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CASE NO.: Appeal (civil)  6735-6736 of 2003

PETITIONER: M/S. Sanjeev Woolen Mills

RESPONDENT: Commissioner of Income-tax, Mumbai

DATE OF JUDGMENT: 24/11/2005

BENCH: Dr. AR. Lakshmanan & P.P. Naolekar

JUDGMENT: J U D G M E N T  

P.P. NAOLEKAR, J.

               The appellant, (hereinafter to be referred to as an  ’assessee’) is a firm engaged in the imports of synthetic waste  and manufacture and export of woolen blankets.  Since the  assessee had been in export, the economy of the business of the  assessee worked out on the basis of U.S.  $ price and for the  purpose of stock valuation, the same was recorded in Rupees  for which the prevailing exchange rate was applied.  The  assessee was maintaining books of accounts on a consistent  method on mercantile basis right from the insertion of its  business and Department has accepted the same for the purpose  of income-tax except in the years in question.  Since the  Account Year, 1986-87, the assessee followed the method of  accounting, and for which the stock of raw-material/semi-  finished goods were valued at cost price and finished goods at  the market price.                 For the Assessment Year 1992-93 (hereinafter to  be referred to as the ’First year’), the assessee valued the  closing stock at the rate of Rs.130/- per kg. whereas the opening  stock were shown at Rs.90/- per kg. In the subsequent year  1993-94, the assessee valued the opening stock at Rs.130 per  kg. for the finished goods and there was no closing stock. The  assessee returned a loss of Rs.54,420/- for the second year.  For  the First year, the assessee claimed benefit under Section 80  HHC of the Income-tax Act 1961 (hereinafter to be referred to  as an ’Act’).  It is the case of the assessee that during the  Financial year 1991-92, the Rupee had undergone de-valuation  against U.S. $.  The price of the U.S. $ as on 1.4.1991 was  Rs.18/- per Dollar and at the time of the closing as on  31.3.1992, it was Rs.31/- per U.S. Dollar.  As per the evidence,  the assessee’s case is that at the relevant time the market price  of the blanket in the international market was U.S.$ 4.59 per kg.  and the rate of U.S. Dollar in Rupees  18.20 per Dollar.  As  such, the market price was Rs.90/- per kg. as on  31.3.1991/1.4.1991 (closing stock of the previous year/opening  stock valuation for the year 1992-93).  At the end of the year  1992-93, on 31.3.1992, the market price of the blanket in the  international market was U.S. $5.35 per kg. and the rate of U.S.  $ in Rupee was Rs.31/- per Dollar and the market price worked  out to be Rs.165.85 per kg. and on 31.3.1992 after deducting  the transport charges, freight, commission and other incidental  charges to the tune of Rs.35.85, price of the blanket at market  value was fixed at Rs.130  per kg. which was shown as closing  stock value of the Assessment Year 1992-93.  The assessee has  taken the value of the closing  stock as on 31st of March as the  opening stock on 1st of April to be the same in every year for

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the finished product at market value and the raw material at cost  price.  The assessee also valued the market price of the finished  product at the rate of Rs.98/- as on 1.4.1991 as the actual  market price of Rs.130/-per kg. as on 31.3.1992 and also on  1.4.1992 the price of the finished product as opening stock  value for the Second Year.                 The Assessing Officer has found that on adoption  of the aforesaid method, there is a stark contrast in the gross  profit ratio for the accounting year 1990-91, 1991-92 and 1992- 93.  He concluded that the method of valuing the closing stock  at market value resulted in a distorted picture and assessee had  artificially inflated the profits in order to get benefit under  Section 80 HHC of the Act, which amounted to tax planning  with intent to defraud the Revenue.  The Assessing Officer  ruled that by following the aforementioned method, the  assessee effectively showed to earn income out of itself, which  was totally against  the basic principles of accountancy and law.   He further observed  that by proper application of the  provisions of the Act and principles of accountancy, the  assessee had to value its closing stock at cost or market price  whichever was lower but that was not done.  He further found  that in the Second Year, the assessee had valued opening stock  at Rs.130 per kg. in place of Rs.90 per kg. which had  suppressed the factum of profits.  He applied the standard  prescribed for "Valuation of Inventory" at the cost price and  added an amount of Rs.2,67,38.280.00 to the total income of  the assessee for the second year.                 The assessee preferred an appeal for the First Year  and also for the Second Year before the C.I.T. (Appeals).  Both  the appeals were dismissed by C.I.T. (Appeals) by observing  that by merely following a particular system of accounting  regularly in the past would not entitle the assessee to follow the  same system of accounting which was not in  accordance with  the standard principles of accountancy and placed reliance on  the judgment of this Court in British Paints   vs.   C.I.T.   [1991]188 I.T.R. 44.  It was held that the Assessing Officer had  rightly interfered, as duty bound under provisions of Section  145 of the Act to conclude the correct taxable income of each  year and for that purpose, there was need to change the system  of accounting regularly followed by the assessee, that must be  done.  As per the appellate authority, no person could earn  profit  from his own pocket. The valuation of the closing stock  required valuing of closing stock either at cost or at market  price, whichever was lower.                 The assessee, aggrieved by the orders passed by  C.I.T. (Appeals), further filed appeals before the I.T.A.T.  The  Income-tax Appellate Tribunal allowed the appeals of the  assessee taking the view that the application on the principle of  lower cost or market value was pre-dominantly wrong because  there had been several accepted method of accounting such as  pure cost method, LIFO, FIFO etc. and observation of the  Assessing Officer and the first appellate authority regarding a  particular method is the only correct method, was held to be  totally absurd.  It was observed that lower of the cost or market  value method might certainly be considered to be a prudent  method of accounting and might be followed by the vast  majority    of business enterprises but what might not be  considered prudent did not necessarily incorrect or against the  principles of accounting and hence if any firm has been  employing the market value method for a long time  consistently, it could not be considered as against the principles  of accountancy nor the method adopted for defrauding the  Revenue.  The Tribunal has directed that valuation of the  finished goods as made by the assessee be accepted.  Regarding  opening stock of the Second Year, the Tribunal has allowed the

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assessee to value it as the closing stock of the First year.  The  Revenue challenged this order of the Tribunal in the High Court  of Bombay by filing an Income-tax Appeal.                 The Division Bench of the High Court by its  judgment dated 11.12.2002 allowed both the appeals and held  that the method of valuation of closing stock adopted by the  assessee was not correct and that the entire device was to inflate  deduction under Section 80 HHC and to suppress the profits in  the Second Year because the correct taxable income could  never be computed on the basis of the system of relief provided  under Section 80 HHC and that under the different assessment  year constituting separate unit and the principle of ’lower of the  cost or market value’  had been fully satisfying the mandatory  touchstone of "no escapement of tax" rule.  Against this order  of the High Court, the assessee has came before this Court.                 Shri B.V. Desai, learned counsel for the appellant  has urged that in the facts and circumstances of the case where  in the First Year, the valuation of the stock  increased pre- dominantly  because of the market factor and also the sudden  spurt and increase in the exchange rate of U.S. $, it could not  have been said that the appellant has adopted a method of  accounting to defraud the Revenue particularly so when the  accounting method chosen by the assessee is not for a particular  year and is being adopted consistently from the year 1985-86.   It is further urged that it is a well-settled principle of income- tax law that the assessee is free to adopt any system of  accounting and the valuation chosen at the market rate has been  a well settled principle of accounting and therefore simply  because the assessee has claimed benefit under Section 80  HHC,  in a particular year the method of accounting could not  have been found fault with.  It was further urged that the  provisions of Section 145 (1) of the Act are not attracted as the  assessee had adopted the valuation of the finished goods on  market price and consistently followed the same.  The  contention of the counsel proceeded on the exercise of  jurisdiction and he urged that the power under Section 145 of  the Act could only be exercised if there is material to prove that  the method in question is such that in the opinion of the  Assessing Officer, the income cannot be properly deducted.   The sine qua non for enforcing the provisions of Section 145 of  the Act is that the Assessing Officer should be of the opinion  that from the method of accounting the income cannot be  properly deducted and this opinion should be based on sound  and reasonable footing.  On the other hand, Shri Rajiv Dutt, Sr.  Advocate for the respondent has urged that the established and  consistent practice of accounting which is accepted by Courts is  valuation of the closing stock either at the cost or at market  price, whichever was lower.  If the established practice of  accounting is not adopted, the Assessing Officer was justified  in invoking Section 145 of the Act.  The method of accounting  chosen by the assessee was merely to claim maximum  deduction under Section 80 HHC in the First Year and  suppression of the profit in the Second year.  It is further urged  that each accounting year being a separate unit in itself, merely  because in the past Department accepted a method, would be no  ground to prohibit the assessing officer from exercising his  discretion and powers under Section 145 of the Act.                 To appreciate and to deal with the rival contentions  put forward by the learned counsel in the facts of the present  case, it would be appropriate to re-produce the relevant  provisions of Section 145 (1) of the Income-tax Act as was  applicable at the relevant time.  Section 145 (1) of Income-tax  Act reads as under: 145. (1)        Income-chargeable under the head  "Profits and gains of business or profession" or

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"Income from other sources" shall be computed in  accordance with the method of accounting  regularly employed by the assessee:  Provided that in any case where the accounts are  correct and complete to the satisfaction of the  Assessing Officer but the method employed is  such that, in the opinion of the Assessing Officer,  the income cannot be properly deduced therefrom,  then the computation shall be made upon such  basis and in such manner as the Assessing Officer  may determine:

Provided further that where no method of  accounting is regularly employed by the assessee,  any income by way of interest on securities shall  be chargeable  to tax as the income of the previous  year in which such interest is due to the assessee:

Provided also that nothing contained in this sub- section shall preclude an assessee from being  charged to income-tax in respect of any interest on  securities received by him in a previous year if  such interest had not been charged to income-tax  for any earlier previous year.

Where the Assessing Officer is not satisfied about  the correctness or the completeness of the accounts  of the assessee, the Assessing Officer may make  an assessment in the manner provided in Section  144.

               Section 145 provides that in case assessing officer  is of the view  that the assessee’s accounts are incomplete or  incorrect or method of accounting has not been regularly  followed by the assessee, the Assessing Officer may resort to  make best judgment assessment in the manner provided under  Section 144 of the Act instead of making assessment under  Section 145 of the Act.  To attract Section 145 of the Act, it is  necessary  that:  a)       the assessee has computed the income in  accordance with the method of accounting  regularly employed by the assessee ;  and

b)            provided  where the accounts are correct  and  complete to the satisfaction of the assessing  officer; but

c)            the method employed is such that in the opinion of  the assessing officer, the income cannot be  deduced therefrom then the assessing officer may  adopt a different method of computation of the  income as he may determine.

The assessee may employ whichever basis of  valuation of stock in hand,  but it must adhere to that  consistently  year after year.  Casual departure of valuation of  trading stock in hand at cost or market value is not permissible.   The method adopted of maintaining the accounts should be  definite method of valuation which is carried by the assessee  from year to year.  To attract the provision of Section 145 of the  Act the consistent method of maintaining accounts books is a  first condition thereafter the assessing officer should be of the  view that the accounts are correct and complete but the method  employed is such that in the opinion of the assessing officer the  income cannot properly be deduced therefrom.  The choice of

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method of accounting regularly employed by the assessee lies  with the assessee but the assessee would be required to show  that he has followed the chosen method regularly.  The  Department is bound by the assessee’s choice of method  regularly employed unless by this method the true income,  profit of accounts cannot be arrived at.  The assessee’s regular  method would not be rejected as improper merely because it  gives him the benefit in certain years or that as per the assessing   officer the other method would have been more preferable.  The  method of accounting cannot be substituted  by the assessing  officer merely because it is unsatisfactory.  What is material for  the purpose of Section 145 is, the method to be such that the  real income, profit and gain can be properly deduced therefrom.   If the method adopted  does not afford true picture of profit, it  would be rejected, but then such rejection should be based on  cogent evidence and would be done with caution.   The power  can be exercised by the assessing authority to choose the basis  and manner in computation of income but he must exercise his  discretion and judgement judicially and reasonably.

In the present case the assessee through out has  computed the income and maintained accounts on the basis of  valuation of opening stock of raw material and semi finished  goods at stock price and finished goods at the market price.   The assessee has adopted method of accounting whereby  closing stock of the year is the opening stock of the next year,  and the valuation placed by the assessee upon his closing stock  of the year as the valuation of the opening stock of the next  year.  As per the assessing officer by virtue of this method in  the assessment year 1992-93 the gross profit ratio was  Rs.2054.60% for the first year  which stood in stark contrast to  119.18% for the accounting year 1991-92 and 64.85% for  accounting year 1991 and, therefore, the method adopted shows  artificially inflated profit in order to get the deduction benefit  under Section 80HH (C) of the Income Tax Act.  While  framing the question of law the High Court has also framed a  question whether in the facts and circumstances of the case and  in law, the ITAT was justified in holding that the higher market  rate of valuation of closing stock adopted by the assessee was  correct, without appreciating that acceptance of said method  had resulted in doctored abnormal gross  profit ratio of  2054.60%, which by no yardstick of basic principle of  accountancy could be held as proper reflection of income.  The  High Court has arrived at the conclusion that this gross inflation  in the profit was made merely to get the benefit of Section  80HH(C) for the first year and suppress the profit in the second  year.  Thus it is apparent that the assessing officer as well as the  High Court were impressed by the factor that the method  adopted by the assessee in computing the income results in  showing of abnormally gross profit ratio and that was done for  the purposes of taking benefit under Section 80HH(C) for the  first year and for reducing the profit in the second year by  showing the value of the finished products at the market rate at  the end of the first year and in the beginning of the second year.   Although it is correct to say that regular method of accounting adopted  cannot be rejected by the assessing officer merely on the basis  of profit earned or loss suffered by the assessee in particular  year but that can be certainly  a reason for an assessing officer  to make deeper probe of the account to find and whether the  accounts reflects real income, profit and gains of the assessee.                 It is settled law that the true trading result of  business for an accounting period cannot be ascertained without  taking into account the stock in trade  at the end of the  accounting period.  While considering the method of  accounting in C.I.T. vs. A. Krishnaswami Mudaliar [1964]

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53 I.T.R. 122, this Court pointed out that in the event where the  assessee is following the cash system of accounting, the  valuation of the closing stock cannot be dispensed with.  The  Court quoted with approval the following observations in   Commissioner of the Inland Revenue  vs.  Cock, Russell and  Co. Ltd. [1949] 29 Tax Cases 387 = (1949) All E.R. 889:                 "There is no word in the statutes or  rules which deals with this question of valuing  stock-in-trade.  There is nothing in the relevant  legislation which indicates that in computing the  profits and gains of a commercial concern the  stock-in-trade at the start of the accounting period  should be taken in and that the amount of the  stock-in-trade at the end of the period should also  be taken in.  It would be fantastic not to do it : it  would be utterly impossible accurately to assess  profits and gains merely on a statement or receipts  and payments or on the basis of turnover.  It has  long been recognized that the right method of  assessing profits and gains is to take into account  the value of the stock-in-trade at the beginning and  the value of the stock-in-trade at the end as two of  the items in the computation.  I need not cite for  the general proposition, which is admitted at the  Bar, that for the purposes of ascertaining profits  and gains the ordinary principles of commercial  accounting should be applied, so long as they do  not conflict with any express provision of the  relevant statutes"

               The Court further observed:                 "We have already said that in England  there is no provision which compels the tax officer  to adopt in the computation of income the system  of accounting regularly employed by the assessee.   But whatever may be the system, whether it is case  or mercantile, as observed by Croom-Johnson J. in  a trading venture it would be impossible accurately  to assess the true profits without taking into  account the value of the stock-in-trade at the  beginning and at the end of the year\005."

From the above it is clear that it is settled law that true profit of   business for an accounting period cannot be ascertained without  taking into account the value of the stock  in trade remaining at  the end of the period and that such valuation is a  necessary  element in the process of determining the trade result of the  period.  The principles on which the method of valuation of  closing stock is done is also well settled.   They have been set  out in Whimster and Co.    vs.  C.I.R.  [1925] 12 Tax Cases  813 in the following words :-                 "In computing the balance of profits  and gains for the purposes of income tax\005 two  general and fundamental commonplaces have  always to be kept in mind. In the first place, the  profits of any particular year or accounting period  must be taken to consist of the difference between  the receipts from the trade or business during such  year or accounting period and the expenditure laid  out to earn those receipts.   In the second place, the  account of profit and loss to be made up for the  purpose of ascertaining the difference must be  framed consistently with the ordinary principles of  commercial accounting, so far as applicable, and in  conformity with the rules of the Income-tax Act, or

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of that Act as modified by the provisions and  schedules of the Acts regulating excess profits  duty, as the case may be.  For example, the  ordinary principles of commercial accounting  require that in the profit and loss account of a  merchant’s or manufacturer’s business the values  of the stock-in-trade at the beginning and at the  end of the period covered by the account should be  entered at cost or market price, whichever is lower;  although there is nothing about this in the taxing  statutes."

               In the words of Bose, J. in Kikabhai Premchand   vs.  CIT  [1953] 24 I.T.R. 506 (SC) at page 510 :-                 "The appellants’s method of book- keeping reflects the true position.  As he makes his  purchases he enters his stock at the cost price on  one side of the accounts.  At the close of the year  he enters the value of any unsold stock at cost on  the other side of the accounts thus canceling out  entries relating to the same unsold stock earlier in  the accounts ; and then that is carried forward as  the opening balance in the next year’s account.   This canceling out of the unsold stock from both  sides of the accounts leaves only the transactions  on which there have been actual sales and gives a  true and actual profit or loss on his year’s  dealings."

               The rationale behind valuation of the stock at  "cost"  or  "market", whichever is lower is explained by  Patanjali Sastri, CJ in Chainrup Sampatram  vs.  C.I.T.  [1953] 24 I.T.R. 481 (S.C.)  at Page 485:-                 "Mt is wrong to assume that the  valuation of the closing stock at market rate has,  for its object, the bringing into charge any  appreciation in the value of such stock.  The true  purpose of crediting the value of unsold stock is to  balance the cost of those goods entered on the  other side of the account at the time of their  purchase, so that the canceling out of the entries  relating to the same stock from both sides of the  account would leave only the transactions on  which there have been actual sales in the course of  the year showing the profit or loss actually realized  on the year’s trading.  As pointed out in paragraph  8 of the Report of the Committee on Financial  Risks attaching to the holding of Trading Stocks,  1919,  "As the entry for stock which appears in the  trading account is merely intended to cancel the  charge for the goods purchased which have not  been sold, it should necessarily represent the cost  of the goods.  If it is more or less than the cost,  then the effect is to state the profit on the goods  which actually have been sold at the incorrect  figure\005 From this rigid doctrine one exception is  very generally recognized on prudential grounds  and is now fully sanctioned by custom, viz., the  adoption of market value at the date of making up  accounts, if that value is less, than cost.  It is of  course an anticipation of the loss that may be made  on those goods in the following year, and may  even have the effect, if prices rise again, of  attributing to the following year’s results a greater

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amount of profit than the difference between the  actual sale price and the actual cost price of the  goods in question" (extracted in paragraph 281 of  the Report of the Committee on the Taxation of  Trading Profits presented to British Parliament in  April 1951).  While anticipated loss is thus taken  into account, anticipated profits in the shape of  appreciated value of the closing stock is not  brought into account, as no prudent trader would  care to show increased profit before its actual  realization.  This is the theory underlying the rule  that the closing stock is to be valued at cost or  market price whichever is the lower, and it is now  generally accepted as an established rule of  commercial practice and accountancy."                 In A.L.A. Firm vs.  C.I.T. [1991] Vol.189  I.T.R.  (S.C.) page 285,  the Court said that as against the valuation of  the stock at cost or market whichever is lower, valuation of the  closing stock at the market value will invariably create problem.   For, if the market value is higher than the cost then the accounts  will reflect notional profits not actually realized.    On the other  hand, if the market value is less, the assessee will get the  benefit of the notional loss which he has not incurred.   Nevertheless, as mentioned earlier, the ordinary principle of  commercial accounting permit valuation at cost or market  whichever is lower.  The proper practice is to value the closing  stock at cost.  That will eliminate entries relating to the same  stock from both sides of the account.  To this Rule, custom  recognized only one exception and that is to value the stock at  market value that is lower. But on no principle can one justify  the valuation of the closing stock at a market value higher than  the cost as that will result in taxation of the notional profits the  assessee has not realized.  In Shakti Trading Co. vs. C.I.T.,  Coimbatore , (2001) 6 S.C.C. 455, this Court had held that the  proper practice is to value the closing stock at cost.  To this  Rule, the custom recognized only one exception and that is to  value the stock at market value if it is lower.  But on no  principle can one justify the valuation of the closing stock at  market value higher than the cost as that will result in taxation  of notional profits which the assessee has not realized.  The  aforesaid catena of decision  recognized in the accounting  practice, of valuation of closing stock and permissible limit  thereof of showing the stock at cost or at market value  whichever is lower.  Permissibility of value of the stock at a  market value would be only if the valuation of the market value  of the stock is lower than the cost of the stock.   In C.I.T.  vs. A.Krishnaswami Mudaliar [1964] 53  I.T.R. 122, at page 128:-                  "Again as observed by this Court in  C.I.T.   vs.  McMillan and Co. [1958] 33 I.T.R.  182, the expression ’in the opinion of the Income- tax Officer’ in the proviso to Section 13 of the  Indian Income-tax Act, 1922 does not confer a  mere discretionary power ; in the context it  imposes a statutory duty on the Income-tax Officer  to examine in every case the method of accounting  employed by the assessee and to see whether or  not it has been regularly employed and to  determine whether the income, profits and gains of  the assessee could properly be deduced  therefrom."                   It is said in S.N. Namasivayam Chettiar vs.  C.I.T. [1960] 38 I.T.R. 579 (S.C.), it is for the officer to  consider the material placed before him and, if, upon such  consideration, he is of the opinion that correct profits and gains

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could not be deduced from the accounts, he would then be  obliged to have recourse to the proviso to section 13 of 1922  Act which corresponds to Section 145 of the Act                    In  C.I.T.  vs. Sarangpur Cotton Mfg. Ltd.  ,(1938) 6 ITR 36, Lord Thankerton stated that section 13 of the  Indian Income-tax Act, 1922, related to a method of accounting  regularly employed by the assessee.  The section postulated that  such a method of accounting was the necessary basis of  computation, unless in the opinion of the Income-tax Officer,  the income, profits and gains could not properly be deduced  from such method.  But it could very well be that, "though the  profit brought out in the accounts is not the true figure for  income-tax purposes the true figure can be accurately deduced  therefrom . . ."   But it was not a correct view that the Income- tax Officer was "prima facie entitled" to accept the profits  mentioned in the accounts where there was a method of  accounting regularly employed by the assessee.  "It is the duty  of the Income-tax Officer, where there is such a method of  accounting to consider whether income, profits and gains can  properly be deduced therefrom, and the proceed according to  his judgment on this question.  From the aforesaid decision one  can easily deduce the principle that it is the duty of the  assessing officer to examine in every case the method of  accounting adopted by the assessee and to see whether the  income, profit and gains of the assessee could properly be  assessed therefrom.  If the assessing officer is of the view that  the profit could not be properly deduced from the accounts  maintained he can apply the provisions of Section 145 of the  Act.  In the present case, the method adopted by the assessee is  to value the closing stock at the market value irrespective of the  fact  whether the market value of the stock at the relevant time  is more than the cost value of the stock, which necessarily  results in an imaginary or notional profits to the assessee which  he has not actually received.  In fact such a notional imaginary  profit cannot be taxed.  It is well settled principle as held in  Kikabhai Premchand vs. C.I.T. [1953] 24 I.T.R. 506 (S.C.)  Constitution Bench judgment that the firm cannot make profit  out of itself.  The transaction which is not business transaction  and does not derive immediate pecuniary gain   is  not subjected   to tax   In the present case by showing the market  value  of the  closing stock the assessee has earned potential     profit     out     of     itself in as much as   the stock in  trade remained with the  assessee at the closing of the accounting year.  Secondly,  putting the stock at the market value does not and cannot bring  in any real profit which is necessary for taxing the income  under the Act as is held in Chainrup Sampatram vs. C.I.T.   [1953]  24 I.T.R. 481 (S.C.) and CIT  vs.  Hind Construction  Ltd.. (1972) 83 ITR 211. Thirdly, it is settled principle of  Income-tax Law that it is the real income, which is taxable  under the Act. This proposition was enunciated in C.I.T.  vs.  Birla Gwalior (P.) Ltd., [1973] 89 I.T.R.266 (S.C.), which was  pronounced in C.I.T., Bombay City I  vs. Messrs. Shoorji  Vallabhdas and Co. [1962] 46 I.T.R. 144 (S.C.).                 Under Section 145 of the Act chargeable income  has to be deduced from the accounts regularly employed by the  assessee, if in the opinion of the assessing officer the accounts  are correct and complete.  The assessing officer can apply a  different method of accounts to deduce the income chargeable  if in his opinion the method employed by the assessee the  chargeable income cannot properly be deduced.  The  recognized and settled accounting practice of accounting with  the closing stock in the accounts has to be valued on the cost  basis or at the market value basis if the market value of the  stock is less than the cost value.  In the present case the  assessee has not adopted the established and settled practice.  

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The market value of the stock has been taken into consideration  while arriving at chargeable income although the market value  of the stock is more than the cost value of the stock.  The profit  earned is only notional.  There is no transfer of the goods and  the closing stock remains the opening stock of the next  accounting year.  The income which has not been derived at by  the assessee cannot be said to be the income chargeable for  income and, therefore, the rejection of the accounts maintained  by the assessee for the valuation of the closing stock by the  assessing officer and confirmed by the High Court is in  accordance with law.  The power exercised by the assessing  officer under Section 145 is as per the principles enunciated by  various authorities and the  courts.  We do not find any good or  sufficient reason to interfere with the order passed by the High  Court. The appeal is dismissed with no order as to  costs.