Closing stock of incentive sugar is to be valued at levy price and not at cost – SC

Profits of the business could only be ascertained by comparison of assets and liabilities of the business at the opening and closing of the accounting year. The method that an assessee adopts for closing is an integral part of accounting, within the meaning of Section 145. There are different methods of valuation of closing stock. The popular system is Cost or Market, whichever is lower. However, adjustments may have to be made in the principle having regard to the special character of assets, the nature of the business, the appropriate allowances permitted etc. to arrive at taxable profits. In the present case, it is the case of the assessee, that following the judgment of this Court in Ponni Sugars and Chemicals Ltd. (supra) the closing stock of incentive sugar should be allowed to be valued at levy price, which on facts, is found to be less than the cost of manufacture of sugar (cost price). We find merit in this contention. In Ponni Sugars and Chemicals Ltd. (supra), this Court, on examination of the Scheme, held that, the excess realization was a capital receipt, not liable to be taxed and in view of the said judgment, we hold, that the assessee is right in valuing the closing stock at levy price. As stated, in certain cases, adjustments may have to be made having regard to the special character of assets, the nature of the business, the appropriate allowances permitted etc. in order to arrive at taxable profits. The position would have been different, if as in the case of Sahney Steel and Press Works Ltd. (supra) this Court on examination of the relevant scheme in question held that such excess amount was a revenue receipt. This judgment, therefore, is confined to the Sampat Committee Report which has provided incentives in the form of price and duty differentials [see para 13 of the judgment in Ponni Sugars and Chemicals Ltd. (supra)]. In the present case, if the closing stock of incentive sugar was to be valued at any figure, above the levy price, the direct consequence of such a valuation would have been that the excess amount over the levy price would be reflected as part of business income which would run counter to the judgment of this Court in Ponni Sugars and Chemicals Ltd. (supra).