1991 (7) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC).
2. Admissibility of notional loss in investment trading for deduction from book profits.

Summary:

Issue 1: Applicability of State Bank of Travancore v. CIT
The Tribunal held that the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) is not applicable to the present case. The High Court agreed, noting that the Supreme Court in State Bank of Travancore dealt with the accrual of interest on "sticky" advances, which is different from the issue of stock valuation in the current case. The High Court emphasized that income must be computed based on the regular method of accounting followed by the assessee.

Issue 2: Admissibility of Notional Loss in Investment Trading
The High Court examined whether the notional loss of Rs. 7,45,35,029 due to the revaluation of shares and securities should be deducted from the book profits of the assessee-bank. The court noted that the assessee-bank consistently valued its investments at cost or market value, whichever is lower, for income-tax purposes but did not reflect this in its final accounts. The court held that the method of stock valuation is part of the method of accounting, and the assessee cannot claim a different method for tax purposes without adopting it in its books of account. The court cited several Supreme Court decisions, including Investment Ltd. v. CIT [1970] 77 ITR 533 and CIT v. British Paints India Ltd. [1991] 188 ITR 44, to support its conclusion that the method of accounting must be consistently followed.

The High Court concluded that the assessee-bank's claim for a notional loss based on a different method of stock valuation for tax purposes alone is not permissible. The court answered both questions in the negative and in favor of the Revenue, stating that the assessee must follow the same method of stock valuation in its books of account and for tax purposes.

Conclusion:
Both questions were answered in the negative and in favor of the Revenue. The court emphasized the importance of consistency in the method of accounting and stock valuation for both book-keeping and tax purposes. There was no order as to costs.