2018 (6) TMI 1475 - HC - Income Tax

Accounting principle being followed by the assessee bank for valuation of stock - determination of real income - Tribunal held that the assessee is not entitled to value the shares and securities which were held to be its stock in trade on the basis of the cost or market price whichever is lower as claimed in the return - Held that - On an appreciation of the case of The United Commercial Bank case 1999 (9) TMI 4 - SUPREME COURT it clearly appears that the court stressed on the determination of real income rather than theoretical principles of accountancy. It says that if the securities and shares were valued at cost and from that no firm conclusion could be drawn a tax payer was free to employ his own method of keeping accounts to value the stock in trade whether at cost or market price. Then it went on to say that the emphasis was on determination of real income. Again it observed that where from the computation the real income could not be properly deduced the computation should be made in the manner determined by the Income Tax officer. We think that the computation made by the assessee for the subject assessment year does not disclose the real income and that changing the method of valuation of closing stock to cost or market price whichever was lower would determine the income correctly.

Summary

Issues:
- Valuation of closing stock of shares and securities for income tax return purposes based on cost or market price.
- Application of accounting principles to compute profit and loss in the context of Reserve Bank of India's directives to banks.
- Consistency in valuation methods for stock-in-trade and real income determination.

Analysis:
The judgment by the High Court of Calcutta involved a reference application under Section 256(1) of the Income Tax Act, 1951, where the applicant sought answers to questions arising from the Income Tax Appellate Tribunal's order related to the valuation of shares and securities in the assessment year 1990-91. The central issue revolved around whether the assessee could value closing stock on the basis of cost or market price, considering the Reserve Bank of India's directives to banks regarding investments in securities and shares.

The bank, following a practice of valuing stock-in-trade at cost for statutory balance sheets and at cost or market value for income tax returns, faced discrepancies due to falling share prices. The tribunal initially ruled against the assessee's claim for a different valuation method, citing a previous decision. However, the Supreme Court later clarified that a taxpayer could value closing stock at cost or market value, emphasizing the determination of real income and the taxpayer's freedom to choose accounting methods.

The court highlighted the importance of determining real income over theoretical accounting principles, stressing that the method of valuation should reflect the actual income earned. It concluded that changing the valuation method to cost or market price, whichever is lower, would lead to a more accurate income determination. Consequently, the court set aside the tribunal's order on the accounting method for stock valuation and directed its revision based on the judgment.

In a similar case (ITR 19 of 1999), the court reiterated the judgment's application to both reference applications and directed the tribunal to revise its order accordingly within three months. Both reference applications were disposed of, emphasizing the importance of consistency in valuation methods for stock-in-trade and the accurate determination of real income for tax purposes.