mercantile basis right from the insertion of its business and Department has accepted the same for the purpose of income-tax except in the years in question. Since the Account Year, 1986-87, the assessee followed the method of accounting, and for which the stock of raw-material/semi- finished goods were valued at cost price and finished goods at the market price.

(2.) For the Assessment Year 1992-93 (hereinafter to be referred to as the First year), the assessee valued the closing stock at the rate of Rs.130/- per kg. whereas the opening stock were shown at Rs.90/- per kg. In the subsequent year 1993-94, the assessee valued the opening stock at Rs.130 per kg. for the finished goods and there was no closing stock. The assessee returned a loss of Rs.54,420/- for the second year. For the First year, the assessee claimed benefit under Section 80 HHC of the Income-tax Act 1961 (hereinafter to be referred to as an Act). It is the case of the assessee that during the Financial year 1991-92, the Rupee had undergone de-valuation against U.S. $. The price of the U.S. $ as on 1-4-1991 was Rs.18/- per Dollar and at the time of the closing as on 31-3-1992, it was Rs.31/- per U.S. Dollar. As per the evidence, the assessees case is that at the relevant time the market price of the blanket in the international market was U.S.$ 4.59 per kg. and the rate of U.S. Dollar in Rupees 18.20 per Dollar. As such, the market price was Rs.90/- per kg. as on 31-3-1991/1-4-1991 (closing stock of the previous year/opening stock valuation for the year 1992-93). At the end of the year 1992-93, on 31-3-1992, the market price of the blanket in the international market was U.S. $5.35 per kg. and the rate of U.S. $ in Rupee was Rs.31/- per Dollar and the market price worked out to be Rs.165.85 per kg. and on 31-3-1992 after deducting the transport charges, freight, commission and other incidental charges to the tune of Rs.35.85, price of the blanket at market value was fixed at Rs.130 per kg. which was shown as closing stock value of the Assessment Year 1992-93. The assessee has taken the value of the closing stock as on 31st of March as the opening stock on 1st of April to be the same in every year for the finished product at market value and the raw material at cost price. The assessee also valued the market price of the finished product at the rate of Rs.98/- as on 1-4-1991 as the actual market price of Rs.130/-per kg. as on 31-3-1992 and also on 1-4-1992 the price of the finished product as opening stock value for the Second Year.

(3.) The Assessing Officer has found that on adoption of the aforesaid method, there is a stark contrast in the gross profit ratio for the accounting year 1990-91, 1991-92 and 1992- 93. He concluded that the method of valuing the closing stock at market value resulted in a distorted picture and assessee had artificially inflated the profits in order to get benefit under Section 80-HHC of the Act, which amounted to tax planning with intent to defraud the Revenue. The Assessing Officer ruled that by following the aforementioned method, the assessee effectively showed to earn income out of itself, which was totally against the basic principles of accountancy and law. He further observed that by proper application of the provisions of the Act and principles of accountancy, the assessee had to value its closing stock at cost or market price whichever was lower but that was not done. He further found that in the Second Year, the assessee had valued opening stock at Rs.130 per kg. in place of Rs.90 per kg. which had suppressed the factum of profits. He applied the standard prescribed for "Valuation of Inventory" at the cost price and added an amount of Rs.2,67,38.280.00 to the total income of the assessee for the second year.