2021 (11) TMI 628 - AT - Income Tax

Valuation of investments held as stock in trade - whether the loss of in account of valuation of stock can indeed be allowed as a deduction in computation of business income? - HELD THAT - Right from Hon'ble Supreme Court's landmark judgment in the case of Chainrup Sampatram 1953 (10) TMI 2 - SUPREME COURT the law is very well settled, duly recognizing the principle of conservatism embedded in the accountancy practices, that if there is any anticipated loss, whether crystallized or not the same is to be allowed as the deduction while anticipated profits are not be taken in to account for this purpose. Whether the loss is crystallized or not as long as it can be reasonably anticipated, on the basis of the situation as it prevails at the year end, which is what is reflected by the fall in value of stock indicates, the same is taken in account for computation of business loss. In the case of United Commercial Bank 1999 (9) TMI 4 - SUPREME COURT Hon'ble Supreme Court has taken notes of this foundational legal position and held that loss on all in value of investments which are held as stock and trade by the bank constitute and admissible deduction. The the action of the Assessing Officer, which has been upheld by the learned CIT(A) in a very mechanical manner without application of mind, cannot meet our judicial approval. We reverse the stand of the authorities below, and direct the Assessing Officer to delete the impugned disallowance - Decided in favour of assessee.

Issues:
- Correctness of order by CIT(A) in assessment under section 143 r.w.s. 263 for AY 2010-11
- Disallowance of valuation loss in securities held as Available for Sale and Held for Trading
- Treatment of appellant as a Banking Company under Banking Regulation Act
- Non-compliance with CBDT instructions on depreciation of securities
- Disallowance of deduction under section 37 for loss on securities valuation
- Treatment of loss on securities valuation as provision for unascertained liabilities
- Classification of investments in government securities by banks
- Treatment of valuation loss on securities as loss on conversion
- Adjudication on appeal against addition of ?4,02,87,000 for valuation loss

Analysis:

1. The appellant challenged the correctness of the CIT(A) order regarding the assessment for AY 2010-11. The primary grievance was the disallowance of valuation loss in securities held as Available for Sale and Held for Trading. The Assessing Officer disallowed the claimed deduction, stating it was a provision and notional loss, hence not allowable under section 37 of the Income Tax Act, 1961.

2. The appellant argued that the loss on securities valuation should be allowed as a deduction in the computation of business income. The Assessing Officer's decision was based on the premise that investments in government securities by banks cannot be treated as stock in trade, and any loss on conversion of securities from one category to another is not deductible.

3. The appellant contended that the loss on securities valuation should be treated as a provision for unascertained liabilities and not merely a notional loss. The CIT(A) upheld the Assessing Officer's decision without addressing the appellant's arguments, leading to the appeal before the ITAT Mumbai.

4. The ITAT Mumbai analyzed the legal position on the allowability of deductions for fall in the value of investments held as stock in trade. Referring to landmark judgments, including Chainrup Sampatram vs. CIT and United Commercial Bank vs. CIT, the ITAT emphasized the principle of conservatism in accounting practices. It highlighted that anticipated losses, whether crystallized or not, should be allowed as deductions.

5. The ITAT Mumbai observed that the Assessing Officer and CIT(A) did not dispute the admissibility of the loss on securities valuation. The revision order by the CIT focused on non-examination of details rather than the inadmissibility of the deduction. Therefore, the ITAT reversed the decision of the authorities and directed the Assessing Officer to delete the disallowed amount of ?4,02,87,000, providing relief to the appellant.

6. The judgment underscored the importance of consistent accounting practices and the recognition of real income for tax purposes. It clarified that the method of valuing stock-in-trade at cost or market value, whichever is lower, is permissible under the law. The ITAT emphasized that the appellant's long-standing practice of valuing investments at cost for statutory balance sheets and at cost or market value for income tax returns should be accepted by the tax authorities.

7. In conclusion, the ITAT Mumbai allowed the appeal, highlighting the necessity of considering the real income and consistent accounting methods in determining deductions for losses on securities valuation. The judgment provided a detailed analysis of legal precedents and accounting principles to support the appellant's claim for deduction.

← Previous Next →