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TMI Blog2005 (3) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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. - Member(s) : JOGINDER PALL., BHAVNESH SAINI. ORDER Per Joginder Pall, Accountant Member. - This is a bunch of six appeals - all filed by the Revenue against the respective orders of CIT(A), Jammu with Hqrs. at Amritsar for the assessment years mentioned in the caption of this order. Since the issues involved in all these appeals are common, these were heard together and are being disposed of by this consolidated order for the sake of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, the assessee changed the method of valuation of closing stock either at cost or market price whichever was less, was accepted by the Tribunal. None of these judgments were followed by the Assessing Officer and the reasons for the same were also not given. The only reason given by the Assessing Officer for disallowing the loss was that securities were held as investments and not as stock-in-trade in earlier years, and, therefore, change in the method of valuation of the closing stock could not be permitted. The same reasoning was adopted for the various other assessment years. 3. Being aggrieved, the assessee impugned the disallowance of loss for the various years in appeals before the CIT(A). It was submitted before the CIT(A) that the Assessing Officer was not justified in holding that the investment made in securities in the earlier years were not held as stock-in-trade and were shown as capital investment. The assessee had submitted three annual reports of the earlier assessment years where securities were shown as stock-in-trade and net profit realized on sale of such securities was shown as business profit. Thus, it was submitted that findings recorded by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that specified percentage of deposits on account of time and demand liabilities are kept in a liquid form or in such a form that the liquidity can be realized forthwith. The intention of the Reserve Bank to fix this percentage is to ensure that whenever somebody comes to withdraw the money, it can get the money back. In these days, Banks are not expected to keep only cash and securities. As a banking company deals in money, the cash and securities will have to be considered at par and, therefore, they will have to be considered as stock-in-trade of the banking company. (b) The appellant company had always treated the investment in securities as stock-in-trade and that is why the profit on the sale of investment securities was always credited to the profit and loss account. (c) The appellant company, prior to assessment year 1982-83 had valued the investment in stock at cost, but in the assessment year under appeal, it decided to change the method of valuation of investment in securities to bring in line with the provision in the Banking Regulation Act wherein it is provided that for deciding whether a particular banking company was maintaining cash and unencumbered approved securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket price whichever was lower. According to the learned Tribunal, their Lordships of the Supreme Court made it clear in the case of Chainrup Sampatram (24 ITR 481) and Indo Commercial Bank Ltd. (44 ITR 22) that the option exercised by an assessee detrimental to revenue could never be the basis for denying that option. Bearing this principle in mind, the learned Tribunal allowed that Bank's claim of loss claimed on the basis of valuation of closing stock at market price. Keeping in view the legal position which has emerged in the earlier paragraphs, the ITO could not be considered justified in not allowing loss of Rs. 2,24,54,054 on account of revaluation of investment in securities. Accordingly, the addition made by him is deleted." This order was followed in all the subsequent years. The Revenue is aggrieved by the orders of the CIT(A). Hence, these appeals before us. 5. The learned DR strongly relied on the orders of Assessing Officer. He submitted that in the case of CIT v. Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697', the Hon'ble Madras High Court held that interest on investment made in debentures in accordance with Banking Regulation Act was not interest on securities in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Co-operative Apex Bank [2001] 251 ITR 194 (SC) (viii) CIT v. Bank of Baroda [2003] 262 ITR 334 (Bom.) Thus, he submitted that the securities were held as stock-in-trade. He submitted that for the purpose of Income-tax assessments, closing stock has to be valued either at cost or market price whichever was less. He, therefore, submitted that the change in method of valuation of closing stock of securities was rightly made, bona fide and acceptable. He submitted that the same method of accounting has been consistently followed in all the subsequent years. He also relied on the following judgments in support of his contention that if the change in method of valuation of closing stock is consistently being followed, the same is permissible: (i) Corpn. Bank Ltd.'s case (ii) CIT v. Dalmia Cements (Bharat) Ltd. [1995] 215 ITR 441 (Delhi) (iii) Bank of Cochin Ltd.'s case (iv) CIT v. National Grindlays Bank Ltd. [1993] 202 ITR 559 (Cal.) (v) Para 22 of Tribunal Decision in the case of Nedungadi Bank Ltd. (vi) Page No. 4975 of Chaturvedi Pithisaria's Income Tax Law Fifth edition. (vii) CIT v. Bharat Commerce Industries Ltd. [1999] 240 ITR 256 (Delhi) (viii) CIT v. Travancore Cochin Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of banking business and such securities constitute stock-in-trade. 7.1 As regards the judgment of Hon'ble Madras High Court in the case of Lakshmi Vilas Bank Ltd. relied upon by the Ld. DR, this judgment is with reference to Interest-tax Act, 1974 which is applicable to the interest received by banks and later extended to Financial Institutions. It was observed by the Madras High Court that where Banks show debentures under the head 'Investments' the debentures are in the nature of securities. Interest on such debentures must be related as interest on investments, which fall outside the purview of the Interest-tax Act, 1974 and not as interest on loans and advances taxable under the Interest-tax Act, 1974. Thus judgment is in different context and not with reference to the fact whether securities held by Banking Company under the statutory obligation formed part of banking business and were stock-in-trade. Further, it may be noticed that earlier in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438(SC) Bench comprising of two judges of the Hon'ble Supreme Court held that Government Securities coming out of the reserve fund which cannot be easily encashed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that it had always credited surplus realized on the securities as profit, has not been controverted by the Revenue. In fact, the assessee had produced before the CIT(A) annual reports of the last three years to prove that the securities held by the Bank were always held as stock-in-trade. In the case of State Bank of Patiala, the securities were shown as investments in the balance sheet. Still the ITAT Chandigarh Bench held that these were stock-in-trade and, therefore, got to be valued either at cost or market price whichever was less. In the case of Josna Bank Ltd., it was held that the transactions of securities of the Banking Institutions will fall in the nature of trade. Thus, we hold that the learned CIT(A) was justified in treating the securities as stock-in-trade. 7.3 Now the last aspect of the case which requires to be considered is whether change in the method of valuation of closing stock of securities could be accepted by the Department. It is no doubt that earlier the assessee used to value the closing stock of securities at cost. However, this method of valuation of securities was changed in the accounting year under reference as the assessee started valuing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial Bank Ltd. 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. 7.4 This issue was also considered by the ITAT Cochin Bench in the case of Nedungadi Bank Ltd. where the Tribunal has held that the change in method of valuation of closing stock if it was bona fide and the same method was followed in the subsequent assessment years would be permissible. 7.5 In the case of Travancore Cochin Chemicals Ltd., the Hon'ble Kerala High Court also took the same view that change in method of valuation of stock was valid where the same method has been followed in the subsequent assessment years. 7.6 Thus, from the detailed discussions in the preceding paragraphs, the position that emerges is that the bona fide change in the method of valuation of closing stock is permissible if the same method has been followed regularly and consistently in the subsequent assessment years. 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 rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer observed that such loss occurred in 8 Branches. He disallowed the claims of the assessee on the ground that such claims were pre-mature and in most of the cases, such loss had occurred prior to the assessment year under reference. 10. Being aggrieved, the assessee impugned the disallowance of loss in appeals for both the assessment years before the CIT(A). It was submitted before the CIT(A) that the assessee was entitled to such loss because it was incidental to assessee's business. Reliance was also placed on the two judgments of Hon'ble Supreme Court in the cases of Badridass Daga v. CIT [1958] 34 ITR 10 and Associated Banking Corpn. of India Ltd. v. CIT [1965] 56 ITR 1. It was also contended that the assessee had claimed the loss on account of embezzlement for the assessment years under reference when the same had been detected. Reliance was also placed on CBDT's Instructions issued vide Circular No. 35D of 1965, dated 24th November, 1965, as per which it was clarified that the loss of embezzlement by employees should be treated as incidental to business and be allowed as deduction in the year in which it is discovered. The ld. CIT(A) considered these submissions and observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss by embezzlement by employees should be treated as incidental to business and the same should be allowed as deduction in the year in which it is discovered. Such instructions are binding on the authorities below. By referring to such instructions, the Hon'ble Gujarat High Court in the case of Dinesh Mills Ltd. held that the embezzlement loss by an employee should be allowed in the year in which it was discovered by the assessee. Therefore, respectfully following the decision of the Hon'ble Gujarat High Court and by referring to the aforesaid instructions of the Board, we hold that the assessee would be entitled to claim deduction of such loss in the year when the same had been detected. 14. Now 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 pa ..... 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