Taxpayer allowed stock valuation loss only if valuation method actually and consistently used in statutory final accounts

SC allowed the appeal and set aside the High Court order, holding that a taxpayer may claim diminution in value of securities for tax purposes only if that method of stock valuation is actually and consistently followed in preparing statutory final accounts. Where the bank had, for decades, prepared its balance-sheet on cost and submitted tax returns valuing stock at the lower of cost or market-a practice accepted by the revenue-the notional revaluation loss could be reflected for real income determination. The departmental disallowance was therefore improper.

---

---

Issues Involved:
1. Justification of the Tribunal in canceling the Commissioner of Income-tax's order under section 263 of the Income-tax Act.
2. Admissibility of notional loss in investment trading for deduction from the book profits of the assessee-bank.

Detailed Analysis:

Issue 1: Justification of the Tribunal in Canceling the Commissioner of Income-tax's Order under Section 263 of the Income-tax Act
The Tribunal canceled the Commissioner of Income-tax's order under section 263, which had set aside the assessment order that accepted the bank's claim of notional loss based on the market value of securities. The Commissioner argued that the bank could not calculate profit or loss from the investment trading account as it excluded it from its final accounts. The High Court, however, disagreed with the Tribunal, stating that the bank's practice was contrary to the decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), which emphasized that the method of accounting should disclose the true and proper income.

Issue 2: Admissibility of Notional Loss in Investment Trading for Deduction from Book Profits
The High Court ruled that the bank could not revalue its stock of shares at market value for income-tax purposes if it did not follow the same method in its final accounts. The court emphasized that the method of accounting should be consistent and in accordance with section 145(1) of the Act. The appellant argued that the balance-sheet prepared under the Banking Regulation Act, 1949, did not reflect the real profit or loss as it did not account for depreciation in the value of shares. The bank had been using the method of valuing stock-in-trade at cost for statutory balance-sheet purposes and at cost or market value, whichever is lower, for income-tax purposes for over 30 years, which had been accepted by the Department.

Court's Conclusion:
The Supreme Court held that:
1. The practice of valuing closing stock at cost or market value, whichever is lower, is an established rule of commercial practice and accountancy.
2. The method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities.
3. The concept of real income must be applied with care and within recognized limits.
4. The real income disclosed in the income-tax return cannot be ignored based on the statutory form of the balance-sheet.
5. The decision in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) does not preclude the consideration of real income for tax purposes.

The Supreme Court allowed the appeal, set aside the High Court's order, and answered the questions in favor of the assessee and against the Revenue. The court recognized the bank's consistent practice of valuing stock-in-trade for income-tax purposes and upheld the Tribunal's decision to cancel the Commissioner of Income-tax's order under section 263.

---