COMMISSIONER OF INCOME-TAX, BOMBAY Vs. SARANGPUR COTTON MANUFACTURING CO LTD , AHMEDABAD

JUDGEMENT

(1.) This is an appeal from a judgment of the High Court of Judicature at Bombay, dated 28th March 1935 upon a question of law referred to the High Court by the present appellant under S.66, Indian Income-tax Act, 1922. The question arises out of the assessment of the respondents to income-tax for the financial year ending 31 March 1932 and concerns the computation of the profits or gains of their business for the year of account ending on 31st December 1980 under S.10 of the Act. The respondents are a limited liability company doing business at Ahmedabad as manufacturers of cloth and yarn. For the purpose of their assessment for the year ending 31 March 1932 they made a return under S. 22 (1) of the Act on 18 July 1931 to the Income-tax Officer, which consisted of (a) a copy of the audited balance sheet and profit and loss account of the Company for the accounting year ending on 31 December 1930 which showed the profit for the year as Rs.2,64,086, (b) a return of the total income of the Company for assessment, which included the income, profits and gains as per profit and loss account for the accounting year as Rupees 1,99,086 and (c) a covering letter which explained the adjustment of the figure in the profit and loss account so as to arrive at the figure of income in the return, and which was in the following terms : We herewith beg to enclose the Income-tax Form No. 4449 for the year 1931-32 duly filled in showing therein the profits as per statement shown below, which please receive and pass the receipts for the same.

(2.) The printed copy of the Balance Sheet for the year 1930 is enclosed herewith which please note. On receipt of the above return the Income-tax Officer issued a notice under S.23 (2) of the Act on the assesses to produce evidence in support thereof, and, in compliance, the assesses duly produced their closed accounts for the accounting year. The assesses contended, before the Commr. of Income-tax, Bombay V/s. Ahmedabad New Cotton Mills Co. Ltd.,(1930) 17 AIR PC 56 that the undervaluation of the closing stock of the assessee Company for the year 1929 disallowed by Rs.3,97,634 in the assessment year 1930-31, should be allowed as an addition in the opening stock of the current 1930, and that the undervaluation of the closing stock of the Company by Rs.3,59,966, should also be added in the closing stock of the Company in the current assessment; (2) that the method of adopting the undervaluations of the opening as well as closing stocks was adopted by this office in previous assessments and that it should not be departed from in the current year's assessment ; (3) that the ruling in 57 IA 211is also in consonance with the method adopted by this office in considering the undervaluations of both the opening and closing stocks in computing the income of the Company for income-tax purposes. In his assessment order of 26 February 1932 the Income-tax Officer states :

(3.) As regards above contentions, according to the Privy Council's decision in 57 IA 21,1 I understand that, if the undervaluation of the closing stock of any assessee is considered in the assessment in any year, the undervaluation of the opening stock should also be considered in his assessment of that year; but if the undervaluation of the closing stock is not considered in the assessment, the undervaluation of the opening stock should also be left out of the same assessment. I accordingly set aside the question of the undervaluations of the opening as well as closing stocks of the assessee Company in the current year's assessment, and accept the profit of Rs.2,64,086, shown in the statement of the profit and loss account of the Company. Under the circumstances, the claim of the assessee Company for Rs. 37,668, as a deduction from the current year's assesment is rejected. On an appeal by the assessees, the Assistant Commissioner of Income-tax confirmed the assessment by his order dated 22 November, 1932. The assessees then applied to the present appellant to review the above orders under S. 33 of the Act, or, alternatively, to make a reference of questions of law to the High Court under S. 66 (2) of the Act. The appellant declined to review the orders, and, on the ground that no legal point was involved, he also declined to make the reference. Thereafter the High Court, on an application by the assessees, under S.66 (3) of the Act, required the appellant to make a reference, and he made the present reference with the question of law as formulated by the High Court, viz.: Whether in view of the provisions of S. 13, Income-tax Act or otherwise, the Income-tax Officer was right in computing for the purpose of S.10 of that Act income, profits and gains in accordance with the method of accounting regularly employed by the aseessee, whether or not that method in fact shows the true income, profits and gains.