KURISETTI SATYANARAYANAMURTHY v. INCOME TAX OFFICER
[Citation -1987-LL-0927]

Citation 1987-LL-0927
Appellant Name KURISETTI SATYANARAYANAMURTHY
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 27/09/1987
Judgment View Judgment
Keyword Tags valuation of closing stock • business consideration • system of accounting • method of accounting • method of valuation • average cost price • valuation of stock • last in first out • registered firm • purchase price • diesel engine • market price • actual cost • sale price
Bot Summary: What the assessee has done is to take the purchase price of the whole year and divided the same with the purchases made in that year and arrive at an average rate. Shri Kailasnath for the department submitted that the valuation of stock on average purchase price is not scientific when the stock purchased is easily ascertainable. Average purchase price can be adopted according to him only when several items of purchase and it is difficult to pin-point the stock with reference to any of the purchase price. The assessee is actually following the weighted acreage cost method insofar as he is taking into account the entire purchases made for that year with the entire purchase price. The Income-tax authorities however contended that as the actual price of the closing stock was known or could be easily ascertained from the records in the assessee's possession, the stock must be valued at the actual cost price and not at the average price for the year: Held, that the stock might be valued at the option of the assessee at the average cost price of the entire stock purchased in the course of the year and need not be at the actual cost of the closing stock and that the method of valuation of the stock adopted by the assessee was correct. The purchases of paddy and the issues for milling are simultaneous process and it will not be correct to assume that the next purchase of paddy will be made only after the earlier stock has been completely exhausted. Shri Ratnakar had pointed out that there are instances where the average purchase price is higher than the last purchase price.


main issue in this appeal by assessee is valuation of closing stock. assessee, registered firm, is running rice mill. accounts are closed on 31st October 1983. stock of paddy was 4,465 quintals and these were valued at Rs. 157.50 per quintal. In other words, closing stock value of paddy was Rs. 7,03,276. Income-tax Officer found from registers of assessee that for last month of accounting years, assessee had purchased 6,789 quintals of paddy for Rs. 14,76,345. This indicated ruling price of paddy in last month to be Rs. 217.46. Since closing stock was valued at less than last purchase, Income-tax Officer proposed to increase in valuation of closing stock by Rs. 2,67,682. 2. assessee stated that they were following average cost method for all these years and therefore no addition need be made. This submission was rejected by Income-tax Officer. According to him, closing stock has to be valued at cost or market rate. There was no authority for valuing at average cost price. He, therefore, made addition of difference in valuation. 3. In similar manner, he revalued closing stock of broken rice. On last day of accounting year, there was 1,770 quintals which was valued at Rs. 3,71,700. Income-tax Officer found that broken rice had been sold at average rate of Rs. 256.12 per quintal. As against this price, assessee had valued at Rs. 210. On further enquiry regarding rate at which broken rice was sold immediately after close of year, he found that average rate was Rs. 245. He applied this rate and made addition of Rs. 62,014. 4. Against these two additions, assessee appealed. Commissioner (Appeals) also held that closing stock should be valued either at cost or at market price whichever is lower. average purchase price which is average cost price is not according to Commissioner approved or recognised method. He, therefore, upheld addition in regard to valuation of closing stock. However, with regard to broken rice, he accepted that average sale price should have been Rs. 243.05 as against Rs. 245.05 fixed by Income-tax Officer. On that ground he allowed certain reliefs. 5. assessee is on appeal before us. Shri Ratnakar appearing for assessee submitted that Commissioner [Appeals] is in error in holding that cost or market price is only method of valuation of closing stock. He submitted that accountancy principles recognise other methods also like First-in- First-out, Last-in-First-out, weighted average, simple average, standard costing, etc. He submitted that assessee had been following same method of valuation for all earlier years and subsequent years. What assessee has done is to take purchase price of whole year and divided same with purchases made in that year and arrive at average rate. Thus, in asst. year 1981-82, average price rate was Rs. 115.04, for year 1982-83, it was Rs. 145.81 for year 1983-84, it was Rs. 148.67 and for year under appeal it was Rs. 157.53. It is true he submitted that average purchase price will be different from ruling rate in last month. But, this also is to be taken into account while working out average rate. Sometimes, average rate would be more than last month's purchase rate. This happened he pointed out in year 1982-83 when last month's purchase at Rs. 143.50 per quintal whereas average purchase price was Rs. 145.81. Nevertheless, he submitted that assessee was valuing stock on average purchase price. 6. In support of his submission, he relied on decision of Bombay High Court in case of CIT v. Tata Iron and Steel Co. Ltd. [1977] 106 ITR 363 n d decision of Madras High Court in case of CIT v. K. Sankaranpandia Asari and Sons [1981] 130 ITR 541. With regard to valuation of broken rice, he submitted that yearly average ceilings price has to be taken account. 7. Shri Kailasnath for department submitted that valuation of stock on average purchase price is not scientific when stock purchased is easily ascertainable. He pointed out that closing stock was only 4,465 quintals and last purchase was 6,789 quintals. Therefore, closing stock necessarily must be from last purchase. purchase price of this stock is easily ascertainable and therefore on circumstances, average purchase price is not scientific method. Average purchase price can be adopted according to him only when several items of purchase and it is difficult to pin-point stock with reference to any of purchase price. He then referred to decisions of with reference to any of purchase price. He then referred to decisions of Andhra Pradesh High court in case of CIT v. Margadaris Chit Funds (P.) Ltd. [1985] 155 ITR 442. Especially observations at page 446: "It must be said at outset that choice to account for income on acceptable basis is that of assessee, and not of department. This is, however, not unlimited choice, because Income-tax Officer has always t h e liberty to examine system of accounting regularly employed by assessee, to determine whether system of accounting is defective, and whether by following such system of accounting, correct profits can be deduced from account books maintained by assessee." 8. We have considered submissions. We agree with Sri Ratnakar that there are reveal other methods of valuing closing stock other than cost or market rate. number of systems of collusion based upon common sense keeping in view ultimate object that true and correct profit to year are reflected have been recognised as proper methods for valuation of closing stock. These are: cost price method, (2) market price method/ net selling value method, (3) cost or market price which ever is lower, (4) first in first out method, (5) last in first out method, and (6) direct cost and on cost method. These are discussed in 3rd Member's decision in case of Raymond Woollen Mills Ltd. v. ITO [1986] 18 ITD 64 (Bom.) at page 104. Among cost price methods, there are several variations like ordinary cost, average cost and weighted average cost. assessee is actually following weighted acreage cost method insofar as he is taking into account entire purchases made for that year with entire purchase price. Such method is recognised method in milling and manufacturing accounts and this is supported by decision of Trav. -Coch. High Court in case of Concordia Corpn. Ltd. v. CIT [1952] 22 ITR 344. Head-notes of this case read as follows: "The assessee-company was carrying on business of purchasing raw cashew nuts and, after subjecting stuff to certain processes, selling kernels by export to America. year of account was first year of company's existence. In valuing closing stock of raw nuts company adopted average cost price per bag calculated on all purchases made by it throughout year. Income-tax authorities however contended that as actual price of closing stock was known or could be easily ascertained from records in assessee's possession, stock must be valued at actual cost price and not at average price for year: Held, that stock might be valued at option of assessee at average cost price of entire stock purchased in course of year and need not be at actual cost of closing stock and that method of valuation of stock adopted by assessee was correct. liberty reserved to assessee to choose his method of accounting by section 17 of Travancore Income-tax Act (corresponding to section 13 of t h e Indian Income-tax Act, 1922) is not confined to adopting method of valuation of stock according to cost or market price whichever is lower for purposes of ascertaining profits of business. section only enjoin upon assessee obligation of employing method chosen, regularly after choice. right of department to interfere with assessee's method of account arises under proviso only if no method of accounting has been regularly employed or if method employed is such that in opinion of t h e Income-tax Officer, income, profits and gains cannot be properly deduced therefrom." Thus, it will be seen that there is direct authority for method used by assessee in valuing closing stock. criticism of Shri Kailasnath on this method has also been answered by Kerala High Court. Shri Kailasnath had submitted that when closing stock is easily identified with last purchase, this method is not scientific. In that case, assessee was manufacturing and selling cashew nuts. Raw cashew is purchased and kernel is extracted from them. Just as in this case paddy is milled into rice. At page 355 it is observed: "Suppose for instance raw cashew nuts are purchased every day and stored in room of sufficient capacity and such of it as is required for purpose of processing is taken out on occasions, how can it be ascertained which is nut that is being taken out? You cannot distinguish nuts. Suppose there have been issues out of stock for processing every day of year of account, it will be impossible to attribute issues to this or that purchase. In valuing closing stock in such case only appropriate and available method would be to value it at average cost taking into account all purchases made during period. same is case with reference to stock say for instance, of fuel, wood, coal or oil all of which would be stored in one lump or lot and issues there out can be and would be made without regard to date or price of each purchase. It is unnecessary to multiply instances. It is sufficient to say that point appears to be so obvious that doubt was first entertained as to whether point stressed by department was at all properly understood." same would apply here. No doubt, closing stock is less than last purchase. But, there is no guarantee that last purchase is only quantity in stock. purchases of paddy and issues for milling are simultaneous process and it will not be correct to assume that next purchase of paddy will be made only after earlier stock has been completely exhausted. Under these circumstances, we are of opinion that method followed by assessee must be accepted. Shri Ratnakar had pointed out that there are instances where average purchase price is higher than last purchase price. Even then same method has been consistently followed. We, therefore, hold no disturbance in closing stock of purchase of paddy and production of broken rice is required. additions are deleted. Shri Kailasnath had referred to decision of Andhra Pradesh High Court in case of Margadarsi Chit Funds (P.) Ltd. (supra). observation of High Court are general in nature and it has not been stated anywhere that average purchase price is not proper method for valuation of closing stock. 9. next ground is allowance of Rs. 10,000. One B. Madhusudhana Rao was working in this firm for several years. He travels quite lot in connection with assessee's business. He was paid salary of Rs. 250 month. Mr. Madhusudhana Rao periodically drawing advances for meeting his travelling expenses and such advances at beginning of year was Rs. 10,484. It appears that Mr. Rao was asking for substantial increase in his salary but that was allowed at end of year. It was also agreed that amount overdrawn to extent of Rs. 10,000 would not be collected from him. It would overdrawn to extent of Rs. 10,000 would not be collected from him. It would appear that at time he wanted to perform his daughter's marriage and had required some advance payments. It is on this account that Rs. 10,000 was written off. 10. Income-tax Officer was of opinion that write off was unconnected with business consideration and it was only like gift. So it was not allowable. Commissioner agreed with it. 11. In our opinion, on facts stated amount should be allowed as deduction. It is not in dispute that Shri Madhusudhana Rao was long standing employee and he was being allowed salary of Rs. 250 only till prior accounting year. It is certainly inadequate. It was in connection with assessee's business that he had to travel advances taken by him were shown as debits against him. On occasion of marriage of daughter of employee, it is customary to Indian businessmen to make some presents and these presentations are to keep cordial relationship between employer and staff. It was in this connection that amount was written off. We, therefore, feel that assessee is entitled to this deduction. 12. last ground relates to depreciation on diesel engine fitted to motor car. Department had not allowed depreciation because assessee has not proved purchase of diesel engine. No bills were placed before Income-tax Officer. Thus, fact of installation of diesel engine itself has not been proved by assessee. Under these circumstances, we think that Income-tax Officer and Commissioner were justified in holding that assessee is not entitled to deduction. 13. In result, appeal is partly allowed. *** KURISETTI SATYANARAYANAMURTHY v. INCOME TAX OFFICER
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