1961 (3) TMI 77 - HC - Income Tax

Method of accounting Valuation of stock Method of valuation for regular employment by assessee and not merely for year in question Held, yes Whether mere fact that option to value his closing stock either at cost price or market price exercised by assessee is detrimental to revenue can never be basis for denying him that option

Summary

Issues Involved:
1. Whether the losses arising from writing down securities to market price are deductible for the assessment years 1952-53 and 1953-54.
2. Whether dividends received from a company, no part of whose income is specifically exempted under section 15C, are exempt in the hands of the assessee under section 15C(4).

Detailed Analysis:

Issue 1: Deductibility of Losses from Writing Down Securities to Market Price

Relevant Facts:
The assessee bank, engaged in banking business, held securities and shares as part of its stock-in-trade, which were valued at cost until December 31, 1950. In 1950, the bank claimed a loss based on the fall in market prices without changing the valuation method or making entries in its books. This claim was disallowed for the assessment year 1951-52. The fall in market prices continued in 1951 and 1952. The Reserve Bank allowed banks to value securities at market prices and adjust the resulting loss against current profits or statutory reserves. The bank valued securities at cost at the beginning of 1951 and at market value at the end of 1951, claiming a trading loss of Rs. 5,91,250 for 1952-53. Similarly, for 1952, the bank claimed a loss of Rs. 18,491.

Department and Tribunal's Position:
The department declined to deduct these losses, arguing that the bank was not entitled to change the basis of valuation from cost to market value, as it would distort profits. The Tribunal agreed, stating that altering the basis of valuation would create anomalies and distort the determination of profits.

Court's Analysis:
The court acknowledged that an assessee has the option to value closing stock at cost or market value, whichever is lower, as established in Chainrup Sampatram v. Commissioner of Income-tax. The court emphasized that the option exercised by the assessee cannot be denied merely because it is detrimental to revenue. The court also recognized that the method of valuing closing stock is part of the method of accounting under section 13, which requires regular employment of the chosen method. The court cited Sarupchand v. Commissioner of Income-tax, which held that an assessee could change the method of accounting, provided it is bona fide and intended for regular adoption.

Conclusion:
The court found that the assessee bank's change in the method of valuation was bona fide and consistent with the Reserve Bank's permission. The court held that the requirements of section 13 were satisfied, and the change in valuation method did not violate any principles of revenue law. Therefore, the court answered the first question in the affirmative, in favor of the assessee.

Issue 2: Exemption of Dividends under Section 15C(4)

Relevant Facts:
The assessee bank received dividends of Rs. 40,856 and Rs. 10,690 from India Cements Ltd. in 1951 and 1952, respectively. The bank claimed these amounts were exempt from taxation under section 15C(4). The Appellate Assistant Commissioner rejected this claim, and the Tribunal upheld this decision, stating that the exemption should originate from the company and that the assessee needed a certificate from the company confirming the exemption.

Court's Analysis:
The court noted that section 15C(4) exempts dividends paid out of profits that are exempt from tax under section 15C(1). The court found that India Cements Ltd. had no assessable income in the relevant years due to depreciation allowances, and thus, there were no profits exempt from tax under section 15C(1). Consequently, the dividends received by the assessee bank could not be attributed to profits exempt under section 15C.

Conclusion:
The court held that the assessee bank failed to satisfy the requirements of section 15C(4) as the dividends were not paid out of exempt profits. Therefore, the court answered the second question in the negative, against the assessee.

Costs:
The court directed both parties to bear their respective costs as neither side wholly succeeded on this reference.