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2005 (3) TMI 384 - AT - Income TaxBusiness Loss Or Deduction - difference between the cost price and the market value of securities - Whether change in the method of valuation of closing stock of securities could be accepted by the Department - HELD THAT - It is also not in doubt that the same method of valuation of closing stock has been followed in all the subsequent assessment years. There is no allegation of the Department that change in method of valuation of the closing stock was not bona fide or was with an intention of evading the tax. Now only question that requires to be considered whether such bona fide change in the method of valuation of closing stock which has been consistently followed in the subsequent assessment years could be allowed and accepted. This issue was considered by the Delhi High Court in the case of Bharat Commerce Industries Ltd. 1999 (8) TMI 41 - DELHI HIGH COURT where it was held that change in the method of valuation of stock is permissible if it is bona fide and the same method is regularly followed thereafter. Loss arising on account of revaluation of stock as per changed method was held to be allowable. The Hon'ble Kerala High Court also considered this issue in the case of Corporation Bank Ltd. 1964 (10) TMI 7 - SUPREME COURT . In this case, the assessee used to value the securities at cost price in the earlier years. However, by changing the method, the assessee started valuing the securities at market price for the reasons that the securities formed stock-in-trade of bank and the bank had incurred loss due to its fall in value. Loss arising on account of change in the method of valuation was not written off in the books of account. On these facts, the Hon'ble Kerala High Court held that writing off of loss was irrelevant and the assessee was justified in changing method of value of stock. While taking such a view, the Hon'ble High Court also referred to the judgment of Apex Court in the case of Chainrup Sampatram v. CIT 1953 (10) TMI 2 - SUPREME COURT , where it has held that change in the method of valuation of stock can be accepted if such change was bona fide and was, thereafter continued year after year. In the case of Indo Commercial Bank Ltd. 1961 (3) TMI 77 - MADRAS HIGH COURT on identical facts, Madras High Court held that change in method of valuation of securities at market price was justified and resultant loss was allowable. It is not the charge of the Revenue that the same method of valuation was not followed in the subsequent assessment years or change in the method of valuation was not bona fide. Thus, respectfully following the ratio of various judgments cited, we are of the considered opinion that the learned CIT(A) was justified in accepting the change in the method of valuation of closing stock and allowing loss claimed by the assessee on account of revaluation of securities for the above mentioned assessment years. Thus, we do not find any merit in the submissions of the Revenue. We confirm the orders of the CIT(A) and reject the respective grounds of appeal of the Revenue for the various assessment years. We find from pages 13 to 16 of the assessment order for 1983-84 that out of embezzlement loss of Rs. 4.24 lakhs, the loss amounting to Rs. 40,000 had occurred and was detected in the accounting year under reference. However, the remaining loss of Rs. 3,84,000 relating to two other branches took place in the earlier assessment years and was also detected in the earlier assessment years. The attention of the ld. counsel was drawn to the findings recording by the Assessing Officer on page 14 of the assessment order. He could not controvert the findings recorded by the Assessing Officer which were based on the inspection of the relevant files. Thus, the learned CIT(A) was not justified in allowing embezzlement loss of Rs. 3.84 lakhs for the assessment year 1983-84. Accordingly, we set aside the order of the CIT(A) and restrict the deduction to Rs. 40,000 and confirm the disallowance of Rs. 3.84 lakhs. This ground of appeal is partly allowed. As regards, the assessment year 1984-85, the Assessing Officer has observed that in almost all the cases, such loss had occurred prior to the previous year. The learned CIT(A) held that only out of Rs. 3,90,975, embezzlement loss of Rs. 70,000 occurred and detected in the earlier year. This finding appears to be contrary to the finding recorded by the Assessing Officer. In any case, this is question of fact which can easily be verified, as relevant facts relating to this issue have not been placed before us. We accordingly set aside the order of the CIT(A) and restore the issue to the file of the Assessing Officer with the direction that the disallowance should be made only in respect of loss which occurred and was detected in the earlier/subsequent year. If the loss related to earlier year, what was detected in the assessment year under reference, the assessee would be entitled to claim deduction for the same. Needless to say that the assessee shall be allowed reasonable opportunity while deciding the matter. We order accordingly. This ground of appeal is partly allowed for statistical purposes. In the result, the appeals for the assessment years 1983-84 and 1984-85 are partly allowed and appeals for the assessment years 1982-83, 1985-86, 1991-92 and 1988-89 are dismissed.
Issues Involved:
1. Deduction of loss on revaluation of securities. 2. Deduction of embezzlement loss. Issue-wise Detailed Analysis: 1. Deduction of Loss on Revaluation of Securities: The first common issue raised in all these appeals is whether the CIT(A) was justified in allowing the deduction of loss due to revaluation of securities as trading loss. The assessee, a banking company, changed its method of valuing securities from book/face value to cost or market price, whichever was less, starting from the assessment year 1982-83. This change resulted in a claimed loss of Rs. 2,24,54,054 for that year. The Assessing Officer disallowed this loss, arguing that the securities were capital investments, not stock-in-trade. The CIT(A) reversed this decision, stating that the securities were always treated as stock-in-trade by the assessee, and the change in valuation method was bona fide and consistent with the Banking Regulation Act. The CIT(A) observed that the change aligned with the requirement to consider the market value of securities for maintaining the statutory liquidity ratio. The CIT(A) cited various judgments, including those from the Kerala High Court and ITAT Chandigarh Bench, supporting the view that securities held by banks are stock-in-trade and can be valued at cost or market price, whichever is lower. The Tribunal upheld the CIT(A)'s decision, emphasizing that the securities were integral to the banking business and constituted stock-in-trade. The Tribunal noted that the change in the method of valuation was bona fide, consistently followed in subsequent years, and aligned with accepted accounting principles. The Tribunal cited several judgments, including those from the Supreme Court and various High Courts, supporting the view that securities held by banks are part of their stock-in-trade and that a bona fide change in the method of valuation is permissible. 2. Deduction of Embezzlement Loss: The second issue pertains to the deduction of embezzlement loss for the assessment years 1983-84 and 1984-85. The assessee claimed embezzlement losses of Rs. 4,24,000 for 1983-84 and Rs. 3,20,000 for 1984-85. The Assessing Officer disallowed these claims, arguing that the losses were premature as the matters were pending in court and some losses occurred in earlier years. The CIT(A) allowed the claims, stating that the losses were detected in the respective assessment years and were incidental to the assessee's business. The CIT(A) relied on Supreme Court judgments and CBDT instructions, which clarified that embezzlement losses should be allowed in the year they are discovered. The Tribunal partially upheld the CIT(A)'s decision for 1983-84, allowing a deduction of Rs. 40,000 but disallowing Rs. 3,84,000 as these losses were detected in earlier years. For 1984-85, the Tribunal remanded the issue to the Assessing Officer to verify the timing of the losses and allow deductions accordingly, emphasizing that losses should be allowed in the year they are discovered. Conclusion: The appeals for the assessment years 1983-84 and 1984-85 are partly allowed, while the appeals for the assessment years 1982-83, 1985-86, 1991-92, and 1988-89 are dismissed. The Tribunal confirmed the CIT(A)'s decisions regarding the deduction of losses on revaluation of securities and provided specific directions for the deduction of embezzlement losses based on the year of detection.
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