JUDGMENT
Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred two questions of law to this court for opinion – one at the instance of the assessee and another at the instance of the Revenue. These questions are as follows :
At the instance of the assessee :
“1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the replacement cost for the purpose of valuing the closing stock of virgin raw materials for the year ended December 31, 1974, has to be determined with reference to the price announced by M. M. T. C. for the quarter ending December 31, 1974, and not with reference to the price announced for the quarter commencing on January 1, 1975 ?”
At the instance of the Department :
“2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in directing the Income-tax Officer to allow the loss to the extent of the difference between the price prevailing on August 27, 1974, and the ruling price on December 31, 1974 ?”
2. The assessee is a public limited company, engaged in the business of manufacture of copper and copper based alloys, strips and coils conforming to various specifications. Copper and zinc are the main raw materials for manufacturing these products. Virgin metals, i.e., copper, zinc and tin are obtained from canalised agencies like the M. M. T. C., Hindustan Copper Ltd. and Hindustan Zinc Ltd. The assessee had been valuing its closing stock on the basis of “cost or replacement cost’ whichever is lower. This method of valuation had been followed consistently by the assessee in the past including the accounting year relevant to the assessment year under consideration 1975-76. The companies who supplied the virgin metals, viz., M. M. T. C., Hindustan Zinc Co. publish the prices from time to time at which these metals would be available.
3. The accounting year of the assessee relevant to the assessment year 1975-76 was the calendar year ending on December 31, 1974. The assessee had purchased the above raw materials from the M. M. T. C. at the rate prevalent in the quarter ending December 31, 1974. At that rate, the valuation of the closing stock amounted to Rs. 1,19,29,040. the M. M. T. C. published its prices for the quarter commencing from January 1, 1975, which showed a reduction in the rate. On the basis of the price announced for the quarter beginning from January 1, 1975, the replacement cost of the above materials would be Rs. 93,38,175. The assessee adopted the replacement cost calculated at the rates declared for the quarter beginning from January 1, 1975, which was lower than the actual cost of the materials incurred by the assessee at the rates prevailing during the quarter ending December 31, 1974. The Income-tax Officer did not accept the above valuation. He determined the value of the closing stock at the rate prevalent in the quarter ending December 31, 1974. According to him, the actual cost incurred by the assessee was the true principle of valuation of the closing stock. On appeal, the Commissioner of Income-tax (Appeals) did not approve the above principle and held that the basis of valuation could be the actual cost of replacement cost, whichever is lower. He, however, did not accept the valuation of the closing stock made by the assessee on the ground that the said valuation was made at the price announced by the M. M. T. C. for the quarter beginning from January 1, 1975, whereas the stock was valued as on December 31, 1974. According to the Commissioner (Appeals), the prices effective on December 31, 1974, alone can be the basis for determining the replacement cost. He, therefore, held that for valuation of the stock as on December 31, 1974, the replacement price prevailing on that date has to be taken as the basis – not the rate announced for January 1, 1975, and onwards. The above finding of the Commissioner was approved by the Tribunal. Hence, the reference of question No. 1 at the instance of the assessee.
4. There was one more controversy in this case. The assessee had entered into a contract with M. M. T. C. on August 27, 1974, to purchase 49.981 kgs. of copper cathodes at the rate of Rs. 33,825 per M. T. The assessee opened an irrevocable letter of credit on September 28, 1974. However, till the last date of the accounting year the material was not received by the assessee. The M. M. T. C. announced the price of copper cathodes at Rs. 25,461 per M. T. for the quarter January to March, 1975. The assessee received the aforesaid material on March 12, 1975. As the market price of the copper cathodes on the date of receipt of the goods by the assessee was less than the contract price, the assessee made a provision amounting to Rs. 4,18,021 for the anticipated loss in the purchase contract representing the difference between the contract price and the market price on the date of receipt of the material. This amount was claimed as a deduction by the assessee in the computation of its income which was disallowed by the Income-tax Officer. The disallowance was affirmed by the Commissioner of Income-tax (Appeals). However, on further appeal by the assessee, the Income-tax Appellate Tribunal held that the provision for anticipated loss on purchase contract should be allowed to the extent of the difference between the price which was prevailing on the date of contract, i.e., August 27, 1974, and the ruling price at the end of the accounting year, i.e., December 31, 1974. The Tribunal directed the Income-tax Officer to recompute the amount accordingly and allow it as a deduction. The Revenue is aggrieved by the above finding of the Tribunal and has come to this court by way of reference of question No. 2.
5. So far as the first question, raised at the instance of the assessee, is concerned, we find that the Tribunal was correct in holding that the value of the closing stock of raw materials for the year ending December 31, 1974, has to be determined with reference to the price prevailing on December 31, 1974, and not with reference to the price announced for the quarter commencing from January 1, 1975. This is so because the closing stock has to be valued on the last date of the accounting year which in the instant case was December 31, 1974. The price of the raw material on that date was the same as the price prevailing on the date of purchase. The change took place only after the end of the accounting year, i.e., on January 1, 1975. Such change cannot affect the valuation of the closing stock on December 31, 1974. The Tribunal was, therefore, correct in holding that the closing stock of the accounting year ending on December 31, 1974, has to be valued at the rate prevalent on December 31, 1974, and not with reference to the rate announced for a period commencing thereafter. Accordingly, we answer the question referred to us at the instance of the assessee in the affirmative, i.e., against the assessee and in favour of the Revenue.
6. We now turn to the question referred at the instance of the Revenue. We find that under the contract in question now raw material was in fact purchased by the assessee during the relevant accounting year. The admitted position is that the assessee had merely entered into a contract on August 27, 1974, to purchase copper cathodes at certain rates. An irrevocable letter of credit was opened on September 28, 1974. However, till the last date of the accounting year, no material was received by the assessee. It was received only on March 12, 1975. On that date, according to the assessee, the price went down. On the basis of such change in the price that had taken place after the end of the accounting year, the assessee estimated the loss and made a provision for the same in the accounting year in which the contract had been entered into and claimed deduction for the same in computation of its income for that year. The Income-tax Officer disallowed the claim for deduction which was upheld by the Commissioner (Appeals). On further appeal by the assessee, the Tribunal, however, held that such loss to the extent of difference between the price prevailing as on the date of contract and the ruling price on the last date of the accounting year was deductible. Hence, this reference at the instance of the Revenue.
7. We have perused the order of the Tribunal. We, however, find it difficult to agree with the above conclusion of the Tribunal. It is clear from the facts that there was no closing stock of the material in the hands of the assessee. What was there was merely a contract with the M. M. T. C. to purchase the raw material at a future date. No payment was made by the assessee during the accounting year and no property therein passed to the assessee. In such a situation, the materials contracted to be purchased cannot be regarded as the assessee’s stock-in-trade and, therefore, cannot be valued in the accounts as such. We are, therefore, of the clear opinion that the assessee is not entitled to claim any anticipatory loss in such a case where he has merely entered into a contract for purchase of some raw materials and opened a letter of credit for that purpose but neither have the materials been received by him within the accounting year and nor had the property therein passed to him. In that view of the matter, we answer the question referred to us at the instance of the Department in the negative, i.e., in favour of the Revenue and against the assessee.
8. This reference is disposed of accordingly.
9. There shall be no order as to costs.