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TMI Blog1999 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... o questions for the opinion of the High Court under section 256(1) of the Income-tax Act, 1961, for the assessment year 1982-83 : 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the Commissioner of Income-tax order under section 263 of the Income-tax Act holding that the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), is not applicable to the facts of the present case ? 2, Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the notional loss in the investment trading (India) to the extent of ₹ 7,45,35,029 by working out a difference between the book value of shares as shown in the final accounts and their market price as on the last date of the accounts, is admissible to be deducted from the book profits of the assessee-bank ? The High Court answered both the questions in the negative and in favour of the Revenue and arrived at the conclusion that stock valuation of shares shown in the bank's final accounts could not be permitted to be revalued at market value for income-tax purposes only. The aforesaid questions arise in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly goes against section 145(1) of the Act. The court further observed that the book results can be rejected by the tax authorities only if the method adopted by the assessee is either defective or if the system adopted does not disclose a proper and true income. The court further held that mere fact that the system followed by the assessee had not been questioned in the past, is no ground to say that it should be accepted all along as there is no estoppel in these matters. We may mention at this stage that learned counsel, Mr. Debiprosad Pal sought an intervention to appear in this matter on behalf of the United Bank of India. It was contended by him that the same question is involved in matters pertaining to other banks which are governed by the Banking Regulation Act, 1949, and we have permitted him to make his submission on the question of law involved. It has been pointed out by learned counsel for the appellant that preparation of balance-sheet by the assessee-bank is governed by the provisions of the Banking Regulation Act, 1949. Section 29, inter alia, provides that at the expiration of each calendar year, every banking company incorporated in India in respect of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and valued at market price or at cost whichever is less and depreciation is to be provided for the shortfall, if any. From the aforesaid form of the prescribed balance-sheet, it is evident that scheduled nationalised banks were directed to put the value of shares and securities at cost and if the market value is lower, it was to be shown separately in brackets. Now, the question would be when such a bank is submitting its statutory return of income, whether it can disclose in its return its real profit and/or loss on the basis of the market value of securities and shares ? It has been pointed out that the balance-sheet or the audited accounts maintained on the basis of the investment in shares at cost would not disclose the real profit or loss of the bank in view of the fact that depreciation in the value of the shares or fall in the market value of the shares and securities is not provided in the audited accounts. Learned counsel for the appellant submitted that even though in the balance-sheet maintained by the assessee, the market price of the shares and securities is not mentioned, yet for determining the real income of the assessee-bank, the said price is required to be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually 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' (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany of the method of valuing stock at cost, that the stock valued was not stock-in-trade. Learned counsel for the Revenue submitted that once the assessee has finalised his accounts as per the statutory provisions, then it is not permissible for him to adopt for income-tax purposes a method different from the one on the basis of which his final accounts were prepared. For this purpose, he relied upon the decisions rendered by his court in the case of State Bank of Travancore v. CIT'[1986] 158 ITR 102 and CIT v. British Paints India Ltd. [1991] 188 ITR 44. In our view, the submission made by learned counsel has no substance. In the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), this court considered the question whether interest on sticky advances debited to the customers account but taken to interest suspense account can be termed is accrued income, In that context, the majority view was where the interest has accrued and the assessee has debited the accounts of the debtor, the difficulty of recovery would not make its accrual non-accrual. Before discussing the question involved, the court after considering the provisions of the Income-tax Act obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion by majority view, it was held that the additions of the sums representing interest on sticky advances as income was justified. Even applying the aforesaid tests laid down by this court, what is taxable under the Act is the really accrued or arisen income. On the basis of the method of accountancy regularly employed by the assessee, the real income is pointed out in the income-tax return submitted by the assessee. This cannot be ignored by holding that in a balance-sheet which is required to be statutorily maintained in a particular form, the market value of the shares and securities is not mentioned or is mentioned in brackets. The decision in the case of State Bank of Travancore v. CIT[1986] 158 ITR 102 (SC), does not lay down any rule that whatever is not mentioned in the prescribed statutory balance-sheet is not to be taken into account for deciding real taxable income. At this stage, we would mention that the aforesaid case State Bank of Travancore [1986] 158 ITR 102 (SC) was considered (in the case of the assessee-bank) by this court in UCO Bank v. CIT [1999] 237 ITR 889. After referring to the decision in State Bank of Travancore [1986] 158 ITR 102 (SC), the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 102 (SC), has already been distinguished in Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC) by a Bench of three judges in a similar fashion and it is held only as laying down that a circular cannot alter the provisions of the Act. Learned counsel for the Revenue further relied upon the decision in CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). In our view, the said decision would not in any way advance the contention raised by the respondent. The court while dealing with the contention of the assessee for valuation of the raw material without taking into account any portion of the cost of manufacture, held that the question of fact which the Assessing Officer must necessarily decide is whether or not the method of accounting followed by the assessee discloses the true income and observed thus : It is a well-recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower. The court further considered section 145 of the Act and observed that what is to be determined by the officer in exercise of the pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by section 53 of the Banking Regulation Act and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance-sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on the mercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee. From the decisions discussed above, it can be held : (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower ; (2) In the balance-sheet, if the securities and shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on revaluation by claiming different method of stock valuation notionally for income-tax purposes only. In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X
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