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TMI Blog1961 (3) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... d shares as part of its stock-in-trade or circulating capital. These securities and shares were all along valued at cost both at the commencement and at the close of each year of account. In 1950 the assessee bank claimed a loss on the basis of the fall in the market prices, but without changing the basis of valuation it had all along adopted and without any entries in its books of account. That claim was disallowed in the assessment year 1951-52. The fall in the market prices of the securities which began in 1950 continued in 1951, and to a lesser extent in 1952. To meet that abnormal fall the Reserve Bank allowed the scheduled banks to value their holdings of securities at the current market prices and adjust the resulting loss against the current profits or against the amounts permitted to be drawn from the statutory reserves. The assessee bank valued the securities at cost at the commencement of 1951, but valued them at the. market value at the end of 1951. The market value was considerably lower at the end of 1951. The difference was Rs. 5,91,250, which the assessee bank claimed as a trading loss in the assessment year 1952-53. Consistent with the valuation at the end of 1951 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually have been sold at the incorrect figure.........From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question." Their Lordships proceeded: "While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the department submitted that the mode or method of valuing the closing stock was a method of accounting within the meaning of section 13. Section 13 permitted an assessee to choose his method of accounting. But what section 13 required was that that method of accounting should be regularly employed. The further submission of the learned counsel was that arbitrary changes at the will of the assessee would be inconsistent with the statutory requirement of regular employment of the chosen method of accounting, and therefore no change from a system of accounting regularly employed in the past was ever permissible. We accept as correct the contention of the learned counsel for 'the department, that the method an assessee adopts for valuing his closing stock is a "method of accounting" within the meaning of section 13. At any rate, it is an integral part of the method of accounting known as the mercantile system of accounting, as it is normally understood. It was the mercantile system of accounting that the assessee bank consistently adopted. It was on that basis the accounts were maintained in the relevant years of account 1951 and 1952. Therefore, as part of that system or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been repeatedly pointed out by courts, it is the assessee and not the department that has the choice of the method of accounting. The department is bound by the choice of the assessee, except in the cases specified in the proviso to section 13. The method of accounting chosen by an assessee can be rejected by the department if it was not regularly employed. Even if it was established to have been regularly employed by an assessee, the department can reject the accounts as the basis for the computation of the income of the assessee, if the income cannot be properly deduced from the accounts based on the system of the assessee's choice. Section 13, however, does not expressly or impliedly sanction a rejection of the assessee's accounts, if nothing more is established than that the assessee has changed his method of accounting. If an assessee bona fide changed, his method of accounting and satisfied the requirement of regular employment thereafter of that changed method of accounting, the only basis for the rejection of the accounts would be that the income, profits and gains could not be properly deduced from the accounts maintained on the basis of the changed method of accounting. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim to have his profits assessed on the changed basis of valuation was upheld by the court. The learned counsel for the department relied on the observations of the Privy Council in Commissioner of Income-tax v. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56 and extracts from which we set out earlier in another context. That however is not authority for the proposition for which the learned counsel contended, that no change is ever permissible, in the sense that a change in the method of accounting with nothing more brings into play the proviso to section 13. The learned counsel for the department next referred to a decision of the Hyderabad High Court, Vithal Reddi v. Hyderabad Government ILR [1953] Hyd. 326. The same learned judges reaffirmed their views in Commissioner of Income-tax v. Sri Kishenlal Badrilal [1956] 29 ITR 443 (Hyd.). In Vithal Reddi's case (supra) the method of valuation of the closing stock adopted by the assessee was changed in the last of the chargeable accounting periods the fifth, with reference to which he had to be assessed to excess profits tax. The learned judges held that the assessee was not entitled to change the basis of his valuation. Though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of valuation of the closing stock, viewed either as a method of accounting by itself or as an integral part of a method of accounting ? In other words, while the assessee can exercise more than once his option to choose his method of accounting as a whole, can he be denied the right to exercise his right a second time to choose the method of valuing his closing stock, provided, of course, the change is bona fide and he further satisfies the statutory requirement of section 13 that the new or changed system of valuation is for regular adoption and not merely for purposes of assessment in the year in question ? As we said, we accept as sound the principle laid down in Sarupchand v. Commissioner of Income-tax [1936] 4 ITR 420 (Bom.). Extending that principle to changes in the method of valuation of closing stock, the position we reach is that an assessee is entitled to change his method of valuation, provided it is bona fide and provided further it is a method of valuation for regular employment by the assessee and not merely for the year in question. In other words, a change in the method of valuing the closing stock under such circumstances does not entail a rejection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 30 would be the anticipatory loss, on which a claim for deduction could be based. If in 1952 there is a further fall from Rs. 70 to Rs. 60 and the securities are sold at the market value of Rs. 60 all that could be claimed as loss is Rs. 10, the difference between Rs. 70 and Rs. 60. If, however, the market value registers a rise, and the security is sold at a market value of Rs. 110, the assessee bank would be assessed to a realised profit of Rs. 40 the difference between Rs. 60 and the book value, Rs. 70. If the sale is at a market value of Rs. 75, five rupees which constituted the difference would be treated as a profit in 1952 though the sale was below the original cost price. It should be remembered that stock-in-trade are not held permanently but are held only for sale. When securities are treated as part of the stock-in-trade of a bank, that they are not so quickly sold makes no difference in principle. The hypothetical example we have given above would show that neither the department nor the assessee really loses by a change in the system of valuation when the trading operation of a series of years is taken into account, as they should be. The Tribunal held that a cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner. He rejected it. Independently of section 15C(4), the Appellate Assistant Commissioner directed a deduction of Rs. 7,122 from Rs. 40,856 in the assessment year 1952-53. It was really the claim for the balance that could have been in issue before the Tribunal. In rejecting the assessee's claim the Tribunal recorded : "The exemption granted under section 15C(4) should in our opinion originate from the company in whose proceedings alone the question of any application of the benefits of section 15C to which it may be due, could be considered on its merits .... So long as the assessee is unable to obtain a proper certificate, from the cement company that its dividends or any part thereof was exempted under section 15C the benefit conferred by section 15C(4) is not available to it." In our opinion the Tribunal was not right in holding that unless the company that declared the dividends took the initiative to claim relief under section 15C(1), no shareholder could claim the benefit conferred on him by clause (4) of section 15C. Nor is the production of a certificate granted by the company that it had in fact obtained relief under section 15C(1) a statutory requirement for the gran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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