Court rejects company’s stock valuation appeal - concurrent findings upheld

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Case Name

Goa Carbon Ltd. Vs Joint Commissioner of Income Tax & Anr. (High Court of Bombay)

Tax Appeal No. 3 of 2016

Date: 19th July 2021

Key Takeaways

• Factual findings are hard to overturn: When all three tax authorities (Assessing Officer, CIT Appeals, and ITAT) make concurrent factual findings, courts won’t interfere unless there’s clear perversity
• Burden of proof matters: Companies must provide proper evidence to support stock valuation claims - unsigned charts and vague explanations aren’t enough
• Procedural importance: Issues not properly raised before lower authorities can’t be entertained in higher appeals
• Section 145 (of Income Tax Act, 1961) empowers tax officers: Assessing Officers have both the power and duty to determine correct profits when accounts don’t reflect true business state

Issue

The central legal question was: “Whether the ITAT was justified in sustaining addition of ₹3,02,29,477/-, without appreciating that the valuation of closing stock has to be done on the basis of cost or market price, whichever is lower and for determining the market price for this purpose, the relevant price is the price as on 31st March and not the average price for the entire year?”

Facts

• Assessment Year: 2009-2010
• The Problem: Goa Carbon Ltd. claimed a loss of ₹3,02,29,477/- in stock valuation
• Assessing Officer’s Action: On 29.11.2011, the AO disallowed this loss and added it back to the company’s total income
• Appeals Process:
• CIT (Appeals) upheld the assessment order on 11.05.2015
• ITAT dismissed the company’s appeal on 14.09.2015
• The Dispute: Company argued they should use March 2009 market price (₹18,107/-) instead of average yearly price (₹24,721/-)

Arguments

Company’s Arguments (Appellant):

• The Assessing Officer wrongly used average market rate for the entire year (₹24,721/-) instead of March 2009 rate (₹18,107/-)
• Their accounts were accepted by the AO and were based on Generally Accepted Accounting Principles
• No evidence was required since the figures came from accepted books of accounts
• The authorities’ approach constituted “an error apparent on the face of the record”

Tax Department’s Arguments (Respondent):

• All three authorities recorded pure findings of fact, not perverse decisions
• The company failed to provide adequate evidence for the significant variation between cost and market price
• This was a case where the court shouldn’t re-assess material on record

Key Legal Precedents

The court relied heavily on Commissioner of Income-tax vs. British Paints India Ltd. (1991) 54 Taxman 499 (SC).

Key principle from British Paints: Section 145 (of Income Tax Act, 1961) of the Income Tax Act gives Assessing Officers both the power and duty to make computations to deduce correct profits and gains. When accounts don’t disclose the real cost of stock-in-trade, the AO must determine taxable income by making appropriate computations.

The Supreme Court in British Paints emphasized that accounting systems excluding costs other than raw materials can create a “distorted picture of the true state of the business” and may shift profits from one year to another, which is incorrect for tax computation purposes.

Judgement

The company lost on all fronts. Here’s the court’s reasoning:

1. Procedural Issue: The specific question now raised wasn’t clearly presented to lower authorities. The court found that “such a question in the form in which it is sought to be projected was not raised before the Assessing Officer or the CIT (Appeals)”
2. Factual Findings: All three authorities made concurrent factual findings that couldn’t be interfered with unless perverse. The court stated these findings “cannot be styled as some perverse view or a view which no reasonable person, well instructed in the law, could have ever arrived at”
3. Lack of Evidence: Apart from an unsigned chart and vague pleas, the company provided no material to explain the cost-price and market-price variation
4. Final Order: “The Appeal is accordingly dismissed. There shall be no order as to costs”

FAQs

Q1: Why couldn’t the company argue about March 2009 vs. average pricing?

A: The court found this specific argument wasn’t properly raised before the lower authorities. You can’t bring up new detailed arguments for the first time in a high court appeal.

Q2: What does “concurrent findings of fact” mean?

A: When all three tax authorities (AO, CIT Appeals, and ITAT) reach the same factual conclusion, courts generally won’t interfere unless the finding is completely unreasonable or perverse.

Q3: Could the company have won with better evidence?

A: Possibly. The court noted they only provided an “unsigned chart” and failed to produce “cogent evidence” to explain the price variations. Better documentation might have helped.

Q4: What’s the takeaway for other companies?

A: When claiming stock valuation adjustments, ensure you have proper supporting evidence and raise specific arguments clearly at each level of appeal. Don’t rely solely on “accepted accounting principles” without substantiating unusual variations.

Q5: Does this mean average pricing is always correct?

A: Not necessarily. The court didn’t rule on the pricing method itself but rather that the company failed to prove their case with adequate evidence and proper procedural compliance.

1. Heard Mr. Mihir Naniwadekar, learned Counsel for the Appellant, and Ms. Susan Linhares learned Standing Counsel for the Respondent nos. 1 and 2.

2. This appeal was admitted on 7th March 2016 on the following substantial question of law :

“Whether on the facts and in circumstances of the case and in law, the ITAT was justified in sustaining addition of Rs.3,02,29,477/-, without appreciating that the valuation of closing stock has to be done on the basis of cost or market price, whichever is lower and for determining the market price for this purpose, the relevant price is the price as on 31st March and not the average price for the entire year?

3. This appeal pertains to the assessment for the Assessment Year 2009-2010. The Assessing Officer vide his order dated 29.11.2011, disallowed the loss of 3,02,29,477/- claimed by the ₹ Appellant-Assessee in the stock valuation and added the same to the total income of the Assessee.

4. The assessment order dated 29.11.2011 was upheld by the

Commissioner of Income Tax (CIT)(Appeals) on 11.05.2015.

The Assessee's appeal to the Income Tax Appellate Tribunal

(ITAT) was dismissed on 14.09.2015. Hence, the present appeal

on the aforesaid substantial question of law.

5. Mr. Naniwadekar, the learned Counsel for the Appellant,

submits that in the present case, the Assessing Officer took into

account the average market rate for the period from 01.04.2008

to 31.03.2009 instead of taking into account the market rate for

March 2009 which was only 18,107/-. He submits that the ₹

details furnished by the Appellant were based on the books of

account maintained by the Appellant and such accounts were not

rejected but accepted by the Assessing Officer. He submits that

at no stage was the Assessee required to produce any evidence to

support the entries/figures reflected in the book of accounts. He

submits that the Assessing Officer, CIT (Appeals), and ITAT have

referred to the average market price for the entire year instead of

taking the market price only for March 2009 and this constitutes

an error apparent on the face of the record. He submits that the

findings recorded by all the three authorities are such as ought not

to be arrived at by any reasonable authority instructed in law and

on facts. He, therefore, submits that the substantial question of

law as framed is required to be answered in favor of the

Appellant-Assessee.

6. Ms. Linhares, learned Standing Counsel, defends the

impugned orders based on the reasoning reflected therein. She

submits that pure findings of facts have been recorded by the

three authorities and this is not a case of perversity in the record

of such finding of facts. She submits that the Assessee wishes this

Court to re-assess this material on record, which exercise this

Court while exercising second appellate jurisdiction should

normally decline. She submits that no evidence was produced by

the Assessee to justify the significant variation in the cost price

and the alleged market price. For all these reasons, she submits

that this appeal is liable to be dismissed.

7. The rival contentions now fall for our determination.

8. At the outset, we must note that from the perusal of the

orders made by the Assessing Officer, CIT (Appeals), and ITAT, it

does appear that the question which is now sought to be raised by

the Appellant-Assessee was not clearly raised. At least, such a

question in the form in which it is sought to be projected was not

raised before the Assessing Officer or the CIT (Appeals). There is

only a sentence to be found in the order made by the ITAT about

a submission that the market price of the Assessee's products

during the end of the relevant assessment year i.e. March 2009,

was 18,107/- whereas the average market price for the whole ₹

year was 24,721/-. However, except for this submission, such ₹

an issue in the form in which it is projected in this appeal does

not appear to have been raised before the Assessing Officer or

CIT (Appeals).

9. If, the memo of appeal before ITAT is perused, then, it is

evident that the Appellant-Assessee had merely contended that

the Appellant has valued the closing stock “consistently in line

with the Generally Accepted Accounting Principles”. Based on

this single line, it was urged that the CIT (Appeals) erred in

holding that the valuation of closing stock as computed by the

Assessing Officer was more than 3,02,29,477/-. ₹

10. The aforesaid means that neither was the specific ground

now sought to be projected in this Appeal ever raised in the

memo of appeal before the ITAT nor was such contention

seriously advanced and pressed before the ITAT. Based on the

single statement in the ITAT order dated 14.09.2015, which is

again not backed by any ground in the memo of appeal, we

cannot accept that the substantial question of law now raised, was

effectively raised and adjudicated before the earlier authorities. In

such circumstances, the substantial question of law though

framed, cannot be said as arising in this Second Appeal.

11. Be that as it may, the Assessing Officer, the CIT (Appeals),

and ITAT have recorded pure findings of fact. Such findings of

fact cannot be interfered with in a Second Appeal unless a case of

perversity is made out. At this stage, it is not for this Court to re-

assess or re-appreciate the material on record, only to find

whether some different view is possible. All the authorities, based

on the material before them, or the lack of proper evidence before

them, have held that the disparity between the cost price and the

market price remains unexplained by the Appellant-Assessee. The

ITAT has also noted that the Appellant-Assessee failed to explain

the basis for valuation of closing stock being lesser than even the

average cost or the average market price. ITAT also noted that

the Appellant-Assessee failed to produce any cogent evidence to

substantiate its claim even before the ITAT itself despite the grant

of opportunity.

12. According to us, the findings recorded by the three

authorities or the view taken by the three authorities cannot be

styled as some perverse view or a view which no reasonable

person, well instructed in the law, could have ever arrived at.

Accordingly, there is no case made out to interfere with such

concurrent findings recorded by all the authorities, in the exercise

of the limited jurisdiction vested in us in this Second Appeal.

Apart from producing an unsigned chart and raising vague pleas,

no material was placed on record by the assessee to explain the

variation in the cost price and the market price during the

relevant assessment year. No case is therefore made out to

interfere with the findings concurrently recorded by the three

authorities.

13. Ms. Linhares learned Standing Counsel, relied on

Commissioner of Income-tax vs. British Paints India Ltd.

1 to submit that in the absence of any cogent evidence produced on

1 (1991) 54 Taxman 499 (SC) record by the Assessee, the Assessing Officer was justified in determining the market price, having regard to the market rate in the course of the assessment year.

14. In the present case, the Assessee, apart from submitting an

unsigned chart, allegedly based on the books of account

maintained by the Assessee, had failed to produce on record any

material in support of the substantial variation between the cost

price and the market price. In such a situation, there was nothing

wrong with the approach of the Assessing Officer and the

determination ultimately made by the Assessing Officer.

15. In British Paints India (supra), the Hon'ble Supreme

Court has held that :

“Section 145 (of Income Tax Act, 1961) confers sufficient

power upon the officer – nay, it imposes a duty

upon him – to make such computation in such

manner as he determines for deducing the correct

profits and gains. This means that where accounts

are prepared without disclosing the real cost of the

stock-in-trade, albeit on sound expert advice in the

interest of efficient administration of the company,

it is the duty of the ITO to determine the taxable

income by making such computation as he thinks

fit. Any system of accounting which excludes, for

the valuation of the stock-in- trade, all costs other

than the cost of raw material for the goods in

process and finished products, is likely to result in

a distorted picture of the true state of the business

for the purpose of computing the chargeable

income. Such a system may produce a comparatively lower

valuation of the opening stock and the closing stock, thus, showing a

comparatively low difference between the two. In a

period of rising turnover and rising prices, the

system adopted by the assessee, as found by the

Tribunal, is apt to diminish the assessment of the

taxable profit of a year. The profit of one year is

likely to be shifted to another year which is an

incorrect method of computing profits and gains

for the purpose of assessment. Each year being a

self-contained unit, and the taxes of a particular

year being payable with reference to the income of

that year, as computed in terms of the Act, the

method adopted by the assessee has been found to

be such that income could not properly be

deduced therefrom. It was, therefore, not only the

right but the duty of the Assessing Officer to act in

exercise of his statutory power, as he has done in

the instant case, for determining what, in his

opinion, was the correct taxable income. The

Tribunal's order, affirming that of the Assessing

Officer, was based on findings of fact made on

cogent evidence and in accordance with correct

principles. The High Court was clearly wrong in

interfering with those findings. Accordingly, the

judgment of the High Court was to be set aside.”

16. According to us, the aforesaid observations in British

Paints India (supra), assist the revenue in this matter.

17. For all the aforesaid reasons, we dismiss this Appeal by

holding that substantial question of law as framed, does not arise

in the matter or any case, based on the material on record,

is required to be answered against the Appellant-Assessee.

18. The Appeal is accordingly dismissed. There shall be no

order as to costs.

M. S. JAWALKAR, J. M. S. SONAK, J.