Closing stock valuation change and dividend exemption turned on bona fide accounting method and attributable exempt profits.

A bona fide change in the method of valuing closing stock from cost to market value is permissible where the new basis is regularly employed and enables proper computation of income; the resulting trading loss was deductible. Dividend exemption under section 15C(4) extends only to distributions attributable to profits on which tax is not payable under section 15C, and shareholder relief does not depend on prior company certification. On the facts, the dividend was not shown to arise from exempt profits, so exemption was denied.

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Issues: (i) Whether the assessee bank could validly change the method of valuing its closing stock of securities from cost to market value and claim the resulting losses as deductible trading losses under the Income-tax Act, 1922. (ii) Whether dividends received from an industrial company were exempt in the hands of the shareholder under section 15C(4) of the Income-tax Act, 1922.

Issue (i): Whether the assessee bank could validly change the method of valuing its closing stock of securities from cost to market value and claim the resulting losses as deductible trading losses under the Income-tax Act, 1922.

Analysis: The method of valuing closing stock is an integral part of the method of accounting. An assessee is entitled to choose the basis of valuation, and a bona fide change from one accepted basis to another does not by itself attract the proviso to section 13. The decisive requirement is that the changed basis must be regularly employed and must enable proper deduction of income, profits and gains. The rule permitting valuation at cost or market value, whichever is lower, remains a settled principle of commercial accounting, and the fact that the change is disadvantageous to revenue is not a ground for rejection.

Conclusion: The change in valuation was permissible, the losses were deductible, and the answer was in favour of the assessee.

Issue (ii): Whether dividends received from an industrial company were exempt in the hands of the shareholder under section 15C(4) of the Income-tax Act, 1922.

Analysis: Section 15C(4) exempts only that part of a shareholder's dividend which is attributable to profits on which tax is not payable under section 15C. The shareholder's entitlement does not depend on the company first obtaining relief or issuing a certificate. On the facts, the company had no assessable income, so the dividends could not be shown to be attributable to exempt profits within the meaning of section 15C(4).

Conclusion: The dividends were not exempt in the shareholder's hands, and the answer was against the assessee.

Final Conclusion: The reference was answered partly for the assessee and partly for the revenue, with the valuation loss claim allowed and the dividend exemption claim rejected.

Ratio Decidendi: A bona fide change in the method of valuing closing stock is permissible if the new method is regularly employed, and dividend exemption under section 15C(4) extends only to distributions attributable to profits on which tax is actually not payable under section 15C.

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