Real income in tax computation may follow a consistent valuation method even when statutory balance-sheet form shows cost values.

A banking company's statutory balance-sheet format under the Banking Regulation Act did not control income-tax computation where the assessee regularly followed the mercantile system and a recognised method of valuing investments at cost or market value, whichever is lower. The accepted commercial principle is that unrealised loss may be anticipated while unrealised profit is not taxed, so entries in the regulatory balance-sheet were not conclusive of real income. Section 145(1) permitted the use of the regularly employed accounting method unless it failed to disclose proper income, and a consistent method could not be rejected merely because the statutory balance-sheet showed cost values.

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Issues: Whether a banking company, though required to prepare its statutory balance-sheet in the prescribed form under the Banking Regulation Act, 1949, could still value its investments in the income-tax return at cost or market value, whichever is lower, and whether the revision under section 263 of the Income-tax Act, 1961 was justified.

Analysis: The statutory form of balance-sheet required under section 29 of the Banking Regulation Act, 1949 did not control the computation of taxable income where the assessee regularly followed the mercantile system and consistently adopted a recognised method of valuing closing stock for tax purposes. The accepted commercial principle is that closing stock may be valued at cost or market price, whichever is lower, because unrealised loss may be anticipated while unrealised profit is not brought to tax. The entries in the statutory balance-sheet were not conclusive of real income. The fact that the balance-sheet was prepared under a regulatory format, and that the bank was permitted not to disclose market value in brackets, did not prevent the assessee from showing its real income in the return on the basis of the regular accounting method. The method had been consistently followed and accepted for many years, and there was no basis to reject it merely because the statutory balance-sheet reflected cost values. The concept of real income and section 145(1) permitted the income-tax computation to be made on the basis of the method regularly employed, unless that method failed to disclose proper income.

Conclusion: The assessee was entitled to value its investments for income-tax purposes at cost or market value, whichever was lower, despite the statutory balance-sheet format. The revision under section 263 was not sustainable on the reasoning adopted by the High Court.

Final Conclusion: The tax computation had to reflect the real income deduced from the assessee's regular accounting method, and the statutory balance-sheet format did not bar that treatment.

Ratio Decidendi: For income-tax purposes, a regularly and consistently employed accounting method valuing closing stock at cost or market value, whichever is lower, cannot be rejected merely because the statutory balance-sheet under another enactment records the stock at cost.

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