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TMI Blog1986 (12) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... , to 'cost or market rate whichever was lower', there was a loss to the extent of Rs. 4,64,547 on the basis of the IAC's order under section 144B of the Income-tax Act, 1961 ('the Act'), the relevant portion of which reads as follows : "The company has all along been valuing the closing stock of shares at cost. As assessee can change its method of valuation of closing stock provided it is bona fide. During the accounting year under consideration, the company earned a huge profit of Rs. 5,90,530 from speculation in shares. So the reason for changing the method of valuation in this particular year is not far to seek. The company has changed the method of valuation of the shares during the year in order to set off the loss of Rs. 4,64,547 arising on account of such valuation against the aforesaid speculation profit and to reduce it so that it does not pay the taxes which the company would have been liable to pay. In these circumstances, the change of method of valuation has not been bona fide." The Commissioner (Appeals) agreed with the aforesaid finding of the IAC by observing, inter alia, vide paragraphs 23 and 24 of his order that 'the appellant suddenly and arbitrarily chose to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e actual loss incurred due to change effected in the method of valuation of closing stock amounted to Rs. 4,64,547 and that the assessee incurred a loss of Rs. 81,000 on sale of shares. It has been stated that before the ITO the assessee submitted extracts from the proceedings of the minutes of the meeting of the board of directors held on 7-7-1975 which recorded the reasons for effecting the change in the valuation of closing stock of shares and debentures in the following manner : "The chairman informed the Board that the closing stock of shares and debentures have all along been valued 'at cost'. But there has been fluctuations and steep fall in the value of the shares and debentures held by the company over a number of years. Because of the said reason, the chairman felt that the closing stock of shares and debentures valued 'at cost' does not reflect the correct financial position of assets. To present a true and correct financial position of the assets, he suggested to change the method of valuation of closing stock of shares and debentures from 'at cost' to 'at cost or market rate whichever is lower'. The first of such valuation of closing stock shall be made on the close o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Sri Visweswardas Gokuldas [1946] 14 ITR 110 wherein it has been held that the proviso to section 13 of the Indian Income-tax Act, 1922 gives the ITO full liberty of action if he is satisfied that the method adopted by the assessee does not allow of a correct assessment of the profits. In that case it has been pointed out that the assessee in the past valued its stocks at the cost price both at the beginning and at the end of the year. In the subsequent year, the assessee opened the account with stocks valued at cost price and closed it with a valuation at the market price which was much higher than the cost price. The ITO, valued the stocks both at the beginning and at the end of the year at cost and thereby made addition by resorting to the proviso to section 13 which was upheld by the High Court. He also referred to various other decisions in support of the Commissioner (Appeals)'s order that a change effected in the method of valuation of shares by the assessee, unless for bona fide reasons, cannot be accepted. Decisions relied on are : CIT v. Achrulal [1938] 6 ITR 255 (Nag.), Kanwalnen Hamir Singh v. CIT [1938] 6 ITR 675 (All.), Chouthmal Golapchand, In re [1938] 6 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem, the requirements of section 13 were satisfied. It has been observed that the change in the method of valuation even if it is detrimental to the revenue was not a relevant factor in deciding whether the assessee had the right to change the basis of valuation. It has further been observed vide Indo Commercial Bank Ltd.'s case as under : ". . . A notional or anticipatory loss resulting from a valuation of the closing stock, which an assessee is permitted to take into account in ascertaining his trading profits, stands on no different footing. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, if the latter was less than the cost price. If the revised basis of valuation is continued thereafter the profits and losses thereafter would be correctly computed. . . ." The aforesaid decision of the Madras High Court has been referred to by the Calcutta High Court in the case of Snow White Food Products Co. Ltd. wherein at p. 872 it has been observed that 'the law appears to be settled that an assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has been further observed that "only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the expression 'good faith' and 'bona fide' occur in the observations in the earlier judgment noted earlier." The earlier judgments referred to in this context are the decisions of the Calcutta High Court in the cases of Eastern Bengal Jute Trading Co. Ltd. and Rajasthan Investment Co. (P.) Ltd. The High Court on a due consideration of the Calcutta High Court decisions in the case of Chouthmal Golapchand and Reform Flour Mills (P.) Ltd. held that where it is found that an assessee has changed his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change, Snow White Food Products Co. Ltd.'s case at page 874. The assessee's learned counsel furnished before us copies of the ITO's orders for the assessme ..... 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