1999 (9) TMI 4 - SC - Income Tax

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 ... Justification of the Tribunal in canceling the Commissioner of Income-tax's order u/s 263 - concept of real income - Notional loss - closing stock of securities at the market value - maintaining its accounts on the mercantile system - bank had no right to calculate profit or loss arising out of investment trading account as it has excluded it from the preparation of its own final accounts - Whether, the Tribunal is correct in law in holding that the notional loss in the investment trading (India) by working out a difference between the book value of shares as shown in the final accounts and their market price as on the last date of the accounts, is admissible to be deducted from the book profits of the assessee-bank ? HELD THAT:- For determining the real income, the entries in a balance-sheet require to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the Income-tax Officer as well as the assessee to point out the true and proper income while submitting the income-tax return. Since stock valuation is admittedly a method of accounting the assessee-bank can claim the benefit of stock valuation 'at cost or market value, whichever is lower' only if such method is actually followed and adopted by him in preparing the final accounts. Without following this method in preparing the accounts, which are required to be prepared and presented under section 29 of the Banking Regulation Act, 1949, in the form set out in the Third Schedule thereto, the assessee-bank cannot be permitted to claim a loss on revaluation by claiming different method of stock valuation notionally for income-tax purposes only. In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case. In the result, the appeal is allowed. The impugned order passed by the High Court is set aside. 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 ActThe 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 ProfitsThe 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.