TaxTMI 
TaxTMI 
2013 (7) TMI 656
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....ory of: (a) 'Available for Sale' (b) 'Held to Maturity' & (c) 'Held for Trading'. The assessee treated such securities as stock-in-trade and claimed depreciation on book value after valuing the Securities at lowest of cost or market value as consistently followed earlier. The revenue refusing to accept the assessee's plea that classification of Securities as per RBI guidelines was not mandatory for the purpose of computing income under the Act and observed that assessee's treatment of securities held as stock-in-trade valued at lowest of cost or market rate, was defective and violation of RBI guidelines. Therefore, the assessee's claim of depreciation on securities under Income Tax Act, 1961 is not allowable on the whole 'Investment Portfolio' (Securities) which is classified as 'stock-in-trade'. 3. The assessee in its reply dated 19-07-2006 stated that though the classification is relevant only for the purpose of actual provisions in the accounts and not for the purpose of computing the real/ taxable income and requested that depreciation in the value of investments be allowed as this is being cla....
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....s CIT reported in (1953) 24 ITR 481 (SC), wherein the Apex Court held as under: "This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year's account in a business that is continuing are not brought into the charge as a matter of practice, though, as already stated, loss due to a fall in price below cost is allowed even if such loss has not been actually realized. As truly observed by one of the learned Judges in Whimster & Co. v. Commissioners of Inland Revenue, "Under this law (Revenue law) the profits are the profits realized in the course of the year. What seems an exception is recognized where a trader purchased and still holds goods or stocks....
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....es not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of Section 145 and are meant to ensure that assesses of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied." After referring the aforesaid judgments, the Apex Court in the case of UNITED COMMERCIAL BANK v/s COMMISSIONER OF INCOME TAX reported in (1999) 240 ITR 355 (SC) has held as under: "Hence, for the purpose of income-tax whichever method is adopted by the assessee a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance-sheet require to be maintained in the statutory form, may not be ....
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....each case, the assessee has to prove, as has happened in this case with regard to the sum of Rs. 20,34,605, that interest is not recognized, or taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept the claim of the assessee under the Income-tax Act or not to accept it in which case there will be add back even under the real income theory as explained hereinbelow. Scope and applicability of the RBI Directions 1998 32. RBI Directions 1998 have been issued under section 45JA of the RBI Act. Under that section, power is given to RBI to enact a regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Section 45JA comes under Chapter III-B which deals with provisions relating to financial institutions, and to non-banking institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; provisioning, etc. As stated above, the basis of the 1998 Direction....
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....as provided in the Companies Act, they do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark to market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act/ Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of 1998 Directions. Therefore, the RBI Directions and the IT Act operate ....
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....f the judgment of the Hon'ble Supreme Court set up about, the reasoning adopted by this Court in ING VYSYA BANK's case runs counter to the law declared by the Apex Court. 8. From the aforesaid judgments of the Apex Court, new it is clear that a method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like Bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be inconformity with the said requirements. RBI Act or Companies Act do not deal with the permissible deductions or exclusion under the IT Act. For the purpose of IT Act, if the assessee has consistently treating the value of investment for more than two decades as investment as stock-in-trade and claim depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regula....