TMI Blog2002 (6) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... ntants in valuing such profits. The AO, however, did not agree with the contention raised by the assessee. According to the AO, the assessee is maintaining the books of account on mercantile basis. Therefore, the accrued profits as on the last day of the accounting year should also be determined especially in view of the fact that the assessee has been claiming the loss also on certain contracts. Such loss has been allowed to it as deduction in appeal in earlier years. Thus, the AO is of the opinion that the amount of profit should also be brought to tax. The AO referred to the guidelines issued by the Foreign Exchange Dealers Association of India to its Members regarding the method of accounting to be followed with respect to such forward contracts wherein it has been suggested that the unrealised profits should be booked as profits at the end of the previous year in question. According to the AO, the guidelines issued by the Foreign Exchange Dealers Association of India are of greater relevance to a bank rather than the guidelines of the Institute of Chartered Accountants. The AO also referred to the Supreme Court decision in the case of CIT v. British Paints India Ltd. [1991] 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the valuation of such securities is accounted for in the books of account which is allowable as deduction while computing the business income. He pointed out that it was not the anticipated loss for the future period but an ascertained loss accrued in the year ending on 31-3-1991. The learned Counsel further pointed out that the assessee had consistently followed the method of accounting of adopting the loss on the valuation of securities at the year end at cost or market price, whichever is lower. The learned Counsel referred to the Supreme Court decision in the case of A.L.A. Firm v. CIT [1991] 189 ITR 285 wherein it has been laid down that the stock in trade has to be valued as per the normal principles of accountancy i.e. cost of market price, whichever is lower. The learned Counsel referred to the order of the Bombay Tribunal in ITA No. 7251/Bom./91 for the assessment year 1989-90, dated 15th October, 1999 in the assessee's own case, especially he invited our attention to pages 22 to 26 and contended that the deduction in respect of loss on valuation of securities has been allowed by the Tribunal. The learned Counsel also referred to the order of the Mumbai Tribunal in IT App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocedure in operation from the quarter commencing on 1st October, 1988. The learned DR, thus, contended that the assessee bank has not followed the accepted method for valuation of profit/loss unlike other banks. The learned DR argued that profits and losses should be treated in a like manner. He also contended that in the case of banks, the method and procedure suggested by the RBI has to be given a higher priority than that recommended by the Institute of Chartered Accountants. The learned DR also invited out attention to the order of the Bombay Bench of the Tribunal in ITA No. 7251/Bom./91 for the assessment year 1989-90, dated 15th October, 1999 in e assessee's own case, especially para 26 and argued that outstanding foreign exchange forward contracts constitute stock in trade of the bank, therefore, the same has to be valued at the end of the previous year as per the accounting principles. The learned DR referred to the decision of the Madras High Court in the case of CIT v. Indian Overseas Bank [1985] 151 ITR 446 wherein the Hon'ble High Court has held that "It cannot be disputed that as against the profits earned in the accounting year, only the actual loss incurred can be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 1991 issued by the CBDT. Para 2 of the Circular reads as follows: "The matter has been considered by the Board and it has been decided that the securities must be regarded as stock in trade by the bankers. Therefore, the claim of loss if debited in the books of account, would be given the same treatment as is normally given to the stock in trade. So far as the second issue is concerned, both the interest payment and receipts must be regarded as revenue payments/receipts and only the net interest on securities shall be brought to tax as business income." The learned DR also argued that the securities are not stock in trade as has been laid down by the Supreme Court in the case of Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541. The Hon'ble Supreme Court held that "Where the assessee purchases securities at a price determined with reference to their actual sales, the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay and no part of it can be set off as an expenditure against the income by way of interest received on the securities." The learned DR pointed out that the securities have been shown in the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities had not disputed the fact that the securities form part of stock in trade of the assessee bank and that it had suffered a loss due to fall in the value of the securities. The quantum of loss was also not disputed. The assessee had not written off the loss in its books of account but was not relevant. Ignoring the loss would result in distortion of the real income of the assessee during the relevant year. The Tribunal was justified in approving the change of the method of valuation of stock". The CBDT in their Circular No. 599, dated 24th April, 1991 has also clarified that the securities must be regarded as stock in trade by bankers. Consequent upon the judgment of the Supreme Court in the case of Vijaya Bank Ltd., the circular was withdrawn by issuing a Circular No. 610, dated 31st July, 1991. However, the CBDT issued a fresh Circular NQ. 665, dated 5th October, 1993 clarifying that the AO should determine on the facts and circumstances of each case as to whether any particular security constitute stock in trade or investment, taking into account the guidelines issued by the RBI in this regard from time to time. In the case of the assessee for the assessment year 1989-90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent profits from the contracts to the extent not settled as on the last day of the accounting year whereas any loss on such contracts is provided for by a charge in the profit and loss account on the best estimates. The learned Counsel during the course of hearing brought to our notice that the assessee is valuing the closing stock at cost or market price, whichever is lower. He, further contended that each currency is a different stock, therefore, they are being valued separately. According to him, where there is a loss, the assessee is taking into account, the market value of the securities because the same is less than the cost. Where there is a profit, the assessee is taking into account the cost because the same is less than the market value. Thus, according to him, only loss is accounted for in the books of account and not the profit. 18. In our opinion, the method adopted by the assessee for valuing the closing stock is not as per the accounting principles. The bank is dealing in currency only. As per the provisions of Banking Regulation Act, the holding of securities by a bank is obligatory and that a substantial portion of the assets of the banking company must be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost or market price, (iii) a method of accounting adopted by the taxpayer consistently and regularly cannot be descarded by the departmental authorities on the view that he should have adopted different methods of keeping accounts or of valuation (iv) the concept of real income is certainly applicable in judging whether there has been income or not but in every case, it must be applied with care and within the recognised limits, (v) whether the income has really accrued or arisen to the assessee must be judged in the light of reality of the situation, (vi) under section 145 of the Act, in a case where accounts are correct and complete but the method applied is such that in the opinion of, the ITO, the income cannot be properly deduced therefrom, the computation shall be made in such a manner and on such a basis as the ITO may determine. In the present case, the assessee has valued part of the securities at cost and the remaining part at market value. This method employed by the assessee is such that taxable income of the assessee cannot be properly determined. Therefore, the learned DR has rightly pointed out that the method of valuation of closing stock of securities is defective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defective system of accounting though the same was regularly employed by the assessee, the correctness of which has not been questioned in the past. Under the circumstances, we do not find any infirmity with the findings of the learned CIT(A). 20. We would not like to refer the various cases relied upon by both the parties. In the case of Indian Overseas Bank relied upon by the learned DR, the Madras High Court held that notional or anticipated loss cannot be allowed as deduction. But in the present case, the issue involved is regarding valuation of the closing stock of investment. There is no dispute regarding the fact that the securities held by the assessee bank constitute stock in trade. This case is, therefore, not relevant to the facts of the present case. The case of Karam Chand Thapar Bros. (P.) Ltd. relied upon by the learned DR is not relevant to the facts of the present case as the above case pertains to the business of coal mining and the Court held that the loss is not allowable in the earlier years as the same was sustained in the subsequent year. In the present case, we are dealing with banking company and the securities held by the bank is a stock in trade. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l profit. Similarly, the decision of the Tribunal in the case of Brockhoven BV does not help the assessee as the issue of notional profit has not been considered in this case also. Similarly, in the case of Bank of Tokyo Ltd relied upon by the learned Counsel, the issue of notional profit has not been considered. Therefore, this case is also not relevant for deciding the issue in the present case. Similarly, the other cases relied upon by the learned Counsel have no relevance to the facts of the present case. 21. In view of the discussion in the aforesaid paragraphs, we confirm the addition of Rs. 1,90,07,000 being unrealised profits on unexecuted foreign exchange forward contracts. The findings of the learned CIT(A) are, therefore, upheld. In view of our specific findings, the alternative ground taken up by the assessee that unrealised profits of Rs. 1,90,07,000 and unrealised losses of Rs. 64,98,000 on unexecuted foreign exchange forward contracts as on 31-3-1991 be excluded while computing the total income of the assessee does not survive and the same is not considered. 22-29. [These paras are not reproduced here as they involve minor issues.] - - TaxTMI - TMITax - Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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