Srinivasan, J.:— The assessee carries on the business of purchase and sale of snake skins. On 31-8-1953, at the end of the account year corresponding to the assessment year 1953–1954, he held a certain stock of snake skins. Of these, some varieties, including crocodile skins, were valued at Rs. 53,016. There were a number of other skins, Cobra, Virian, etc., which the assessee did not value at all. These had been purchased during the course of the account year. During that year, Cobra skins found a market upto February 1953, but other varieties, of which also the assessee carried a stock but upon which he did not place any value, admittedly had virtually no sales at all. During the course of the assessment proceedings, the assessee explained that, all these varieties of skins, including Cobra, virian and baby, were saleable only in America and England, that they had no market whatsoever in India and that his foreign agents and representatives had informed him that there were no buyers for these three varieties even abroad. He accordingly claimed that he was entitled to value this stock at “nil”. The Income-tax officer, however, rejected this plea. His view was that the assessee had obtained overdraft facilities from the banks on the security of these skins as well, and that he further continued the purchase of these skins, though, according to him, the foreign market for these skins had either ceased to exist or was not brisk. He purported to value these varieties of skins at a total of Rs. 96,028. The result was that there was an assessment on a larger income.

2. This addition of Rs. 96,028 being the estimated value of unsaleable stock of snake skins, was objected to by the assessee in his appeal before the Appellate Assistant Commissioner. The assessee reiterated his plea that he had to make the purchases of these skins in a lot along with other skins, and pointed out that was the practice in the trade. The Appellate Assistant Commissioner, however took the view that though the demand for a particular commodity may fall off temporarily, or even for a protracted period, it cannot be a sufficient reason to ignore the value of the stock. He observed:

“It is the time factor which determines the ultimate value of unsold stocks, and as the years go by, the value gets written off by the continuous process of valuation at lower rates and still lower rates”.

3. He also thought that the explanation that the assessee was compelled to purchase these skins cannot be said to be satisfactory. He accordingly sustained the addition. In the further appeal to the Tribunal, it was pointed out that the accepted mercantile practice of valuing the closing stock at either the market rate or cost, whichever was lower, had been ignored by the authorities below. It was also pointed out that the overdraft from the bank was on the security not of these unsaleable skins but of the tannery, buildings, and closing stock, hides and skins, etc., to the value of nearly Rs. two lakhs. Correspondence was produced before the Tribunal to show that there was no market for these varieties of skins definitely after February 1953. The tribunal accepted the assessee's case as true “to a certain extent”, for it found that the turnover of the assessee had fallen from Rs. 25 lakhs to about Rs. 6 lakhs. It also agreed that snake skins could not last indefinitely. Even if there was no market for these skins, the Tribunal thought that the assessee could not abruptly place “nil” valuation upon them. It proceeded to observe:

“After some lapse of time, when it has become clear beyond reasonable doubt that these skins were only dead stock and would not move due to falling off of demand in western countries, it would be open to the assessee, on accepted principles of accountancy, to treat them at the proper valuation at that time; but even then, for treating it as having no value, there must be evidence to show that at the relevant time efforts were made to sell the skins at least locally, find out market value and value the goods at that rate. Of course, it is difficult for a merchant who had great expectations of profit by export to try to sell them locally either for cheap or nominal prices. This the assessee had not done. To permit him to precipitately say that they had no value on the 31st March, 1953 would open the door for showing these very goods as obsolescent and then sell them later without bringing the profit into the books…. Even otherwise, if the assessee had thought that on 31-3-1953 these had become useless, in the normal parlance, he should have written it off. That he has not done so would support the view we have taken above……..”

4. The Tribunal thereafter proceeded to value the skins at somewhat lower rates than, those adopted by the Income-tax Officer, and determined the value of this part of the closing stock at Rs. 43,708.

5. On the directions of this Court under section 66(2) of the Income-tax Act, the following question stands referred to us:

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in valuing the closing stock of the unsold snake skins at Rs. 43,708?”

6. It seems exceedingly difficult to accept the reasoning adopted by the Tribunal in justifying the addition. The Tribunal purports to hold that if the assessee had written off this stock, he would have been justified in doing so. It accepts also the position that the fancy market for snake skins had disappeared, as is strongly supported by the circumstance that the turnover had fallen from Rs. 25 lakhs to Rs. 7 lakhs (sic). The reference to well accepted principles of accountancy that the assessee could reduce the value or place “nil” value only after some lapse of time when it became clear that the skins were only dead stock, in fact, supports the very action taken by the assessee. It has been found as a matter of fact that in so far as Virian and Baby skins are concerned, during the whole of the previous year, only Rs. 12 worth of the first variety and Rs. 112 worth of the second variety could be sold. In the case of Cobra skins, against the total purchases of nearly two lakhs of skins, the assessee had been able to sell till February about 1,70,000 skins, and, according to the correspondence which he produced, there had been no demand for these skins subsequently. It also seems to be accepted by the Tribunals below that there was no local market for snake skins of any variety.

7. The question is, whether, in these circumstance, the assessee in the normal course of its accounting is not entitled to value the price of the skins at the market price which, in the present case, happens to be “nil”. We are also unable to see how revenue is affected by this method of valuation. If these skins which are valued at “nil” happen to find purchasers in the next accounting year, it is obvious that the entire sale value will figure as a profit in the books and the assessee would have to pay tax on the entire sale value and not only on the difference between the sale value and the purchase value. Indeed, in the contingency of these skins finding a sale, it is revenue that would stand to gain. The observation of the Tribunal that this method of permitting him to value the goods “would open the door for showing these very goods as obsolescent and then sell them off later without bringing the profits into the bosks” is wholly uncalled for. It seems to suggest that the Tribunal found the assessee's intention to be to make a concealed profit by the sale of the goods in subsequent years. It is unfortunate that the Tribunal should have indulged in such uncalled for aspersions on the assessee's integrity.

8. In the Commr. of Income-tax v. Chari and Ram, (1949) 17 ITR 1 : (AIR 1949 Mad 580), it has been laid down that the accepted basis of valuation of stock is cost or market value, whichever is lower. In that case, the method followed by the assessee was to take the average cost of or market value in respect of each separate article of the stock. The average cost of the opening stock was in respect of all the items lower than the market rate, and so the assessee valued the opening stock at the average cost price. At the time of valuing the closing stock with regard to some of the articles, the market rate was lower and with regard to others, the market rate was higher than the average cost. The assessee took the average cost of these classes of articles separately for the purpose of valuing the closing stock. In one case he took the average cost where it was lower than the market rate and in the other he adopted the market rate where it was lower than the average cost. This was objected to by the Department. The learned Judges upheld the assessee's contention. They pointed out that this was an accepted principle which was obviously intended to be in favour of the trader in order to enable him to more evenly distribute his loss.

9. In Ramswarup Bengalimal v. Commr. of Income-tax, (1954) 25 ITR 17 : (AIR 1954 All 665), this right of the assessee to value the closing stock either at cost price or at the market price, whichever is lower, was affirmed. In that case, the assessee had been valuing his stock at cost price for several years. But, in the assessment year which was under reference, he valued the stock at the market rate, as it was lower than the cost price. It was pointed out that there was no proof that this was a variation of the method of accounting which the assessee had been following, and the decision in (1949) 17 ITR 1 : (AIR 1949 Mad 580) was followed. In Chhanilal Pragdas v. Commr. of Income-tax, (1957) 31 ITR 597 : (AIR 1957 All 580.), this principle was again affirmed. While it was pointed out that the assessee could not place an arbitrary value on the stocks, it was held that stocks must be valued either at cost price or at market price.

10. There seems to be no quarreling with the question of fact that there was no market for these skins either locally or abroad. Locally it is certain there was at no time any market, and the observation of the Tribunal that the assessee should have tried to sell them locally is certainly un-understandable in the context of the evidence. It is for the trader to ascertain what avenues for the sale of the goods are open to him, and if he shows that as far as his connections establish, there was no prospect of the sale of the goods, for there was no demand, it is not for the Income-tax department to order the mode of carrying on the business of the trader. For instance, when the only market for these skins was in the United Kingdom and United States all these years and if that market fell off, the Income-tax Officer cannot ask the assessee why he could not have sold the skins in other foreign countries. This is virtually the stand taken by the Tribunal. As we have also pointed out, if the assessee should gain in initial advantage by valuing his closing stock at “nil”, he is bound to value these goods at the same value in his opening accounts of the succeeding year of account, so that any sale of the goods, in that year would result in the entire sale price being treated as profit liable to tax, clearly an advantage to revenue. Even apart from that, it is settled law that the assessee has a right to value his closing stock at cost price or market price, whichever is lower, and in the present case, there is no doubt that the market price was “nil”. The question is, therefore, answered in the negative and in favour of the assessee, who will be entitled to his costs. Counsel's fee Rs. 250.

BI/LGC/DVC.

11. Answer in negative.