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TMI Blog1991 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the assessee-bank ?" The facts leading to this reference are as under : The assessee is a banking company. The assessment of the assessee- bank was originally completed by the Inspecting Assistant Commissioner (Assessment), Range-III, Calcutta, on March 19, 1985, on a total income of Rs. 2,57,59,020. Subsequently, the Commissioner of Income-tax initiated proceedings under section 263 of the Income-tax Act, 1961. The Commissioner found that, in completing the assessment of the assessee bank, the Inspecting Assistant Commissioner had allowed loss to the extent of Rs. 7,45,35,029 on account of revaluation of shares and securities appearing under the heading " Investments " in the balance-sheet of the assessee-bank. The Commissioner found that the loss or profit on revaluation is never provided by the assessee-bank in its final accounts ; but, for arriving at the taxable income, it has deducted a notional loss from the book profit by working out the difference between the book value of shares as shown in its final accounts and the market price as prevailing on the last day of the relevant previous year. This, according to the Commissioner, was purely a hypothetical and/or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it as stock-in-trade " at cost or market value whichever is lower " for the purposes of preparing accounts under section 29 of the Banking Regulation Act, 1948. It is an admitted fact that the investments in shares and securities are shown in the balance-sheet "at or below cost'. The notes to the audited accounts as are relevant for the purposes of this reference read as under : " 7. (a) The Central Government has issued a notification exempting the bank from disclosing the market value of Government/trustee securities. Depreciation in the value of Government/trustee securities has not been fully provided for in the accounts. (b) Book value has been taken as market value of investments in the cases where quotations are not available." It is by now well-settled that the method of valuation, of stock is part of the method of accounting followed by an assessee. Section 145(1) of the Income-tax Act, 1961, clearly provides that income falling under the heads "Profits or gains of business or profession" and "Income from other sources" should normally be computed in accordance with the method of accounting regularly employed by an assessee, if the assessee has maintained accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to fall in price below cost is allowed even if such loss has not been actually realised. As truly observed by one of the learned judges in Whimster and Co. v. Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so drew our attention to another decision of the Supreme Court in State Bank of India v. CIT [1986] 157 ITR 67 in support of his contention that the way in which entries are made by an assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss and, therefore, the entries made by him cannot be regarded as conclusive one way or the other. There the Supreme Court observed as follows ( at page 71 ) : " The important question to be considered is the true nature of the transaction and whether in fact it had resulted in profit or loss to the assessee. In that context, it is well-settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee had earned any profit or suffered any loss. The assessee might, by making entries which were not in conformity with the proper principles of accountancy, have concealed profit or showed loss and the entries made by him would not, therefore, be regarded as conclusive one way or the other. " There cannot be any controversy with this principle laid down by the Supreme Court time and again. But the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102. There the Supreme Court held that income has to be computed on the basis of the regular method of accounting followed by the assessee and the income for tax purposes should not in any way be different from the income arrived at according to the regular method followed by the assessee. There, however, the Supreme Court was concerned with the question as to whether the interest on " sticky " advances which had accrued to the assessee according to the mercantile system of accounting and which had not been given up but credited to the " Interest Suspense Account" was assessable as the income of the assessee. This is not the case here. In this case, the question is the method of valuation of stock-in-trade. The finding of the Tribunal was that the investment of the assessee was nothing but stock-in-trade and as such the assessee was required to follow the same method of accounting for income-tax purposes for the purpose of making its balance-sheet and trading account as well. Our attention has also been drawn to a decision of the Supreme Court in CIT v. British Paints India Ltd. [1991] 188 ITR 44. In that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee. This is not only a right but a duty that is placed on the officer, in terms of the first proviso to section 145, which concerns correct and complete account but which, in the opinion of the officer, does not disclose the true and proper income. The correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by reason of the fall in the market value of those goods below their original cost. Ordinarily, therefore, the goods should not be written down below the cost price except where there is an actual or anticipated loss. On the other hand, if the fall in the price is only such as would reduce merely the prospective profit, there would be no justification to discard the initial valuation at cost. " After referring to several decisions of the Supreme Court, the Supreme Court proceeded to hold as follows (at page 56 of 188 ITR ) : " Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer nay it imposes a duty upon him to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared ..... X X X X Extracts X X X X X X X X Extracts X X X X
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