V. BALASUBRAMANIAN, V.P. Y.R. MEENA, J.M. T.D. SUGLA, PRESIDENT (AS THIRD MEMBER) K.S. VISWANATHAN, A.M. ORDER September, 1985 assessee is manufacturer of woollen material from mostly imported wool and exporting them. Different grounds of appeal have been raised. These are considered seriatim. 2. Disallowance under s. 40(c)/40A(5) of Act: point relating to treatment of contribution of sum of Rs. 1,80,750 to Directors/Employees Retirement Benefit Fund Trust as perquisite is covered by decision of Tribunal for asst. yr. 1973-74 in assessee's own case in ITA. Nos. 1270 and 1271 (Bom)/1980 and 576 and 3303 (Bom)/1981 against assessee. other grounds of appeal relating to reimbursement of medical expenses, disallowance of foreign travel expenses and disallowance of depreciation claimed on assets used for scientific purposes are not pressed. 3. Closing stock valuation : ITO found that assessee was valuing closing stock exclusive of customs and other fiscal levies. According to ITO, customs duty on raw materials could not be excluded from valuation of goods in stock since it formed important element in total cost of goods. value of stock could be made at cost or market price whichever is lower but could not be less than cost if cost price was less than market price. ITO, therefore, held that method of valuing closing stock adopted by assessee no scientific basis and accounts did not indicate correct profits assessee earned during year. Apart from customs duties there were also other fiscal levies, like, excise, octroi duty etc. 4 . ITO, therefore, estimated value of closing stock on proportionate basis of total duty paid on goods of both imported and indigenous varieties consumed by assessee. total consumption of imported and indigenous goods came to about Rs. 13.52 crores on which customs duty worked out to Rs. 3.93 crores which worked to average of 29 per cent. assessee disclosed closing stock of raw materials, components, finished goods, semi-finished goods and goods-in-process at Rs. 4.32 crores on which, on proportionate basis, he worked out customs duty at Rs. 1.25 crores. In his proposal to IAC under s. 144B of IT Act, 1961, ITO suggested addition of above amount of Rs. 1.25 crores. IAC went, in detail, into matter, heard assessee's representative and came to conclusion that closing stock valuation was not properly done and on basis of system of valuation followed by assessee proper income of year could not be ascertained. He, however, restricted addition to Rs. 25.96 lakhs in place of sum of Rs. 1.25 crores added by ITO. He also gave certain directions for adjustments to be made to this valuation after getting certain factual details from assessee. According to IAC, since opening stock and closing stock for year had been revalued on same basis. Some adjustment to total income assessed in past was called for. He directed ITO to make necessary rectification as result of these adjustments. assessee has challenged this addition. 5. Supporting method of valuation adopted by assessee for this and all years, ld. counsel for assessee has pointed out that assessee has been following free and consistent method of valuing stock for several years. This has been accepted by Department and assessments have been made on above basis. Ordinarily, closing stock can be valued under one of three methods: (i) on cost, i.e., direct cost plus portion of overhead expenses, if necessary, including estimate of head office expenses etc., (ii) direct cost, only direct cost involved in manufactured portion being considered, and (iii) certain selected items of direct cost and not all items being considered. assessee has followed last method every year from 1961 onwards. In fact, auditors' reports for some of these years have clearly clarified manner in which closing stock is valued by assessee. assessee's stock consisted of two parts, work-in-progress and finished goods. As regards first, assessee has taken into account cost of materials involved but not all fiscal levies or labour. In respect of finished goods, valuation had been made on principle of direct cost plus labour and fuel but not fiscal levies. Thus, for both finished goods as well as work-in- progress, fiscal levies have been omitted. But, this, according to ld. counsel, has been done not only in systematic manner but regarding it as thoroughly ascertainable and scientific method. 6 . Objective to method/procedure followed by department, ld. counsel has pointed out that on this basis stock as on 1st Jan., 1976 would have to be revalued. opening stock of 1976 will not tally with closing stock of 1975. Department gave notice for revaluing closing stock of 1975 and assessee had to approach High Court on Writ and High Court had granted stay. Whatever be earliest year in which revaluation of stock is attempted, opening stock cannot tally with closing stock of earlier year and accounts have to be disturbed continuously and from year to year. Since assessee has been following same method without any change from year to year, disturbance of valuation of closing stock would not affect, over period of years, income of assessee. same quantum of income would be disclosed and taxed according to ld. counsel, unsettling closing stock thus is case of much do about nothing. 7 . Reference is made in this connection to s. 43B of Act, newly introduced, which supports assessee's case. Under this section all fiscal levies and duties should be allowed as deductions when they are paid. Following method suggested by Department of including fiscal levies in cost would virtually nullify this requirement of law. fiscal levies being included in closing stock, what is allowed under s. 43B of Act would get cancelled by valuation of closing stock. Even though s. 43B of Act, as such, was introduced later, principle involved in this treatment of accounts of assessee cannot be ignored. 8 . method of valuing closing stock followed by assessee is adopted by many other companies as well. Apart from other things, assessee, being substantial exporter, it is pointed out that if assessee were t o follow inflation of closing stock, as suggested by Revenue, in export market, it would be confronted with charge of dumping goods. By following this conservative method, assessee is able to hold its own both in local as well as foreign markets. Dilating on importance of customs duty, in this connection, it is pointed out that imports are of three type; import duty-free, import after paying customs duty with benefit of draw-back on export, and customs duty fully paid for goods not exported. Of stock on hand, assessee cannot identify particular category to which it would fall. It is also pointed out that in view of above uncertainty, it is not proper to relate proper duty to any particular item of stock. Department has interfered with valuation and tinkered with it even though it has not itself found any way of relating fiscal levies correctly with stock on hand but has followed only dubious method stated to be average basis. same difficulty of apportioning labour amongst items has to be faced. accurate estimate, especially when large number of items are there, is not possible. Against this back-ground, it is pointed out that inclusion of duty would give very distorted picture of profitability and even annual profit of assessee's business. It can also be stated, according to ld. counsel, that profit of business cannot be ascertained. Department's right of interference under s. 145 of Act comes in only when accounts do not give correct picture and profit cannot be properly ascertained. In other circumstances, Department cannot interfere with method of accounting regularly followed by assessee. 9. ld. counsel has relied on British Paints India Ltd. vs. CIT (1978) 111 ITR 53 (Cal) as directly supporting his case. Qualified Chartered Accountants have given unqualified reports of valuation for all years. It was, therefore, difficult, and even erroneous, to hold that method is incorrect. Apart from fixing amount of duty to any particular stock on hand, vast divergence in rates of duties also affect such valuation. (1978) 111 ITR 53 (Cal) (supra) has clearly laid down relevance of method regularly followed by assessee. In that case, Tribunal s decision was against assessee but High Court laid down that there was no value of law about 'valuation' at cost or market value. assessee is, moreover in its business, confronted by continuous change in fashion involved in clothing garments with result that inclusion of direct expenses, like fiscal levies, would completely distort accounts as well as profit structure. 10. Taking us through detailed order of CIT (A), it is pointed out that it bristles with several inconsistencies, approximation etc. It is correct to say that Department knew about principle of valuation of closing stock for first time in 1977-78. Chartered Accountant's notes gave this information all through. Referring to additions suggested by ITO in various years in respect of customs duty, octroi, sales-tax etc., it is pointed out that in respect of each of these items, while for some years increase can be made for others there would be clear decrease. duties have also to be apportioned between various stages of production, such as, raw wool, wool tops work-in-progress etc. Referring to elaborate discussion about guide-lines issued by Institute of Chartered Accountants, it is pointed out that this is position in normal case. assessee has maintained books and prepared accounts on basis of circumstances special to it. Rough and ready method applicable to all assessees have not been by guide-lines of Institute of Chartered Accountants. It is also pointed out that guide-lines dealt with mainly with duties which fell on assessees and not with all duties. In view of erratic incidence of duties over years, ld. counsel also questions as to how Department can reopen assessments for all twenty years assessee has been in existence so as to do justice. In fact, following department's method would result in refund being given to assessee for some year. 11. assessee's business involved polyster fibre to good part. Cost Accounting Rules framed in respect of polyster fibre industries would be very relevant in this connection. proforma prescribed by authorities in respect of this industry also does not point out to any defects in assessee's method of stock valuation, support is also derived from Tribunal's decision in case of M/s Goodlass Nerolac Paints Ltd., Bombay (ITA Nos. 3891 (Bom), 3892 (Bom), 7226 (Bom) and 7227 ((Bom))/1983) as also House of Lords decision in case of Duple Motor Bodies Ltd. assessee cannot have any particular motive in following this system of stock valuation especially over period of nearly two decades. That this is position would be clear also from certain observations of Tribunal in Messrs Goodlass Nerolac Paints Ltd., Bombay (supra). Since over years there cannot be any loss to Revenue or gain to assessee on account of stock valuation, according to ld. counsel, disturbance of stock valuation was mere futile exercise. 12. Further, dealing with points made out on behalf of Revenue, it is pointed out that rule of cost or market followed by Accountants for valuing closing stock cannot be elevated to position of rule of law. only rule that both accountancy and income-tax recommends is that method of valuation should be one from which profit can be reasonably well ascertained. Apart from fact that these are not hard and fast rules, stock valuation has no bearing on components of cost, valuation must also not take into account unearned profit. Stress is laid on positive and negative data under which fiscal levy was worked out, even by departmental authorities, for different years. There cannot be case for any addition in all years. In fact, order giving effect to CIT (A)'s order has not been worked out for all years either. 13. method suggested by department, as alternative, according to ld. counsel, is not only arbitrary but unrelated to realities. Reference is made in this connection, to valuation reports given by two Chartered Accountants, both following department's method of valuation of closing stock resulting in vast divergence. assessee's method is neither unscientific nor inconsistent. It is pointed out that distribution of labour cost over finished goods and work-in-progress cannot give figure in excess of total cost incurred. In case of sales-tax paid by dealer to hand over to State, question is whether stock valuation should take into account this fiscal levy. There is no hard and fast fule that it should be added one way or other. burden is on Revenue to show that profits cannot reasonably be ascertained by following method adopted by assessee. There is nothing to show, on contrary, that method adopted by assessee is wrong. On contrary, in treatment given to drawback of customs duty by department, there is clear in application of department's method. It is incorrect to say that draw-back is unrelated to customs duty as would be clear from Customs and Central Excise Duties Draw-Back Rules, 1971, Rule 3. 14. ld. counsel has referred to decision in British South Africa Co. vs. CIT (1946) 14 ITR (suppl.) 17 (PC) : (1946) 36 STC 493 (PC), and in case of CIT vs. A. Krishnaswami Mudaliar (19 64 ) 53 ITR 122 (SC). decision in case of McDowell and Co. Ltd. vs. CIT (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), relied on by Revenue, it is pointed out, involved artificial definition of "turnover". What assessee has done is totally consistent with Statute as would be clear from provisions of s. 43B of Act. Even condition that each year is self contained period cannot be used against assessee in present case since question of valuation involves consideration of different years telescoping into one another. Reliance is placed on decision in case of Mahendra Mills Ltd. vs. P.B. Desai, AAC 1975 CTR (SC) 82 : (1975) 99 ITR 135 (SC). 15. ITO and IAC visited factory of assessee and examined records. It is pointed out that even after this, they could not properly identify items of raw materials or duty paid. It is against these defects that principle of averaging has been evolved. Company Law authorities had investigated assessee's affairs both from point of view of dumping and also stock valuation as directed by income-tax department. Being satisfied about correctness of method they have dropped proceedings. Stress is also laid, in this connection, on certain proceedings before Delhi High Court in connection with stock valuation of subsequent years. These proceedings pointed out also how valuation made by different experts, two Chartered Accountants, Sri P.N. Shah and Thakur, Vaidyanath Aiyar & Co., even in respect of computation made by adopting same broad principles differed. 15A. ld. counsel for Department has pointed out that over years it is well settled that closing stock is to be valued at cost or market price. Even though this is only practice, this practice has been exalted to level of rule of law. In books relating to income-tax, wealth-tax etc. have given no proper or infallible guidance as to valuation of stock, opening or closing. question is whether assessee has valued stock on basis of Universal practice almost resolved into legal proposition. If assessee were to follow cost method, it must take into account all expenditure involved. In present case, assessee has followed either direct cost method or on cost method. Fiscal duties not taken into account would partake character of positive expenditure in two different circumstances; (i) import of certain goods on which duties are paid; and (ii) purchase from another trader who has imported goods. Here also, customs duty etc. form part of purchase price. It is necessary, according to learned counsel, to keep these concepts clear and separately. Under different circumstances, some times, some levies are effective. But, some of levies are subject to and under obligation of Statute where as others are not collected but paid to vendors, with sale price. In respect of latter levies, certainly, there can be no dispute as to their inclusion in stock valuation. assessee's is expanding business. There can, therefore, be no question of any refund or reduction if fiscal levies are to be considered as suggested by department. Reference is made in this connection to factual details regarding fact of taking into account customs duties, excise duties, sales-tax and other levies. ld. counsel for assessee has considered only one or other of duties levied for different years. In this context, he has referred to reduction in customs duty for year 1980-81 as against additions on account of same duty in earlier three years. According to learned counsel for Department if overall position of duties is considered and total effect on profit for each year reckoned, there could be no question of negative overall figure or loss. 16. Regarding question of accepting results in earlier years, ld. counsel has pointed out that averment as to stock valuation was obtained in audit report for first time for asst. yr. 1977-78. fact that assessee was not valuing closing stock on particular basis in consonance with normal, proper and legal method, was known to Department only from auditor's report on accounts for year ended 31st March, 1977 where they stated: "in case of raw materials and finished goods (other than merchanting goods) such cost or market value has been determined exclusive of customs and excise duties". Such statement occurs at note No. 12 in auditor's report of year ended 31st March, 1978 also. At any rate, according to ld. counsel, erroneous assessment for one year does not justify repetition of mistake for any subsequent year or years. deficiency, if not manipulation, was known to Department for first time and ITO sought to rectify it immediately thereafter. One cannot get away from fact that closing stock was not valued by assessee according to law and normal practice in trade. It is also pointed out that even statement of auditors is not supported by at reference to history or practice. In view of above defect, especially referred to by auditors, ITO made inquiries regarding stock valuation and revalued stock as on 31st Dec., 1975, 31st March, 1977, 31st March, 1978, 31st March, 1979 and 31st March, 1980. It is incumbent on assessee to follow proper and legal method for stock valuation. Since there was no evidence to show that this was not done or at any rate this was not known to department, accounts of assessee excluding stock valuation were accepted by department. 17. ld. counsel has detailed facts of assessee's case in relation to payments of takes and duties at three stages of import of wool, polyster fibre etc., production at intermediate stage and duty on manufactured fabric. assessee also paid sales-tax. In valuing work-in-progress assessee has not taken into account duties and also direct expenses like, labour, even though in respect of manufactured goods all these have been included. assessee also does not taken into account fiscal duties paid by seller. As correctly pointed out in detailed order of CIT (A), assessee has only debited in books excise duty actually paid on manufactured fabric which has been sold and which is lying in stock with retail shops. other impositions which are normal have been ignored. assessee's contention in respect of method followed could not be justified on any ground, theoretical or practical. In fact, assessee has not been even able to show other cases where such methods of closing stock valuation has been followed and accepted as correct, scientific and legal. According to ld. counsel, extent of error involved in computation would be clear from fact that assessee has not taken into account even sales-tax etc. paid by his vendor. These levies of sales-tax are not paid by assessee to State but to its vendor which would certainly constitute only cost of purchase of purchase price to assessee. Sales-tax is, certainly, part of purchase price. Labour cost which is inevitably incurred in manufacture whether half-way or fully, certainly, has to be considered as part of price. There is no justification, therefore, for excluding this item even in valuation of work-in- progress. That assessee knew importance of inclusion of some of these items in valuation is clear from fact that assessee itself has followed this principle in respect of some of items. assessee has also adopted averaging method of inclusion of levies in closing stock valuation. learned counsel referred to example elaborately set out in order of CIT(A) which unambiguously showed how non-inclusion of fiscal levies in stock valuation distorted entire profit computation picture. assessee itself while valuing closing stock of finished goods has taken into account some of direct expenses which conforms to legal and Accountancy requirement of department's case. In fact of such inaccurate and incomplete method of stock valuation which, not merely indirectly but even directly, distorted computation of profit, it was clear that correct income of assessee for any of years cannot be properly worked out. 1 8 . assessee has made huge profits from year to year and adjustment of same by following correct and scientific method of stock valuation urged by Department, showed that huge additions have to be made to assessee's income not only for one year but for all years. There is, in fact, no set off from one year to another over period as vociferously contended for by assessee. learned counsel has also relied on elaborate report of Research Committee of Institute of Chartered Accountants which unambiguously laid down principle to be followed for stock valuation. large number of organizations, as noted in Guidance Note prepared by Research Committee, follow method of valuation of closing stock taking into consideration excise duty paid in respect of closing stock remaining on hand at end of year. If excise duty is includible in cost, there is no question of not including other fiscal levies also which are direct imposts on cost of commodity manufactured for sale by assessee. There is also no merit in assessee's contention that merely because it has followed same method of valuation over period, mistake clearly pointed out by Department should be allowed to continue. It is well settled in law that each year is self-contained period. There cannot be any adjustment of what happens in one year for working out income of any other year except where law itself provides for some such adjustment as carry forward etc. No such adjustment is possible or permissible under law in present case. 19. There is inconsistency in very method followed by assessee if its overall accounting system is gauged. assessee itself follows two different items of inclusion or exclusion of duties. In respect of machinery, plant etc., customs duty is included at cost for purpose of claiming depreciation. assessee had also been following method of averaging in working out cost in several cases. That system of averaging cannot, naturally, be called unscientific but is, in fact, method to be followed, according to ld. counsel, has judicial support. Reference, in this connection, is made to decision of Privy Council in cases of British South Africa Co. vs. CIT (1946) 14 CTR (Suppl.) 17 (PC) : (1946) 36 STC 473 (PC), Concordia Corporation Ltd. vs. CIT (1952) 22 ITR 344 (Trav-Coch), and certain passages in Kanga & Palkhivala's 'Income-tax', seventh edition at pages 875 to 879 regarding valuation of work-in-progress as adverted to in this case. Reliance is also placed on decisions in cases of British Paints India Ltd. vs. CIT (supra) and CIT vs. A. Krishnaswami Mudaliar (supra), According to ld. counsel, last case cited furnishes clear answer to many of doubts expressed. Ultimately, one has to find out what is cost price in hands of assessee. All includible items should be included in working out this figure unless permitted to be excluded either by law or by practice or Accountancy principles. Any other arrangement or method of valuation including that of stock would suggest attempts to avoid proper tax payments. Reference is made, in this connection, to dictum of Supreme Court in case of McDowell and Co. Ltd. vs. CTO (supra). 20. assessee's claim that goods are perishable and particular method of valuation has, therefore, to be adopted has also no merit. assessee is manufacturer of textile fabrics wool, polyster fabric are not like vegetable and other perishable commodities. Even reference to change of fashion as factor in this regard cannot be seriously taken note of. In fact, according to learned counsel, assessee pampers to high elites of society and non-perishability is not criterion in purchase of goods in such circumstances/circles. Reference to s. 43B of Act has also no significance. In first place, it comes into operation from asst. yr. 1985-86. It is not also declaratory of existing law. On contrary, it is urged that if actual operation of s. 43B of Act leads to such results as are found in assessee's case, very question of validity of s. 43B of Act has to be considered. It is also pointed out that while all other assessees follow acceptable principle of valuation of closing stock as suggested by department, if assessee's method is recognised as proper, question would be whether it would not lead, in fact, to case of discrimination against businessmen following scientific and traditional system. 21. assessee manufactures woollen material. raw wool is mostly imported and good part of finished products is exported. issue involved in this appeal relating to closing stock valuation is simple by itself but has got wide ramifications for this assessee as well as other cases where such valuation has to be made. assessee has been carrying on business for several years and during none of these years system of closing of stock valuation has been disturbed by ITO. Both opening and closing stock have been valued on same method. assessee's income returned on basis of accounts following this has been accepted for all these years. Only for year under appeal ITO for first time disturbed closing stock. 22. closing stock of assessee includes finished goods and work-in- progress. process of manufacturing woollen garments broadly consists of three stages; first involving preliminary processes on raw wool, second manufacture of woollen tons and lastly manufacture of finished products. In valuing closing stock of last item, assessee took into account all items of expenditure other than fiscal levies such as customs duty, sales-tax, octroi duty, etc. In valuing closing stock of work-in-progress assessee did not include labour charges or even fuel cost. Auditors in their report had made reference to this method of valuation for some of years though for other years no specific mention has been made. Since ITO through that closing stock valuation of work-in-progress as well as finished goods should include fiscal levies, expenditure relating to power, labour, etc. held that assessee was not following scientific method of closing stock valuation. Its correct annual income, therefore, could not be worked out properly in view of method of valuing closing stock followed. He got closing stock revalued by taking into account fiscal levies, etc. and made additions to total income. Both opening and closing stocks were valued. ITO adopted in absence of accurate figures for these levies and expenditure estimates on proportionate or averaging method. This is subject matter of dispute. 23. IT Act lays down specific method of arriving at income of assessee for purpose of his assessments. items of income are worked out under different heads like salary, income from property, business, etc. Separate computation is made of each item of income under appropriate head and total income is computed by adding figures and making any adjustments thereto as laid down by Act. expression "income", which is subject matter of assessment, is not defined in Act. Both from generality, therefore, of this definition usually derived from judicial decisions and also division of total income for computation purposes under different heads it is clear that method of working out of income under each head is not same. Where person derives net income from some source, it is included in total income. In case of property notional income is worked out. In case of dividends, interest, etc. Methods such as receipt, accrual, etc. are followed. In case of business or professional income, Act envisages computation of income on basis of method of accounting followed by assessee. When method of accounting followed by assessee does not give his true income from that source, ITO is empowered to work out income by estimate or other means. 24. Inherently, therefore, in computation of income from business is uniqueness which does not attach itself to computation of income from other heads of income. Since assessee can maintain books of accounts on one or other well recognised or scientific methods, computation of business income also would depend on this. Well recognised methods of accounting are not exhaustive. If, therefore, assessee even as solitary individual follows system of accounting which is capable of giving his business income figure, that cannot be tampered with by income-tax authorities. We are stressing this just to show that mere fact that no other assessee follows similar method of accounting or all others follow different method of accounting would not be reason to reject books of accounts or income returned of any particular assessee. Vital to system of accounting is another peculiarity of computation of business income. business continues from year to year. It is impossible, therefore, whatever be method of accounting followed for any year to compute business income for that year without taking into account what happened earlier or what would happen in subsequent year. Business income computation thus differs vitally from computation of income from other sources where definite receipts of income during year can be fixed without any ambiguity. natural corollary of this is as what has been correctly stated in decision of Supreme Court in case of Mahendra Mills Ltd. vs. P.B. Desai, AAC 1975 CTR (SC) 82 : (1975) 99 ITR 135 (SC) results of each year telescoping into that of others in business income computations. income of business is computed as excess earned during year over assets it had at beginning of year. definition of "income" as given in classic definition In re Spanish Prospecting Co. Ltd. (1911) 1 Ch 92, 98 per Lord Justice Moulton: "Profits" implies comparison between state of business at two specific dates usually separated by interval of year. fundamental meaning is amount of gain made by business during year. This can only be ascertained by comparison of assets of business at two dates, is relevant in this connection". 25. In finding out, therefore, income of business, value of net assets at beginning of year and their value at end has to be computed. In running business at end of each year there would be stock accumulated and not sold. stock would consist of finished products, work-in-progress at various stages of manufacture or production, raw materials, stores and other accessories, tools and variety of other items. net income earned during year can be evaluated only by taking into account relative value of above mentioned items between beginning and end of year in addition to sale proceeds, receipts in cash and kind etc. from business. It is in this context different businesses and even different assessees adopt methods of finding out relative values of above items. Stock valuation, therefore, relevant to product business brings out is very important. other items like stores spent, tools, etc. exhausted also are important. Some times these are valued both at beginning and at end of year and value of exhausted goods debited to Profit & Loss Account. Sometimes value of shares, etc. purchased is straight away debited to Profit & Loss Account, no account being taken of what remains in beginning of year and what remains at end of year. Then business is continuous and since only way profit of year in business can be ascertained is by taking relative values only, method systematically followed from year to year is regarded as giving correct profit for computation purposes. 26. position with regard to stock is also same as above. difference between closing stock would and opening stock require to be adjusted for arriving at annual profit. Whatever, therefore, be nature of any absolute method of valuation conceived of in this respect, provided method of valuation is same for opening and closing stock that would give most approximate figure of profit going into computation. In short what we want to stress is this : Even theoretically there is no absolute method of determining annual business income of assessee as that of determining his annual salary. only basis is excess earned over year. This involves finding out of relative values of all items which go into Revenue account and not capital account. same method of valuation, therefore, is more important, in fact only important thing for such computation of business income. In our view even from purely theoretical point of view to say that particular method of valuing items including stock which go into trading account is only correct method would be clearly erroneous from any point of view. If assessee who has been following one method of valuation of stock or stores, etc. suddenly switches over to another method thus gaining temporary advantage for year that would be wrong. But so long as he continues same method of valuation for every year of continuance of business any method of valuation consistently followed with regard to stock, stores, etc. should be regarded as correct one. This is primarily because there is no cut and dried absolute method of working out business income ignoring its continuity over years or assuming its winding up at end of every year. 27. Department has set much stare both from theoretical as well as practical point of view on methods of valuation of closing stock. It has also been urged that system of valuing closing stock at market or cost whichever is lower, is almost rule of law. There is fallacy in these contentions which would be clear from nature of business income explained at length in above paragraphs Even accountancy experts advocate cost or market value which-ever is less principle only as one of best methods. It would be correct for assessee to value closing stock at cost for all years, or at market value for all years. If there are different components in cost he could also without any damage to theoretical or practical working of profit value stock taking into account or omitting any of components, provided that is done both for opening stock valuation as well as closing stock valuation. Where assessee values closing stock at cost if market price has fallen, he has not taken into account loss he has already suffered. Where he values closing stock only at market value, he ignores loss but he might have taken credit for profit not realised. In these and other situations neither cost nor market value will have any significance if demand for goods on stock is low or non-existent. If commodity manufactured is not saleable in market, valuing that commodity in stock at cost or market whichever is lower would definitely not give correct profit of businessman. It also deserves to be noted that in this arbitrary but consistent adoption of method of stock valuation there is inherent assumption that all goods on hand could be sold. As matter of fact even though stock is valued at market value, if all stock of all businessmen were put on market either goods cannot be sold or would fetch much lower value than market value adopted for stock valuation even if that be less than cost. What we want to emphasise is that even principles laid down for cost valuation are at best approximate, arbitrary and more means of working out profit than representing absolute value or truth. Again it is only consistent following of method which gives even these methods of valuation any scientific support or realistic worth. Even authorities cited including guidelines issued by Institute of Chartered Accountants do not deny above concepts. guidelines and other authorities have only considered what would be better method to adopt in certain circumstances. At any rate, while giving their opinion as expert on stock valuation guidelines do not show that any other method than ones recommended by them is wrong or incapable of indicating correct profit. guidelines also have not directed their attention to importance of following consistent system of valuation from year to year. Granting that there is business only for one year what should be profit? And how could that be found out? This seems to be issue which guidelines have considered. In none of authorities quoted before us any serious discussion as to how in continuous business following consistent system of stock valuation, how any method other than that recommended by guidelines would be defective is not indicated. It would be, therefore, incorrect to say that either what guidelines have laid down is best or only method of stock valuation or that all other methods of valuation would be erroneous and will not indicate correct annual profit of business. 2 8 . Departmental Authorities while drawing support from expert opinion like guidelines have urged that to arrive at stock valuation raw material cost, manufacturing cost and all other imposed, levied and expenditure incurred thereon should be taken into account. As abstract concept certainly no objection can be taken to this contention. It is where one comes to apply this principle to practical realities that difficulties emerge. If simple proposition of asset on which some definite expenditure is incurred alone is to be considered for closing stock, abstract principle can be even made reality, but when variables involved in computation are numerous, uncertain and unascertainable, abstract principle clearly breaks down. Taking for instance, case of present assessee, stock on hand consists of finished material and work-in-progress to consider two items at least. Both these have been worked out starting with some raw material, incurring expenditure by way of fiscal levies, freight, manufacturing operations, supervising operations, management operations and any number of other items of expenditure. In extreme case we can even think of unrelated expenditure like those on advertisement or examination by experts being involved. Not only expenditure on raw materials and other several items of expenditure are incurred at different times, in fact for different years for different purposes and at different rates. For instance, units of raw materials may be purchased at Rs. 100, Rs. 120, Rs. 150 etc. per month and different quantities of this may be mixed in manufacturing process. Likewise stores and other accessories purchased at different times with different rates may be utilised. Some of production might go under normal labour charge; it is possible that idle labour costing practically nothing to factory has enabled some manufacture to be made. Fiscal levies also may vary. Some items might have suffered import duties and that too at different rates; some items might have been subject to sales-tax; some to octroi and so on. same uncertainty may apply to expenditure of power, in allocable expenditure on account of management, examination, supervision etc. When thus different quantities of raw material subject to variable and different levies and expenditure on account of above items are mixed together for obtaining final product to say that any near accurate tally of these items of expenditure can be made is extraordinary proposition. Even from purely theoretical point of view accurate allocation of such expenditure is impossible. difficulty is more when considers fact that both finished product as well as work-in-progress have reached that stage of production starting with different raw materials purchased at different times, at different rates, different levies fiscal and otherwise and also different items of expenditure on different lots at different times. In addition to above, work-in-progress itself is fluid commodity. Starting with wool as raw material there is continuous process of manufacture at various stages going to make finished product. Even if several stages can be regarded as quantified like movement of needle of watch, stages of movement are so numerous that it would be impossible to allocate even to extent of good approximation these levies and expenditure. work-in-progress may consist of wool in some form, woollen tops at various stages, cloth at various stages, etc. We have, therefore, no doubt in holding that even from purely theoretically point of view accurate method of allocation of expenditure for closing stock valuation is impossibility. 29. It is against above back ground that assessee has claimed that instead of making futile attempt at accurate allocation of expenditure including fiscal levies for purposes of stock valuation, it has followed systematic method of assigning certain items by way of on cost in arriving at closing stock. claim made is that in so far as no manipulation is intended or is done so as to reduce profit or avoid tax, bona fide method followed from year to year should be accepted. Department has suggested that where actually allocable expenditure or levy cannot be determined, system of averaging can be followed. In fact in making such average, procedure advocated is to take expenditure over period of years and divide it by suitable denominator. argument is also advanced that in respect of some items even assessee has adopted such averaging method. Certain judicial decisions are also put in to support this claim. We do not see how system of averaging especially taking into account several years for purpose would in any case give accurate or even near accurate allocation of expenditure or levies. If actual computation and allocation are impossibilities, averaging especially over several years would not only be limit of confusion but clearly erroneous. It would be even better to speculate and make estimate in dark. This point, therefore, has neither merit of scientific support nor approach to reality. argument simply is that where task cannot be done properly we should go about it in some round about form. We are not convinced that this is correct. assessee's following averaging method for some limited purpose also cannot exalt that method to any high level. What assessee has done is to completely ignore nineties and difficulties involved in attempt at accurate allocation, but rest correctly and solely on adopting same method of valuation for opening and closing stock. For reasons we have set out earlier, this cannot be said to be wrong at all for purpose of arriving at annual profit. As matter of fact assessee has included on proportionate basis labour and fuel cost for purposes of valuing finished goods. It has not included this for valuing work-in-progress. Fiscal levies have not been considered for valuation of either of items. In extreme case if assessee wants to completely ignore even work-in-progress at beginning of year and end of year and consistently value only other items, we do not see how even this can be regarded as in correct. 30. In our view Revenue's reliance on general principle of taxation law that each year is self-contained period and so continuity of business or what happens in earlier or later year should be ignored cannot be supported. Department has completely ignored particular manner in which business income is computed and how it is different from computation of income from other heads. In case of continuous business each year telescopes into subsequent year, annual income can be worked out only on this understanding. In this context it has been urged that factually there has been reduction of income for every year in method of valuation followed by assessee. Department has relied to support this argument on computation of excess to be added while giving effect to direction of CIT(A). It would appear that CIT(A) has directed ITO to refer matter of stock valuation to Chartered Accountant. valuation for two years only have been completed and this gives increased income for both years. Evidence in support of department's case is thus limited to two years. assessee had been following present method of accounting for about two decades. valuer Chartered Accountant has also adopted some methods of averaging, approximation, etc. In first place what would happen if several more years are considered is not clear. Secondly, and more important value assigned to closing stock has necessarily to be adjusted in opening stock valuation of next year. If by increasing closing stock of first year, there is excess of profit say "X", necessarily otherwise computable profit for subsequent year will definitely go down by same figure of "X". This cannot be otherwise whether one looks at it from theoretical or practical view point. It may be in situation where for period quantity in stock at end of year is more than quantity in stock at beginning, there may be increase, but if quantity at stock at end is less than that at beginning, department's method of valuation would certainly result in reduction. This argument of department, therefore, cannot be accepted. 31. It was also brought out before us that two valuers Shri P.N. Shah and M/s. Thakur Vaidyanathan Aiyar & Co. made stock valuation. values were different. According to ld. counsel for assessee, this itself indicated arbitrariness and extreme approximation relevant in system. learned counsel for Department has on contrary pointed out that certain aspects of problem noted in Shri P.N. Shah's valuation has not been considered by M/s. Thakur Vaidyanathan Aiyar & Co. These two valuations, according to ld. counsel, were also made under different circumstances one in pursuance of CIT (A)'s direction and other in connection with Writ Petition filed before Delhi High Court. Be that as it may, in our view, values do indicate that unless there are only new variables in computation two experts cannot agree. Basically, therefore, where variables involved are too many, it would be incorrect to treat any valuation as absolutely correct and not approximation to some extent. 32. Reference was made for Department to certain computations given by way of illustrations in order of CIT(A) (Paragraphs 82,83 & 84). purpose was to show that method of valuation adopted by assessee distorts profit computation. assessee's Counsel likewise has referred to certain other illustrations going to show that method followed by Department would certainly give wrong picture of profit. 33. CIT(A)'s computation deals with simple theoretical problem such as one that can be given for High School students to solve. It ignores simple fact that number of variables involved in computation of closing stock are so numerous that such easy computation cannot be made. point made out by assessee's counsel on contrary relates to two problems : One taking into account of labour; etc., charges in valuing work-in-progress and other relevance of newly introduced s. 43B of IT Act. As regards first, point made out is that in valuing closing stock of work-in- progress as well as finished goods, entire labour charges incurred is taken into account and whatever labour charges are not referable to items of goods sold would be treated as relevant to stock on hand finished goods as well as work-in-progress. This entire amount assessee has added to stock of finished goods. department's case is that part of labour expenses should be added to work-in-progress. Closing stock includes both work-in-progress and finished goods. If entire labour charge incurred for goods on stock at whatever stage they be is included in valuing finished products, we do not see what difference from point of view stock valuation or profit computation it can make by bifurcating this expenditure on some rational or irrational basis between finished goods and work-in-progress. It is certainly not case of Department that any part of labour expenditure is omitted in its relation to goods sold and goods in stock. 3 4 . other question is about applicability of s. 43B. For Department it was pointed out that since this section came into statute subsequent to this year it has no relevance. question before us is not whether s. 43B applies or not. point made out is that s. 43B gives right to assessee to claim expenditure incurred in year during that year. This may come up perhaps only in year when section was introduced. If however, method of computation now urged by Department is adopted even for earlier years, certainly it cannot be changed for any subsequent year. When one comes thus to future year where even according to Department s. 43B is applicable, since Department cannot alter method of accounting already adopted resultant effect would be that s. 43B would be nullity. Certainly Parliament would not have gone through all these processes to put on statute provision of no consequence. In other words, if department's method is accepted for this year, in order to give effect to s. 43B in future when it applies, necessarily that method has to be given up and assessee's method adopted. On both these points assessee's claim seems to be sound. 35. Other objections raised against assessee's method are that Department came to know about this defective method of stock valuation only in year under appeal and from auditor's report. ld. counsel for Department in fact has pointed out that auditor's report is so unqualified as to point out to real defect in maintenance of accounts in this regard. This view cannot be accepted. In first place auditors had made these remarks even in earlier years. Remarks of auditors were unqualified not in sense of pointing out defect but in sense of pointing out particular method being followed. Even so neither large body of shareholders nor Company Law authorities have regarded this as defect. In facts there seems to have been some proceedings before Company Law authorities in this regard and after full verification of facts they dropped proceedings. Department has also been accepting method from year for very long time. It is idle to say that because assessee followed this method, Department accepted figures ignorant of method followed. assessee's is one of biggest cases for assessment. ITO for every year has satisfied himself about books of account and computed profit. We find that he has issued usual questionnaires to assessee, called for all specific and several details regarding Balance Sheet, Profit & Loss Account, etc. analysed them and then only completed assessment. In case of assessee with big income, certainly Trading Account is important part of accounts. ITO has certainly analysed Trading Account for every one of these years. This in conjunction with auditors' report leads to conclusion that Department knowingly accepted stock valuation every year. It did not regard it in any way as defective or not giving out correct profit computation. 3 6 . disturbance of figures of closing stock for any reason whatsoever but for purpose of computation of annual profit necessarily involves interference with opening stock'. If this is done for one year necessarily same has to be done for all years past. Otherwise it may lead to situation where assessee would lose for particular year in past. It is open to Department to take action for reassessing of income which has escaped on account of revaluation. But if revaluation leads to loss for assessee in sense of larger profit having been assessed for that earlier year, there appears to be apparently no remedy for assessee. It may be noted that even for revaluing stock for year under appeal Department has not referred to any revaluation of stock for several years for which it has accepted assessee's books. Apart, therefore, from any relevance to year's assessment allowing Department to disturb stock valuation for this year would certainly prejudice assessee substantially. fact that Department has accepted method of accounting for several years past would operate as highly unjust if Department were now to change method of accounting. When accounts are maintained on same basis from year to year, mere change of closing stock valuation would over years not affect overall profit taxable and give any particular advantage to assessee by way of reduction of tax. From these points also we have no hesitation in holding that present attempt made by Department to disturb closing stock valuation is futile exercise and should not be permitted. 37. CIT(A) has while confirming ITO's recomputation of closing stock valuation referred to customs duty draw back and on that account interfered with assessment. It is pointed out that draw back is unrelated to customs duty. This is clearly incorrect as would be clear from Customs and Central Excise Draw Back Rule, 1971 Rule 3. draw back is specifically related to customs and excise duty paid. scheme appears to be that manufacturer pays duty on imports, but to extent of goods exported gets draw back on duty paid. Apparently there is limit on draw back to extent of duty paid. duty is paid in items like raw-wool which forms raw material for finished products which alone is finally exported. draw back is not incentive for export but is only refund of duty paid in so far as imported material has been exported either in same form or in different form. It would not, therefore, be incorrect to say that on exported material no net duty has been paid at all. If imported material is utilised for sale within country, duty would necessarily fall on finished goods sold in country. If part of goods are so sold, part of duty only would be covered. To extent goods are exported entire duty would be refunded. It would not, therefore, be correct to say that goods on stock on which import duty has been paid should be valued including import duties, but while draw back is received it should not go to overall duty paid. That computation made by CIT (A) thus is neither correct on clear appreciation of nature of drew back nor takes into account distortion in profit computation cannot b e denied. enhancement made by CIT (A) by taking into account duty draw back, therefore, cannot be supported on any ground. 38. Summarising position we hold that: (1) In computing profit from business continuous over years method of accounting followed by assessee would only be basis unlike in case of income from other heads. (2) Though for income-tax purposes each year is self-contained period, computation of income from business cannot ignore results of earlier and subsequent years. (3) Stock valuation even as similar dealings with stores, tools etc. is important aspect in method of accounting adopted by businessman. (4) There is nothing absolute by way of method in stock valuation. Stock valuation is only aid to arrive at profit from trading account. This being so, so long as same method of stock valuation is adopted from year to year by continuous business, it cannot be said that correct profit cannot be computed from that method. (5) Where closing stock valuation is disturbed and to same extent opening stock valuation for next year has to be adjusted, there can be no escapement of profit over years whether seen from theoretical or practical point of view. (6) assessee's accounts have been, in our view, consciously accepted by Department from year to year. assessee has not changed method o f accounting. method of stock valuation followed by assessee cannot be said to be to extent we are concerned not with method itself but only with determination of annual profit, erroneous or unscientific. 39. We therefore, hold that tampering with method of stock valuation followed by assessee is neither necessary nor justified for purposes of arriving at correct profit from business. additions made by such revaluation are deleted and ITO is directed to accept profit on basis of method of stock valuation followed by assessee. 40. appeal is partly allowed. Y.R. MEENA, J.M. 27th September, 1985 I have gone through order of my ld. brother. After careful consideration of order of my learned brother, I am unable to persuade myself to be agreed with view taken by him so far as valuation of closing stock is concerned. For other issues, I agree with view taken by my ld. brother. 2. main dispute between assessee and Revenue is that while valuing closing stock, fiscal duties, such as excise, customs, sales-tax, octroi etc. should be included in purchase price for raw materials, for valuing closing stock. assessee has not included these fiscal duties etc. for valuing closing stock while claiming same as deduction in Profit & Loss account; and same system is followed by assessee in past and accepted by department. Now, only issue is whether ITO can invoke provisions of s. 145(1) and thereby disturb valuation of closing stock as disclosed by assessee. CIT (A) has taken view that (1) method of accounting (valuation of closing stock employed by assessee is such that its income from business of accounting period cannot properly be deducted therefrom; (2) that for determining income or loss actually for accounting period, closing stock of raw materials, work-in-progress and finished products (other than finished product lying in stock with retail shops of assessee) will have to be valued by taking into consideration custom duties, countervailing excise duties, intermediate excise duties, sales tax, octroi duty paid as also direct expenses incurred by assessee; (3) for valuation of closing stock of finished products lying in retail shops of assessee all duties/taxes/direct expenses mentioned at (2) above also will have to be taken into consideration; (4) that value of closing stock as mentioned above cannot be found out by correlating stock with purchase price and duty/taxes paid in respect thereof, same may be found out by resorting to well recognised method of averaging. 3 . In view of above, CIT (A) has upheld action of ITO in valuing stock for asst. yr. 1980-81. In appeal before us, ld. counsel for assessee Sri N.A. Palkhivala has submitted that similar system was followed for last so many years and accepted by department. When that has been accepted by Department in past and there is no change in facts, similar method should be accepted this year also. Sri Palkhivala's next submission was that method of valuing closing stock is not exactly as laid down in guidelines circulated by Institute of Chartered Accountants of India, but it is little bit conservative; but that does not mean that it should be rejected. He also submitted that similar method was followed by some other companies. Sri Palkhivala further contended that when there is no statutory provision to adopt particular system in valuing closing stock, ITO was not justified in disturbing value taken on basis of particular system followed by assessee in past. Be also submitted that it any system, if ITO has added some amount in income of assessee in other years, that will result in reduction from assessee in future. Therefore, ultimate result will be same. So relied on British Paints India Ltd. vs. CIT (1978) 111 ITR 53 (Cal) (supra). He also argued that amendment in income-tax Act by insertion of s. 43B that confers method followed by assessee. 4. On other hand, ld. counsel for Revenue Sri Jetley, submitted that it is not correct that inclusion or exclusion of fiscal duties while valuing closing stock does not take any difference. In fact, if these fiscal duties including expenses of manufacturing at various stages makes substantial difference, if these are included in valuing closing stock, then that will result in addition of crores every year in income of assessee. He further clarified that system followed by assessee has not been followed by any other company. Therefore, if system has been wrongly followed, that does not give any right to assessee to put into loss Department for ever in future also. 5. I have heard rival submissions. basic issue for considerations is to find out fact whether system for valuing closing stock followed by assessee is such thereby proper income cannot be deducted. First of all, I do not agree with ld. counsel Shri Palkhivala that any system which is followed in past should be accepted in future also when throughout that system is wrong. basic thing to be seen is whether system followed by assessee was proper or not. Once authority comes to conclusion that system so followed by assessee in past was wrong, that can be rejected at any time, at any stage. It does not give any right to assessee to follow wrong system for ever. So far guidelines issued by Institute of Chartered Accountants of India are concerned, I agree with Sri Palkhivala that guidelines are only meant for guidance. If assessee chose some modification in his system to adjust it with normal practice as prescribed in guidelines issued by Institute of Chartered Accountants in considering nature of business of assessee. There is nothing wrong in it, especially when there is no statutory provisions provided in Act, regarding method of valuation of closing stock. But at same time, assessee is not free to extent to follow method he likes. He should follow such method whereby profits are properly deducted. Therefore, basically before us there is question of fact rather than law, whether by method applied by assessee for valuation of closing stock is such, whereby proper income or profit can be deducted. For this purpose, some relevant facts are necessary to refer. They are produced below. Shri P.N. Shah, C.A. has clarified points to ITO vide his letter dt. 23rd Aug., 1985 wherein he has clarified reason for different result by applying method of inclusion of fiscal duties etc. between his report and report given by M/s. TVA & Co. Further, if fiscal duties are included in valuing closing stock, results will be in addition in income of assessee in every year. Sri P.N. Shah has given items and relevant amounts which were not included in valuing closing stock by assessee as on 31st March, 1983. Sri P.N. Shah's comparative chart is as under : Items not included by Figures Figures Figures company in valuation of stock as at in TVA & Co. in my report 31-3-1983 statement (Rs. in (Rs. in lakhs) lakhs) (i) Custom Duty/Excise Duty, 516.36 444.29 Sales tax and other charges (ii) Intermediary Duty (Wool 79. 18 24.25 Tops/Yarn) (iii) Excise Duty on finished 18 .48 goods. (iv) Sales-tax/octroi on 16.35 stocks/Stores & Spare parts Similarly, Sri Palkhivala has given comparative chart of valuation of closing stock by inclusion of these duties on basis of reports given by Mr. P.N. Shah and T.V.A. & Co. regarding valuation of closing stock as on 31st March, 1981, 31st March, 1982 and 31st March, 1983. 31-3- 31-3- 31-3- . 1981 1982 1983 . PNS TVA PNS TVA PNS TVA (Rs. in (Rs. in (Rs. In . lakhs) lakhs) lakhs) (A) Duties/Taxes 358.63 244.84 438.44 307.66 532.71 444.29 Increase/(Decrease) . . 79.81 62.82 95.37 136.63 (B) Intermediary 108.87 83.62 131.48 59.99 97.66 24.25 Duties Increase/(Decrease) . . . (23.63) (33.82) (35.74) (C) Total 467.50 328.46 569.92 367.65 630.37 468.54 Duties/Taxes Total . . 102.42 39.19 60.45 100.89 Increase/(Decrease) above figures are based on materials supplied by assessee. From perusal of these figures, it is apparent that if we add these fiscal duties in valuing closing stock, result is addition in income of assessee. Shri Palkhivala pointed out that if we look into these comparative figures given by M/s. P.N. Shah and M/s T.V. & Co., following same method, even then, result is not same. Therefore, system is also not 100 per cent correct. When this system is not 100 percent correct and assessee has followed some conservative system, that should not be rejected. To clarify this position regarding difference among figures given in comparative chart as produced by Sri Palkhivala, Shri P.N. Shah has clarified this in his letter dt. 23rd Aug., 1985. He has pointed out reasons for difference in addition of income by inclusion of these fiscal duties etc. first reason is that in valuation given by TVA & Co., TVA & Co. has included custom duties on imports, but other related direct expenses have not been considered. second reason given by Sri P.N. Shah is that TVA & Co. have made entire calculation on average basis that gives distorted picture. On other hand Shri P.N. Shah has worked out duty on real figures and on actual basis. Similarly TVA & Co. has not considered wages, power and fuel which were used for processing and manufacture of goods which formed part of closing stock. Similarly he has given other two or three reasons in his report regarding some of relevant expenses which were not considered by TVA & Co. In valuing of closing stock of stores and spare parts, TVA & Co. has excluded sales tax and octroi. 6 . Considering clarifications given by Shri P.N. Shah indicating difference in result, in his report from report given by TVA & Co., in my view, it cannot strictly be said that by following same method, results are different. Therefore, that system is not correct. As has been clarified above, when TVA & Co., has not included some of items which were included by P.N. Shah, result naturally will be different. Therefore, it cannot be said that following same system, results are different. 7. Shri Palkhivala also argued that in business of assessee in case of imports, there is duty draw back system. If assessee paid some custom duty on imports, and part of it is finally exported after manufacture, assessee gets some refund. Therefore, inclusion, of such custom duty is not justified in valuing closing stock and not practical also. In reply to this argument, Shri Jetley submitted that it is not correct that due to draw back system in custom duty, assessee cannot follow system on basis of guidelines given by Institute of Chartered Accountants of India. He also gave some names of these companies who have similar business as that of assessee. drawback system is available in these companies, but they are following system for valuation of closing stock on guidelines issued by Institute of Chartered Accountants of India. It is specifically inquired from Shri Palkhivala to give name of any company having similar business and has followed system as followed be assessee exactly. Not even single name was given by ld. counsel Shri Palkhivala. Therefore, considering these facts, submission of Shri Jetly has to be accepted when other companies have followed system for valuing closing stock on guidelines given by Institute of Chartered Accountants, assessee has no specific reasons to depart from those lines especially when proper income is not deducted. Further, when assessee gets refund of custom duty, it will not affect profit as deduction of that already allowed. If that will be reduced from closing balance similarly that part has to be reduced from deductions already allowed in P & L account. So far, provisions of s. 43B is concerned, I have gone through it carefully. In my view, it cannot be said that it is in conformity with system followed by assessee. Sec. 43B provides that deductions cannot be allowed unless they are paid. Therefore, it is just additional requirement for claiming deduction. Secondly this provision came into force w.e.f. 1st April, 1984 and that has no relevance for year under consideration after 1st April, 1984 taxes can be taken into account on basis of payment. 8. Now reverting back to case law cited by Sri Palkhivala, British Paints (i) Ltd. vs. CIT (1978) 111 ITR 53 (Cal) (supra) issue before their Lordship of Calcutta High Court was whether long standing commercial and accountancy practice followed by assessee should be rejected. Their Lordship have taken view that in valuing stock, it should be valued at cost or market price whichever is less as rule of allowance, but that can be modified having regard to particular business carried on by assessee. 9 . It is true that there is nothing wrong in it if assessee followed any method for valuing closing stock which may not be on normal lines but basic requirement at all remained : whether assessee can follow such method under which proper income or profits cannot be deducted, answer will be in negative, in case before us, reason given by Shri Palkhivala for not following general practice of accountancy was because there was drawback system in nature of business. It could be accepted but from facts it is apparent that when other assessees having similar business of drawback system have followed general system on basis of guidelines given by Institute of Chartered Accountants of India, it cannot be said that assessee could not follow general system because of nature of business. ld. counsel Sri Jetley has brought to our notice names of some companies which are having similar business. They are placed at p. 8 of Revenues' paper book and reproduced for ready reference: (1) Bombay Dyeing & Spg. Mfg. Co. Ltd. (2) Shrinivas Cotton Mills Ltd. (3) Century Spg. & Mfg. Co. Ltd. (4) Oswal Woollen Mills Ltd. (5) Nagesh Hosiery Export (6) Nagesh Knitwear (7) Greatway Pvt. Ltd. (8) York Hosiery Dyes Ltd. Though Shri Jetley has given names of above companies having similar business and drawback system, Sri Palkhivala has not brought to my notice even single case, where because of similar difficulty, system followed by assessee was followed by similar other assessees. Shri Palkhivala also relied on order of Tribunal in case of Messrs. Goodlas Nerolac Paints (ITA. Nos. 3891 & 3892 and 7226 & 7227/(Bom)/1983) which is placed at pp. 97 to 122 of assessee's paper book. I have gone through order cited by Shri Palkhivala. Tribunal has mainly taken into consideration bona fides of assessee and also came to conclusion that there is no escapement of tax. Further is basic issue before Tribunal is that changed method of valuing closing stock is proper? Here we are not concerned with bona fides etc. We are basically concerned with result of system followed by assessee, whether that results in deduction of proper or fair income by valuing closing stock. Therefore, on facts, order of Tribunal (supra) is of no help to assessee. 10. From figures regarding valuation of stock by inclusion of these fiscal duties etc. given by Shri P.N. Shah in his report on basis of material supplied by assessee and comparative chart by Shri Palkhivala, one thing is certain. That, if we include these fiscal duties, in valuing closing stock, ultimate result is addition of income of assessee. Not only that, excise duties, sales tax, octroi, labour and custom duty always form part of cost. When, on one hand assessee is claiming these items as deduction in P&L account for computing income and reducing profit, assessee is not fair in excluding these items from valuation of closing stock which results in reduction of profit. Further, it is also not clear, when assessee is claiming as deduction for fiscal duties etc. in P&L account, and have not been shown in valuing closing stock, at what stage, assessee has taken these into account; whether in subsequent years also they were taken into consideration. If so, how that will affect valuation of closing stock where assessee has not taken into account these fiscal duties. That should also be examined by ITO. In other words whether these fiscal duties are totally escaped of income or only postponement of income but one thing is certain that fiscal duties and other expenses which are claimed as deduction that should be taken into account for valuing closing stock for computing proper income. Excise duty forms part of price (McDowell) & Co. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). To sum up case, in my view, non-inclusion of fiscal duties etc. in valuing closing stock is wrong; these duties should be taken into account which are claimed as deduction in computing income in P&L account as expenses. drawback system in custom duties does not affect profits even in case if assessee values its closing stock by including fiscal duties, etc. Section 43B is not in conformity with system followed by assessee for valuing closing stock. Though ITO has added Rs. 1.25 lakhs in his draft assessment order, same was reduced. In my view, this matter should be re-examined on basis of guidelines issued by Institute of Chartered Accountants and any expenses such as fiscal duties etc. which are claimed as deduction in computing income in P&L account should be included while valuing closing stock and on that basis, addition should be made accordingly. 11. In result, matter is restored to ITO to examine matter in light of observations made above and decide this afresh. Full opportunity of being heard should be given to assessee. order of CIT (A), reports of P.N. Shah & TVA & Co. should be considered while deciding this issue. In case, assessee does not cooperate with ITO, ITO is free to estimate addition on basis of facts available on record. In result appeal is partly allowed. 4th October 1985, Reference under s.255(4) of it act, 1961 above appeal was heard by Dr. V. Balasubramanian, Senior V.P. and myself (Y.R. Meena). Since there is difference of opinion between Members on conclusion in appeal under consideration, following questions are referred to Hon ble President for appointing Third Member to hear above appeal so that same may be decided in accordance with majority view : (1) Whether income can be properly deducted if assessee does not include fiscal duties and other expenses in valuing closing stock, while assessee claimed same as deduction while computing income in Profit & Loss accounts. (2) Whether, setting aside order of Commissioner is justified to decide valuation of closing stock in light of discussions in order of Judicial Member? 31st March, 1986 Reference under s. 255(4) of it act, 1961 T.D. SUGLA, PRESIDENT (AS THIRD MEMBER) There has been difference of opinion on one issue between ld. Members who heard appeal originally. points of difference have been stated by them as under: (1) Whether income can be properly deduced if assessee does not include fiscal duties and other expenses in valuing closing stock, while assessee claimed same as deduction while computing income in Profit & Loss account ? (2) Whether, setting aside order of Commissioner is justified to decide valuation of closing stock in light of discussions in order of Judicial Member? 2. facts have been stated, in detail, by ld. Accountant Member, Vice-President in this case (to be referred hereinafter as Accountant Member only). However, during course of hearing before me, as Third Member few facts have been straightened. It is therefore, considered desirable to state facts relevant to points of difference in brief, in my own way. I am happy to say that there is no dispute between parties about facts which are stated herein. 3. assessee is manufacturer of woollen fabrics from mostly imported wool. It has also units for making ready-made garments out of above fabrics and for Engineers' Files. Its export of woollen fabrics, ready-made garments and Engineers' Files are considerable and are stated to be more than 70 per cent of its total sales. assessee, inter alia, pays following duties : (a) Customs duty on raw materials, e.g. wool and synthetic fibres imported by it; (b) Countervailing duty on synthetic fibres imported and excise duty on locally purchased synthetic fibres; (c) Excise duty on production and manufacture of intermediate products viz., wool tops and yarn, and excise duty on its end products, viz., finished fabrics and engineers' files. duty on wool tops and yarn is payable when intermediate product is removed for further manufacture of end product. duty on end product is payable when end products are removed from specified premises, i.e. bonded warehouse of appellant for sale to customers or on transfer to separate factory for manufacture of readymade garments or on transfer to retail shops of Company; (d) Sales tax/purchase tax, octroi duty, etc., on materials purchased as well as on goods sold. As matter of necessity, assessee has also to incur other expenses, such as, direct labour, direct expenses, production overheads, other overheads, t o bring raw material into, what is known in accounting circles, their "present location and condition". However, while valuing its closing stock of (i) raw materials, (ii) work-in-progress, and (iii) finished goods, assessee, though has apparently followed well recognised method of valuing inventory, namely, cost price or market price whichever is lower, has not taken into account above stated fiscal duties paid on or in respect of closing stock nor included expenses like direct labour, direct expenses, production overheads and other overheads, incurred for bringing raw materials into their present location and condition. 4 . proceedings relate to assessee's assessment for asst. yr. 1977-78 for which previous year is financial year 1976-77. auditors of assessee-company for first time in history of assessee- company gave note, being note No. (3), in annexure to auditors' report reading as under : (3) stocks of finished goods, stores, spare parts and raw materials have been physically verified during period by Management. In our opinion, frequency of verification is reasonable. discrepancies noted on verification between physical stock and book records were not significant. stocks of finished goods, stores (apart from spare parts which are written off in year of purchase) and raw materials, have been valued at lower of cost or market value, due allowance being made for defective, obsolete or slow moving items but in case of raw materials and finished goods (other than merchanting goods) such cost or market value has been determined exclusive of customs and excise duties (amount not ascertainable). Apart from this, in our opinion, valuation of stock is fair and proper in accordance with normally accepted accounting principles. valuation is on same basis as in earlier years. Department has accepted whatever method assessee has followed in matter of valuing its closing stock in past without discussion. It is department's case that it never suspected assessee of following irregular or incorrect method and that this could come to its notice during year under appeal only because of auditors' note referred to above. This seems to be correct. All same, I propose to assume for purpose of this appeal that so far as assessee is concerned it is following this very method of valuing its closing stock since inception even though there was no indication given of it in past by assessee and of verification of it by department. I say this as I find that auditors have clearly stated in their above note that valuation is on same basis as in earlier under and lower authorities have not doubted it at any stage of proceedings earlier. It is, therefore, assumed that assessee is following particular method of valuing its closing stock regularly since inception though in circumstances mentioned above it is not possible to accept that Department has accepted it consciously. 5. ITO as well as IAC (who had to consider issue in view of applicability of proviso to s. 144B of IT Act, 1961) took view that method of valuing closing stock adopted by assessee was such that assessee's income for year could not properly be deduced. ITO proposed addition of Rs. 1,25,00,000 on ground of under-valuation of closing stock in his draft assessment order. However, eventually, he made addition of Rs. 25,96,000 to closing stock in view of directions of IAC issued under s. 144B of Act. On appeal, CIT (A) vide paragraph 129 of his order, held that for purpose of valuation of closing stock, customs duty paid without reducing amount of customs duty by amounts of (duty drawback received) excise duty paid, sales-tax paid, octroi duty paid and direct expenses including labour, etc. incurred in respect of stocks remaining on hand have to be taken into consideration. Vide paragraph 130 of his order, he has directed ITO to make addition to returned income by revaluing stocks for years under appeal in light of his directions. 6. As stated earlier, ld. Members hearing appeal, originally, differed. ld. Accountant Member has summarised his conclusions vide paragraphs 39 and 40 of his order as under : "39. Summarising position we hold that: (1) In computing profit from business continuous over years method of accounting followed by assessee would only be basis unlike in case of income from other heads. (2) Though for income-tax purposes each year is self-contained period, computation of income from business cannot ignore results of earlier and subsequent years. (3) Stock valuation even as similar dealings with stores, tools, etc. is important aspect in method of accounting adopted by businessman. (4) There is nothing absolute by way of method in stock valuation. Stock valuation is only aid to arrive at profit from trading account. This being so, so long as same method of stock valuation is adopted from year to year by continuous business, it cannot be said that correct profit cannot be computed from that method. (5) Where closing stock valuation is disturbed and to same extent opening stock valuation for next year has to be adjusted, there can be no escapement of profit over years whether seen from theoretical or practical point of view. (6) assessee's accounts have been, in our view, consciously accepted by Department from year to year. assessee has not changed method o f accounting. method of stock valuation followed by assessee cannot be said to be extent we are concerned not with method itself but only with determination of annual profit, erroneous or unscientific. 40. We, therefore, hold that tampering with method of stock valuation followed by assessee is neither necessary nor justified for purpose of arriving at correct profit from business. additions made by such revaluation are deleted and ITO is directed to accept profit on basis of method of stock valuation followed by assessee". ld. Judicial Member has summed up his conclusions in penultimate paragraph of his order as follows: "To sum up case, in my view non-inclusion of fiscal duties etc. in valuing closing stock is wrong, these duties should be taken into account which are claimed as deduction in computing income in P & L account as expenses. draw-back system in custom duties does not affect profits even in case if assessee values its closing stock by including fiscal duties etc. Sec. 43B is not in conformity with system followed by assessee for valuing closing stock. Though ITO had added Rs. 1.25 lakhs in his draft assessment order, same was reduced. In my view, this matter should be re-examined on basis of guidelines issued by Institute of Chartered Accountants and any expenses such as fiscal duties etc. which are claimed as deduction in computing income in P&L account should be included while valuing closing stock and on that basis, addition should be made accordingly". ld. Judicial Member has restored matter to ITO for making addition to closing stock after allowing assessee opportunity of being heard in light of observations made by him. 7. Sri N.A. Palkhivala, ld. counsel for assessee, ably assisted by Sri Haresh Salvi has appeared for assessee. Sri G.S. Jetly, Senior Standing Counsel for Department ably assisted by senior authorised representative, Sri K.M. Tuli, has appeared for department. counsels for both sides were heard at length. Having regard complexity of issue, quantum of additions involved and general public importance of issue, counsels were requested to give their submissions, briefly, in writing so that no contention is left out consideration. These have been respectively received on 12th Jan., 1986 and 20th Jan., 1986. 8. On behalf of assessee, strong reliance has been placed on order of ld. Accountant Member in support of claim that valuation of closing stock by assessee is proper and need not be disturbed. It is pointed out that assessee is entitled to draw-back of customs and excise duties paid by it in respect of goods to be exported. Besides, it is also entitled to import raw material, like, wool and synthetic fabrics duty free for fulfilment of export orders. It is difficult, if not impossible, to envisage at time of valuing closing stock, amount of customs and excise duty that closing stock will ultimately bear. This is method of valuation under which all duties and taxes paid are treated as revenue expenditure and when receive-backs are treated as income is quite convenient. method is stated to have been followed by assessee regularly from inception of its business in year 1961 and accepted by Department as such. That apart, if assessee was to value its closing stock in manner suggested by department, value so determined would be greater than export sale price. assessee, in such situation, will expose itself to charge of dumping its goods in export market which is positive handicap in export trade. Our attention in this regard is invited to stringent antidumping laws obtaining in many countries to which assessee's exports are made. To substantiate this part of statement, reference is made to inquiries started by Company Law Board about valuation of closing stock by assessees in this manner. inquiries were not only dropped assessee was also exempted from furnishing particulars with regard to omission of sales in respect of each class of goods dealt with by assessee and indicating quantities of sales of each goods separately, raw materials consumed giving item-wise break-up and indicating quantities thereof and opening and closing stocks of goods purchased giving break-up of each class of goods and indicating quantities thereof. However, in response to query form Bench, it was admitted that if inquiry is instituted under antidumping laws of country or countries, assessee can be asked to give all these details. 9. According to ld. counsel, impugned note of auditors has been given because of Manufacturing and Other Companies' (Auditors Report) Order, 1975. It does not mean by any stretch of imagination, that report of auditors on affairs of assessee for year is qualified one. Reference in this regard is made to " Statement of qualifications in Auditor s Report" published by research committee of Institute of Chartered Accountants of India. Inviting then our attention to provisions of s. 145 of IT Act, 1961, it is submitted that choice of method of accounting is that of assessee as long as method results in ascertainment of true and fair profit. Referring to next book on " Accounting Theory and Practice " by M.W. Egleutier and S. Under down, it is submitted that there are large number of methods of accounting prevalent regarding valuation of closing stock all of which are accepted by Accountancy profession and all of which result in ascertainment of true and correct profit. short question, according to assessee, therefore, is whether method of valuation of closing stock adopted by assessee is consistently followed and results in ascertainment of true and correct profit. 10 . Inviting our attention to fact that departmental authorities have rejected assessee's method of valuation, mainly, on following two grounds: (i) method of valuation is not in accordance with suggestion made in guidance not of Institute of Chartered Accountants of India: and (ii) method suggested by Department would result in higher profit. It is submitted that both these conditions are fallacious and untenable. For this purpose, I am taken through guidance note of Institute of Chartered Accountants of India to show that note does not lay down inviolable rule. It only suggests method of accounting which should normally be followed. This, according to counsel, means that departure from suggestions made in guidance note is conceivable. It is stated that guidance note itself recalls that number of companies are following method under which fiscal levies are excluded while valuing closing stock. In support, it was stated that Messrs Sandvik Asia Ltd., M/s Glaxo Laboratories Ltd., and M/s Goodlass Nerolac Paints Ltd., are companies where method of valuing of closing stock is same as followed by assessee. Apart from contending that mere fact that method suggested by Department would result in higher profit is no ground for rejecting assessee 's method of valuation, it is urged that there is no indefinite postponement of income as result of method of valuation followed by assessee. At best, it could be said that profits of this year are shifted to next year. In other words, method suggested by Department would result in profits of following year being shifted back to earlier year. In support of first proposition, reliance is placed on Madras High Courts decision in case of CIT vs. Carborandum Universal Ltd., (1984) 149 ITR 759 (Mad). 1 1 . It is stated that s. 43B has since been inserted in IT Act by Finance Act, 1983 with effect form 1st April, 1984. section provides that sums payable by assessee by way of tax or duty under any law will be allowed in year in which amount is actually paid irrespective of method of accounting. implication of this section is stated to be that for asst. yr. 1984-85 and onwards fiscal levies will not automatically be treated as part of cost of goods unless paid during year. This means that method of valuing closing stock followed by assessee upto and including asst. yr. 1976-77 and for asst. yr. 1984-85 onwards will be treated as proper whereas for intervening years method suggested by Department will be applied. This is, according to counsel for assessee, clearly contrary to provisions of s. 145 of Act. Reference, in this context, is made to determination of value of closing stock by Shri P.N. Shah, senior Chartered Accountant, at instance of ITO and Messrs Thakur, Vaidhyanatha Aiyar & Co., at instance of assessee. difference between two sets of figures, clearly shows that method of valuing closing stock suggested on guidelines is very complicated and even experts like Sri P.N. Shah and M/s Thakur, Vaidhyanatha Aiyar & Co., have different Ideas about same. To say that method regularly adopted by assessee in this regard is not correct is, according to counsel, too much in circumstances. 1 2 . last submissions made is that being in fancy trade, products marketed by assessee both for domestic and export markets, are subject to frequent changes in fashion and shade changes from season to season. Hence, timely delivery of goods in complete shade and design is crucial since even fortnight's delay can result in cancellation of order which may mean carry forward of stocks to next corresponding season and thus, products will become obsolete. It is for this reason that stocks in particular cases are valued at raw material cost without adding any amount of labour charge etc. In support reliance is placed on Calcutta High Court decision in case of British Paints India Ltd. vs. CIT (1978) 111 ITR 53 (Cal). 1 3 . Strong reliance is placed on order of ld. Judicial Member on behalf of department. It is emphasised that fiscal levies, like customs, excise duty, sales-tax, octroi etc., are parts of cost of goods. It is beyond anybody's comprehension that while valuing closing stock, such levies are excluded from consideration. It is stated that assessee is manufacturer of woollen textiles and excise duty etc., are passed on to buyers and form parts of sales price. Similarly, it will represent cost of goods in hands of assessee. When article is subjected to purchase tax, customs duty or excise duty tax becomes part of price which, ordinarily, buyer will have to pay. No doubt, term 'cost price' is not defined in IT Act. This only means meaning will be given to this term as is understood by businessman and by those in profession of accountancy. Applying this, it would be abundantly clear that fiscal levies on purchase of goods are parts of purchase price. My attention is invited to fact that it is not as if assessee has never included fiscal duties as parts of cost of goods. When it suits assessee s convenience, it has included fiscal duties for purpose of computing cost. This is stated to be so with regard to capital assets on which assessee has claimed depreciation on cost. 14 . contention of assessee that they had ever since followed this system of valuation of stock which has been accepted by department, is stated to be factually incorrect. Department never knew about exclusion of fiscal duties by assessee while valuing its closing stock. It was only in annual report and accounts for accounting year 1976-77 that Department came to know about exclusion while valuing closing stock. This was possible to detect from note No. 3 at page 13 being annexure to auditors report. At no point of time earlier than said report assessee had ever indicated or disclosed to Department that while valuing closing stock assessee was excluding fiscal duties. allegation that Department knew about this method of valuation and accepted it is far from truth. In fact, Department was not even aware of fact that assessee was following peculiar method of valuing its closing stock. question of Department applying its mind and consciously accepting method as correct, therefore, has never arisen. 1 5 . most point, according to Standing Counsel, is whether true and correct profits could be deduced from method of valuing closing stock adopted by assessee. It is stated that for this purpose it is necessary to keep in mind that under IT Act each year is separate unit of assessment. What one has to see is whether true profits of particular year can be deduced form method followed. It is of no consequence what happened in following year or in earlier year. assessee has also omitted to take into account expenses incurred with regard to some processed goods, i.e., work-in-progress. omission to include expenses does not certainly, reveal true picture of accounts. Assuming it is correct that two or three companies, whose instances are cited by assessee s counsel are following method somewhat similar to assessee valuing closing stock but 99 per cent companies follow method of valuing of closing stock suggested by Institute of Chartered Accountants of India. Therefore, inasmuch as method of valuing closing stock adopted by assessee is incapable of resulting in correct and true profits of assessee for year, method adopted by assessee has got to be rejected. 1 6 . According to ld. Standing Counsel provisions of s. 43B introduced in Act w.e.f. 1st April, 1984 have no bearing whatsoever on issue. It is not understood how these provisions stand in way of adopting method of valuing closing stock suggested by Research Committee of Institute of Chartered Accountants of India. After all, Institute is professional body and it must have taken into account all relevant aspects, while suggesting method for valuing closing stock. Lastly, it is emphasised that it is not question of part of profits of this year being taxed in following year. method adopted by assessee results in perpetual postponement of income from being taxed. After all, assessee is prosperous company. As records suggest its closing stock of current year is less than closing stock of following year and so on and so forth. result is that if by adopting this method assessee has been able to postpone taxation of profits to extent of Rs. 1,00,00,000 this year, in next year postponement will be of Rs. 1,25,00,000. In next following year, i t may be Rs. 1,50,00,000 and so on and so forth. Such method cannot certainly be said to be proper method of valuing closing stock. 17 . I have heard parties and have carefully gone through orders of ld. Members, orders of CIT(A), and ITO on record. I find that ld Accountant Member has accepted submissions made on behalf of assessee to effect that assessee was following particular method of valuing its closing stock since inception of business, i.e. year 1961,and that in their reports in some of years in past, auditors had indicated assessee s method of valuing its closing stock which Department had accepted with open eyes rather without verification. conclusion of ld Accountant Member is not correct inasmuch as in course of hearing before me facts have been thrashed out and about which there is no dispute that method of valuing closing stock has not been indicated in printed accounts of assessee in any of earlier years. Nor had auditors referred to this aspect in their reports and Department had also no occasion to know about it. In circumstances, it is not correct to say that Department has accepted assessee particular method of valuing closing stock consciously. On facts, as found, one could even justifiably say that method of valuing closing stock followed by assessee in past is yet to be ascertained. However, in absence of specific dispute raised by Department and fact that auditors in their note have stated that particular method was followed by assessee regularly in past, I proceed on assumption that assessee has been following this method regularly from inception though same was accepted by Department taking it as proper method in good faith. 18 . It may now be desirable to examine provisions of s. 145(1) of Act which, inter alia, deal with computation of income from business. sub- section provides that income chargeable under head business shall be computed in accordance with method of accounting regularly followed by assessee. Though, ordinarily expression "method of accounting" refers to accounting methods such as mercantile, cash and hybrid, it is more or less, settled law that method assessee adopts for valuing its closing stock is integral part of method of accounting. omission to include value of closing stock altogether or inclusion of it at improper and incorrect value will give false or absurd picture of profit. This is what has been held by Madras High Court in case of CIT vs. Messrs Chari & Ram (1949) 17 ITR 1 (Mad) and Indo Commercial Bank Ltd. vs. CIT (1962) 44 ITR 22 (Mad). That value of unsold stock-in-trade is essential item in computation of profits and gains for period has been affirmed by Supreme Court in case of Chainrup Sampatram vs., CIT (1953) 24 ITR 481 (SC) in which case purpose and importance of correct value of unsold stock has been stated by Hon'ble Supreme Court in following words : "...The true purpose of crediting value of unsold stock is to balance cost of goods entered on other side of account at time of their purchase, so that cancelling out of entries relating to same stock from both sides of account would leave only transactions on which there have been actual sales in course of year showing profit or loss actually realised on year's trading. As pointed out in paragraph 8 of Report of Committee on Financial Risks attaching to holding of Trading Stocks, 1919. As entry for stock which appears in trading account is merely intended to cancel charge for goods purchased which have not been sold it should necessarily represent cost of goods. If it is more or less than cost, then effect is to state profit on goods which actually have been sold at incorrect figure.......from this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., adoption of market value at date of making up accounts, if that value is less than cost. It is of course anticipation of loss that may be made on those goods in following year, and may even have effect, if prices rise again, of attributing to following year's results greater amount of profit than difference between actual sale price and actual cost price of goods in question (extracted in paragraph 281 of Report of Committee on Taxation of Trading Profits presented to British parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in shape o f appreciated value of closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation"... 19. To emphasise need to value closing stock for ascertaining profits of given year, I do not think I can do better than to refer to observations of Supreme Court in case of P.M. Mohammed Meerakhan vs. CIT (1969) 73 ITR 735 (SC) "Under IT Act, for purpose of assessment, each year is self- contained unit and in case of trading adventure of profits have to be computed in manner provided by statute. It is true that IT Act makes no express provision with regard to valuation of stock. It charges for payment of tax income, profits and gains which have to be computed in manner provided by IT Act. In case of trading adventure, profits have to be calculated and adjusted in light of provisions of IT Act permitting allowances prescribed thereby. For purpose it is duty of ITO to find out what profits business has made according to true accountancy practice. As normal rule, profit should be ascertained by valuing stock- in-trade at beginning and at end of accounting year." CIT vs. A. Krishnaswami Mudaliar (19 64 ) 53 ITR 122 (SC) "Whichever method of book keeping is adopted in case of trading venture, for computing true profits of year, stock-in-trade must be taken into account. If value of stock-in-trade is not taken into account, in ultimate result profit or loss resulting from trading is bound to get absorbed or reflected in stock-in-trade unless value of stock-in-trade remains unchanged at commencement of year and at end of year." From discussion above, it can be reasonably taken that purpose of valuing opening stock and closing stock is to see that profits of year are computed as far as possible on goods already sold. While appreciation in value of closing stock may be ignored depreciation in value of closing stock for any reason whatsoever may have to be taken care of provided assessee is valuing its closing stock at cost or market price whichever is lower. It is also evident that under IT Act, for purpose of assessment, each year is self-contained unit. 20. It may, however, be mentioned that though method of valuing closing stock adverted to in above cases, is cost or market price whichever is lower, Supreme Court has, in case of Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) held that assessee is free to adopt method of accounting only at cost instead of valuing closing stock at cost or market price whichever is lower. 21. No doubt, s. 154(1) of Act provides for computation of income from business in accordance with method of accounting regularly followed by assessee which will of course include, as stated above, method of valuing closing stock. This however, does not mean that assessee has licence to adopt any method of valuing its closing stock. sub-section has proviso which authorises income-tax authorities to discard even regularly employed methods including method of valuing closing stock if in their opinion, true profits of business for year cannot be properly arrived at. In other words, even regularly followed methods of accounting including method of valuing closing stock are required to satisfy test namely, true and correct profits of business are reflected thereby. 22. pertinent question that arises for consideration is as to concept of proper income envisaged in proviso. word 'income' has been inclusively defined in s. 2(24) of Act to include profits and gains. expression "profits and gains" is not defined in Act as such but as held by Supreme Court in case of Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) that expression has to be understood in its commercial sense. It is here that observations of Supreme Court in case of Chainrup Sampatram vs. CIT (supra) assume importance, namely, profits as far as possible, subject to exception referred to therein should be profits earned on sales already made. It is for this reason that, ordinarily, closing stock is required to be valued at cost price or market price whichever is lower. However, it is not rule of law. number of systems of valuation based upon commonsense keeping in view ultimate object that true and correct profits of year are reflected, have been recognised as proper methods for valuation of closing stock in commercial world and by accountancy profession, such as, (i) cost price method; (ii) market price method/net selling value method; (iii) cost or market price whichever is lower; (iv) first in, first out method; (v) last in, first out method; (vi) direct cost and on cost method. assessee having admittedly, followed cost method what is required t o be considered is meaning and purport or concept of "cost" and whether cost method would or could include within it method adopted by assessee and whether such method of valuation would fulfil object of reflecting true and correct profits of year. 2 3 . That cost comprises purchase price including import duties, transport and handling charges and any other directly attributable costs less trade discount and rebate plus such other expenses which have been incurred in normal course of business in bringing products finished or in progress to its present location and condition, is well known concept. Reference in this context can usefully be made to "Advanced Accounting" by J.R. Batliboi Eighth Edition, pages 46 and 47 and to Research, Publication Series as 12 by G.P. Kapadis, page 19-20, paragraphs 17 to 20 made annexure to this order as annexures 'A' and 'B' respectively. 24. No doubt, cost method, particularly in case of assessee manufacturing goods out of various raw materials and in different stages is difficult of uniform application. For instance, cost has to take care of direct labour and direct expenses, production overheads and other overheads besides fiscal levied, if any suffered at different stages. To this extent learned counsel for assessee is right and I am in agreement with view expressed in this regard by MWE Glautier and B. Underdown in their treatise "Accounting Theory and Practice" at pages 622-627. On carefully going through these pages. I find that complication referred to by ld. authors pertains to production overheads and other overheads and not to fiscal levies and direct labour and expenses in bringing raw material, finished goods or semi-finished goods to their present location and condition. 25. In this context, it is considered desirable to refer to five principles of valuation of closing stock indicated by Calcutta High Court in its decision in case of British Paints India Ltd. vs. CIT (1978) 111 ITR 53 (Cal) at pages 62- 63. principle Nos. (3) to (5) appear to me to be of particular significance in this case : "(3) For purpose of aforesaid valuation, it is necessary to determine what in all circumstances represent costs of stock-in-trade and work-in- progress. What is and what is not profit or gain in those circumstances must necessarily be one of fact, and fact to be ascertained by tests of ordinary business : (4) There are no statutory rules for making this valuation and ordinary method of commercial accounting must be followed except in so far as there is any specific statutory provision requiring otherwise. method must be fair to taxpayer and fair to revenue. Traders are allowed to value their unsold stock and work-in-progress either "at cost or market price, whichever is lower". This is, however, shorthand way of expression; it is not rule of law. It must be adopted in commercial sense in consonance with accounting practice. Anticipated losses and profits for aforesaid purpose are permissible, provided, however, there is market in ordinary sense, and anticipation is backed by consistency of method followed and method followed is supported by recognised accounting principles; (5) Whatever is method, it must be one recognised by accounting practice and sanctioned by commercial practice. method adopted and regularly followed over periods and accepted by Revenue should not be departed unless there is good reason for same. If, however, method adopted and regularly followed by assessee does not result in determination of true profits for tax purposes, even for one particular year, or there is some other good reason, Revenue is entitled to reject method followed and value stock upon such basis as will result in determination of true profits". It is evident from above that method of determination of cost of stock-in-trade must be fair both to taxpayer and Revenue. method must be one recognised by accountancy practice and sanctioned by commercial practice. If, however, method adopted does not result in determination of true and correct profits for tax purposes even of one year, Department is entitled to reject such method. In case before me, assessee is, admittedly, valuing its stock-in-trade at cost, which is one of recognised methods of valuing closing stock. However, while taking cost of closing stock what assessee has done is, it has taken some of components of cost leaving quite few important components, such as, fiscal levies and direct labour and expenses for bringing closing stocks to their present location and condition. This is, certainly, not proper method and, i n any event, it is not method which is recognised by principle of accountancy and sanctioned by commercial practice. It is like assessee saying that values its closing stock at cost but it will take cost at 75 per cent of actual cost. I do not think such method can be accepted as proper method fair both to assessee and IT Department. If opening stock and closing stock were revalued at cost in its proper concept, profits of year will, admittedly, go up by several lakhs of rupees, if not crores. Having regard to above discussion. I am inclined to agree with ld. Judicial Member that manner in which assessee has taken cost of closing stock does not result in determination of true and correct profits of year and Department is, therefore, justified in rejecting assessee s method of valuation and in revaluing closing stock on proper basis. 26. In view of my above conclusion, strictly speaking, it is not necessary to deal with other submissions made on behalf of assessee. However, since these were vehemently urged, I propose to deal with them, in brief as under :. 26.1 Firstly, difficulty and variation envisaged in valuing closing stock at cost by ld. authors M.M.E Glautier and B. Underdown in their treatise "Accounting Theory and Practice " is regarding productions overheads and other overheads. In any event, mere fact that there is difficulty in valuing closing stock at cost (in its proper concept) would not justify valuation of closing stock without taking into account material components of cost. There is indirect authority in decision of Supreme Court in case of Calcutta Co. Ltd vs. CIT (supra) in context of liability to be allowed as expenditure that difficulty in estimation thereof does not mean that accrued liability need not be taken into account. It was held that it was always open to Income-tax authorities to arrive at proper estimate of liability having regard to facts and circumstances of case. Moreover, Institute of Chartered Accountants of India has itself prescribed certain methods for valuing raw material, work-in-progress, finished goods etc. in terms of guidelines issued. In circumstances, it is difficult, if not impossible, to accept that method indicated by Institute of Chartered Accountants of India is incapable of implementation. 26.2 " It was pointed out on behalf of assessee that method followed by assessee has been followed by atleast three other companies, namely Glaxo Laboratories (India) Ltd., Sandvik Asia Ltd., and Goodla Nerolac Paints Ltd. While, printed accounts of first two companies for year ended 30th June, 1983 and 31st Dec., 1979, were filed, reference was made to Tribunal s order in case of Goodlass Nerolac Paints Ltd. (at pages 97 to 122 of assessee s paper book Volume II) I, however, find that case of Glaxo Laboratories, (India) Ltd., does not support assessee s case at all. Note 6 of 'Notes to Accounts ', at page 18 of printed accounts reads as under : " (6) In past years it has been practice to charge total expenses on Excise Duty to Profit and Loss account and include amount relating to unsold stocks in closing stock valuation. For current year Excise Duty has been so charged as expense only in respect of goods cleared and sold and balance amount of Rs. 242.46 lakhs relating to goods manufactured and remaining unsold has been included under Loans and Advances in Schedule. 15. Had previous year's practice been followed, charge to Excise Duty and value of closing stock would have been higher by Rs. 2,42.46 lakhs. However, this charge has no effect upon profits for year". It is evident excise duty paid in respect of unsold goods was not debited to purchase account or Profit & Loss account in this case. It was shown on asset s side and therefore, its non-inclusion as part of cost of closing stock had no effect whatsoever upon profits of year. Note 3 in "Annexure to Auditors' Report" in case of Sandvik Asia Ltd., reads as under : " 3 stocks of finished goods, stores and spare parts and raw materials have been physically verified during year by Management, except for such stocks held by third parties in respect of which confirmations have been received for most of stocks. In our opinion, frequency of verification is reasonable. discrepancies noticed on verification between physical stocks and book records were not significant and these have been properly dealt with in books of account. In our opinion, valuation of above mentioned stocks is fair and proper in accordance with normally accepted accounting principles, except that Company has not included Excise Duty in respect of excisable goods manufactured and subsequently used in manufacture of other products, in valuation thereof. basis of valuation, however, is same as that of previous year." It is not clear from note or accounts whether any excise duty was paid by assessee in respect of goods manufactured at intermediary stage which were subsequently used in manufacture of finished products. It is also not clear whether amounts paid as excise duty, if any, were debited to purchase account or Profit & Loss account or debited to Excise Duty account itself standing as asset in accounts of assessee. In circumstances, it cannot be assumed that Messrs Sandvik Asia Ltd., are following method of valuation of closing stock adopted by assessee. In any event, no material has been placed before me to show that assuming assessee s method of valuation is same as that adopted by Sandvik Asia Ltd., it has been accepted by Department. case of Goodlass Nerolac paints Ltd., supports assessee s claim o n face of it. closing stock in that case was valued at cost without including excise duty paid upto and including asst. yr. 1976-77 and this method was accepted by Department, though it is not clear whether it was accepted consciously or without noticing it. In fact, auditor s note for year ended 31st Dec., 1973 as reproduced in paragraph 20 of Tribunals order in following words : "At cost (in case of stock in process and manufactured goods at raw material cost) or market whichever is lower, as certified by Director". indicates that method may have been accepted by departmental authorities in good faith. For intervening two years, i.e. asst. yrs. 1977-78 and 1978-79, assessee changed method of valuation of closing stock and included excise duty as part of cost and this is reflected in auditors note in accounts for year ended 31st Dec., 1976. accounts for these two years have to be taken as accepted by Department with full knowledge. For asst. yr. 1979-80 and onwards, company reverted to old method which was rejected by ITO as well as CIT(A). Tribunal has, it is true, by its order dt. 29th Nov., 1984, accepted change. It is also true Tribunal has observed in that case that method resulted in determination of true and correct profits of year. However, it appears to me that to great extent, Tribunal was influenced by factors, such as (i) this very method was accepted in past, (ii) changes was bona fide, and (iii) amounts requiring addition on account of revaluation of closing stock vis-a-vis yearly profits of assessee, were not significant. In circumstances I do not think that it will be proper to take that order to be authority for proposition that valuation of closing stock at cost and taking cost by ignoring its material components, such as, fiscal duties, direct expenses and portion of overhead expenses, is proper. 26.3 Next, I deal with difficulty aspect in ascertaining cost of closing stock in manner suggested in guidelines issued by Institute of Chartered Accountants of India. No doubt, there is considerable difference between value of closing stock estimated by firm of Chartered Accountants. Shah & Co., who valued stock at instance of ITO, and by firm of Chartered Accountants, Messrs Thakur, Vaidhyanatha Aiyar & Co., who did it at instance of assessee. Firstly, fact that two experts have interpreted guidelines differently does not entitle assessee to ignore complicated part of it altogether. I, then, find from letter issued by ITO to Shah & Co., and letter issued by assessee to Messrs Thakur, Vaidhyanatha Aiyar & Co., that mandate given to them were different and, therefore, results were bound to be different. Nothing much, thus, turns on this part of assessee's submissions. 27. I now deal with question of antidumping laws. argument has been that if fiscal levies and other direct and overhead expenses are included as parts of cost, cost was likely to be more than export sale price. In that case, foreign buyers may not be interested in importing assessee s goods on account of strict anti dumping laws obtaining in those countries. This argument assumes that foreign buyers are not aware of policies of Government of India in matter of promotion of exports. To my mind, it is well known fact known to all foreign buyers. Almost all companies engaged in export business, value their closing stock in manner suggested by Institute of Chartered Accountants of India in guidelines. Nobody has suggested that their exports are adversely affected on account thereof. In any event, if that is reason, assessee could have followed method adopted by Glaxo Laboratories India Ltd. After all, as observed by Supreme Court in case of Chainrup Sampatram vs. CIT (supra), purpose of valuing of closing stock is to find out amounts that have gone into Profit & Loss account in respect of stock remaining unsold. This would have served assessee s purpose as well as resulted in true and correct profits of year. fact that Company Law Board dropped proceedings started against assessee as result of auditors note with regard to method of valuation of closing stock adopted by assessee and/or exonerated assessee from obligation of giving various details in its printed accounts, at best, shows assessee s bona fides. However, there is no reason to accept that any method of determining cost followed by assessee, if bona fide, must be correct irrespective of its impact on determination of true and correct profits of year. I, however, accept Sri Salve's submission that auditors note cannot be treated as qualification and that they have only highlighted method followed by assessee. That is why I have independently tried to appreciate impact of method of valuation of closing stock adopted by assessee. 28. last argument advanced is that valuation of closing stock of this year does not really effect determination of true and correct profits, that in case of computation of income from business years accounts are telescoped in that of following year and so on and so forth and that it is for this reason that Courts have held almost uniformly that opening and closing stocks of year must be valued on same basis and that value given to closing stock in current year must be value of opening stock of following year. By giving illustration, it was pointed out that addition of income as result of revaluation of closing stock this year, ordinarily, means shifting of following years profit to immediately preceding year and it was vehemently contended that method adopted by assessee does not result in postponing part of profits as suggested by Department. In order to appreciate this part of submissions on behalf of assessee, it is desirable to refer to assessee s sales and closing stock in terms of value. assessee s sales have progressively gone up from Rs. 323.22 lakhs to Rs. 14,079.31 lakhs during course of past twenty-four years. value of closing stock has also gone up from Rs. 94.77 lakhs to Rs. 1,528.88 lakhs in corresponding period. It is only in five years that closing stock in terms of value has been little less than closing stock of preceding year and that too marginally. Otherwise, closing stock has increased both in quantity and values considerably year to year. figures of these five years are : Closing stock of Closing stock of Year year earlier year . Rs.(lacs) Rs.(lacs) 1965 78. 18 91.44 1968 114.49 137.81 1970 125.30 128.81 1974 235.12 263.00 1980- 545.04 567.60 81 Assuming cost of closing stock is taken as instead of x X y, result will be profit by revaluing closing stock at rate of x X y, will go higher and higher year after year. In other words, if assessee has, by undervaluing its closing stock, disclosing its income less by Rs.. 1,00,000 in current year, it is not to pay tax on this amount perpetually because in next year revaluation of closing stock is going to result in addition of Rs. 1,25,000 if not more, and so on and so forth. After all, fact cannot be ignored that assessee is prosperous company. Therefore,. I am not inclined to accept that it is only postponement of profits of one year to next year simpliciter. 29. During course of hearing, it was argued that debiting fiscal levies straight to Profit & Loss account is convenient as it is not possible to envisage which goods will be exported and in respect of which goods assessee will receive draw-back etc. Firstly, this was not one of difficulties envisaged by Institute of Chartered Accountants of India, otherwise, they would not have suggested method of valuation. In any event, when almost all other companies are valuing their closing stock in other manner, it is beyond atleast my comprehension that assessee would not have been able to find way out for property arriving at cost of closing stock. 30. As regards s. 43B of Act which has been introduced in IT Act with effect form 1st April, 1984, according to me, it only means that assessee cannot claim deduction without atleast acknowledging liability, if not actually making payment. It is assumed that even now quite few assessee pay tax as and when liability arises. effect of s. 43B of Act is going to be in manner of computing income for tax purposes. I have my doubts whether it will have any bearing in manner of maintaining accounts. For instance, IT Act even now contemplates number of disallowance out of actual expenses incurred by assessee. Similarly, Act has been contemplating allowances which, quite often are not debited by assessee in their Profit & Loss account. These have never presented any difficulty in maintaining of accounts. To my mind, undue emphasis is laid on provision. I am sure that institute of Chartered Accountants of India will definitely come out with some suggestion in this regard. Just as ss. 37(3A), 37(3B), 40,40A, etc. of Act have no effect so far as book keeping is concerned, s. 43B of Act is not likely to have any effect on maintenance of accounts. At best, trader might be asked to indicate in account whether liability has or has not already been discharged. facts in Madras High Court s decision in case of CIT vs. Carborandum Universal Ltd., (supra) were that assessee was formerly valuing its closing stock in respect of work-in-progress and finished goods at cost which mean not only cost of goods and direct expenses but also overhead expenses. In previous year relevant for asst. yr. 1971-72, assessee changed method of valuing its closing stock from total cost of direct cost, difference being that in direct cost overheads, such as administrative Department expenses were excluded while in total cost such overheads were included. changes was accepted by Tribunal and view of Tribunal was confirmed by Hon'ble High Court. On my part, I would have accepted assessee s method of valuation as proper if it had been only on question of total cost or direct cost both being recognised method. Unfortunately, however, method here adopted is not at all showing correct cost of stock-in-hand. Madras case is, therefore, distinguishable. assessee had also contended at one stage that its products were out o f fashion very soon and that if material remained unsold for some time, it was of no value. Firstly, no material has been placed before me in this regard. Moreover, if portion of closing stock is damaged or is out of fashion etc., assessee can always value such stock at market rate depending upon extent of loss expected on sale. 31. Having regard to above discussion, I am inclined to agree with ld. Judicial Member that true and correct profits cannot be deduced by allowing assessee to follow method of valuing closing stock it has adopted. I also agree with him that in this view of matter, order of CIT(A) requires to be set aside for purpose of revaluing closing stock and making proper computation of assessee income for year. My order will now go to Division Bench for deciding appeal according to majority view. ANNEXURE Extract from Advanced Accounting , Eighth edition by Sri. J.R. Batliboii (page Nos. 46 and 47) Raw Materials and stores In manufacturing concern, this item would denote purchases of raw materials and stores and will appear on debit of manufacturing account. Freight, Carriage or Cartage and Dock Charges, if any on purchase of raw materials also be shown in manufacturing account. As raw materials and stores are held by manufacturing concern not for purpose of resale in their original condition, but to be utilised in process of manufacture, basis of valuation usually adopted is cost price. cost price for this purpose would be net invoice price plus freight, duty, carriage inwards etc. under ordinary circumstances, even if market price has fallen below cost value of raw materials and stores in stock need not be brought down to that level. When, however, fall in market price is appreciably heavy so as to affect selling price of manufactured products, it would be desirable to value these at market price. Work-in-progress In manufacturing concern, item work-in-progress' would mean goods in process of manufacture, whereas in case of contractor t h e same expression would mean work partly executed but not completed. Where separate Manufacturing Account is prepared, work-in-progress at commencement will appear on debit and that at end of financial period will appear on credit side of Manufacturing Account. Great care should be taken in valuing work-in-progress. basis of valuation considered as sound and correct and one that is generally followed in practice is cost of raw materials and direct wages plus reasonable proportion of works on cost, i.e., manufacturing expenses. Finished Products basis for valuation of Finished Products should be actual Factory Cost as in case of partly finished goods. It is always sound and prudent not to add any percentage in respect of office on cost. important point to be borne in mind while valuing finished and partly finished products is that if actual cost of these exceeds, their market price, market price should be basis of valuation and not cost price. Where manufacturing account is prepared quite distinct from trading account, opening and closing stocks of finished products will appear on debit and credit sides of trading account and not in manufacturing account, as later account is supposed to dealt with raw materials and work- in-progress of manufacture, and trading account with finished products. * * * * * * ANNEXURE B Extracts from Research Publication Series 12 by G.P. Kapadia, (pages 19- 20, paragraphs 17 to 20 17. Cost is defined in relation to different categories of stocks and work-in-progress as being that expenditure which has been incurred in normal course of business in bringing product or service to its present location and condition. This expenditure should include, in addition to cost of purchases (as defined in paragraph 18 ) such costs of conversion (as defined in paragraph 19) are appropriate to that location and condition. 18 . Cost of purchase comprises purchase price including import duties, transport and handling cost and any other directly attributable costs less trade discounts, rebates and subsidies. 19. Cost of conversion comprises : (a) costs which are specially attributable to units of production i.e. direct labour, direct expenses and sub-contracted work ; (b) production overheads (as defined in paragraph 20); (c) other overheads, if any attributable in particular circumstances of business to bringing product or service to its present location and condition. 20. Production overheads overheads incurred in respect of materials, labour or services for production, based on normal level of activity, taking one year with another. For purpose each overhead should be classified according to function (e.g. production, selling or administration ) so as to ensure inclusion in cost of conversion of those overhead (including depreciation) which relate to production, notwithstanding that these may accrue wholly or partly on time basis. 14th July, 1986 K.S. VISWANATHAN, A.M. There was difference of opinion between Members, who had heard t h e appeal earlier. matter was referred to Third Member. Third Member has agreed with Judicial Member. As per opinion of majority we hold that true and correct profits cannot be deduced by allowing assessee to follow method of valuing closing stock it has adopted. order of Commissioner (A) requires to be set aside for purpose of revaluing closing stock and making proper computation of assessee s income according to guidelines given in Judicial Member's and third Member's orders. 2. In result, appeal will be treated as partly allowed for statistical purposes. *** RAYMOND WOOLLEN MILLS LTD. v. INCOME TAX OFFICER