(1.) THE question of law referred by the Income-tax Appellate Tribunal in accordance with the direction of this Court in C.M.P.Nos. 5830 and 5831 of 1946 is as follows :-
(2.) THE assessees are dealer in dye-stuffs and chemicals comprising numerous items. In valuing their opening and closing stock, the method followed by them was to take the average cost or market value, whichever was lower, in respect of the each separate article of the stock. For the relevant period the average cost of the opening stock was in respect of all items lower than the market rate and so the assesses valued the opening stock (which was the closing stock of the next preceding year) on the average cost basis. At the time to valuing the closing stock, with regard to some of the other articles the market rate was lower, Whereas with regard the other articles the market rate was higher than the average cost. THErefore, the respondents took the average cost as the value of the closing stock for those articles of which the cost was lower than the market rate and adopted the market rate for other articles of which the market rate was found to be lower than the average cost. THE Tribunal accepted the method adopted by the assessees.
(3.) IN the first place, the profits of any particular year or accouning period must be taken to consist of the difference between the receipts form the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. IN the second place, the accounts of profits and loss to be made up for the purpose of ascertaining 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 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 or manufacturers business the values of the stock-in-trade at he beginning and at the end of 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.