TaxTMI 
TaxTMI 
1999 (9) TMI 4
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....ts and in the circumstances of the case, the Tribunal is correct in law in holding that the notional loss in the investment trading (India) to the extent of Rs. 7,45,35,029 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 ?" The High Court answered both the questions in the negative and in favour of the Revenue and arrived at the conclusion that stock valuation of shares shown in the bank's final accounts could not be permitted to be revalued at market value for income-tax purposes only. The aforesaid questions arise in the context of the fact that the appellant assessee-bank submitted return for the assessment year 1982-83 contending that there was notional loss of Rs. 7,45,35,029 on account of closing stock of securities at the market value. The Inspecting Assistant Commissioner of Income-tax, Assistant Range-III, Calcutta, by the assessment order dated March 19, 1985, accepted the same. The Commissioner of Income-tax, West Bengal, by order dated March 9, 1987, under section 263 of the Income-tax Act, ....
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.... at this stage that learned counsel, Mr. Debiprosad Pal sought an intervention to appear in this matter on behalf of the United Bank of India. It was contended by him that the same question is involved in matters pertaining to other banks which are governed by the Banking Regulation Act, 1949, and we have permitted him to make his submission on the question of law involved. It has been pointed out by learned counsel for the appellant that preparation of balance-sheet by the assessee-bank is governed by the provisions of the Banking Regulation Act, 1949. Section 29, inter alia, provides that at the expiration of each calendar year, every banking company incorporated in India in respect of all business transacted by it, shall prepare a balance-sheet and profit and loss account with reference to that year in the forms set out in the Third Schedule or as near thereto as circumstances admit. In the prescribed form in the column of property and assets, item 4 provides for mentioning the investments thus : "Investments (stating mode of valuation, e.g., cost or market value (f)), (i) Securities of the Central and State Governments and other trustee securities, including treasury bills o....
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....on the basis of the market value of securities and shares ? It has been pointed out that the balance-sheet or the audited accounts maintained on the basis of the investment in shares at cost would not disclose the real profit or loss of the bank in view of the fact that depreciation in the value of the shares or fall in the market value of the shares and securities is not provided in the audited accounts. Learned counsel for the appellant submitted that even though in the balance-sheet maintained by the assessee, the market price of the shares and securities is not mentioned, yet for determining the real income of the assessee-bank, the said price is required to be taken into account. And, for that purpose since years, the assessee-bank was submitting income-tax returns after taking into account the market price of such shares and securities which has been accepted by the Department without any objection. He also submitted that not making of proper entries in the balance-sheet could hardly be a ground for not assessing the real income. For the reasons, the Central Government had issued notification dated May 12, 1982, permitting the assessee-bank not to disclose in brackets the ma....
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....if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question' (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. 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, un....
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....Ltd. [1991] 188 ITR 44. In our view, the submission made by learned counsel has no substance. In the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), this court considered the question whether interest on "sticky" advances debited to the customers account but taken to "interest suspense account" can be termed is accrued income, In that context, the majority view was where the interest has accrued and the assessee has debited the accounts of the debtor, the difficulty of recovery would not make its accrual non-accrual. Before discussing the question involved, the court after considering the provisions of the Income-tax Act observed thus : "It is settled that the income of the assessee will have to be determined according to the provisions of the Act in consonance with the method of accountancy regularly employed by the assessee. The method of accounting regularly employed by the assessee helps the computation of income, profits and gains under section 28 of the Act and the taxability of that income under the Act will then have to be determined. The question is, whether the income which has been computed according to the method of accounting followed regularly by an ....
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....ket value of the shares and securities is not mentioned or is mentioned in brackets. The decision in the case of State Bank of Travancore v. CIT[1986] 158 ITR 102 (SC), does not lay down any rule that whatever is not mentioned in the prescribed statutory balance-sheet is not to be taken into account for deciding real taxable income. At this stage, we would mention that the aforesaid case State Bank of Travancore [1986] 158 ITR 102 (SC) was considered (in the case of the assessee-bank) by this court in UCO Bank v. CIT [1999] 237 ITR 889. After referring to the decision in State Bank of Travancore [1986] 158 ITR 102 (SC), the court observed : "Under section 145 of the Income-tax Act, 1961, income chargeable under the head 'Profit and gains of business or profession' or 'income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee ; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax ....
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....g into account any portion of the cost of manufacture, held that the question of fact which the Assessing Officer must necessarily decide is whether or not the method of accounting followed by the assessee discloses the true income and observed thus : "It is a well-recognised principle of commercial accounting to enter in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the accounting year at cost or market price, whichever is the lower." The court further considered section 145 of the Act and observed that what is to be determined by the officer in exercise of the power is a question of fact, that is, whether or not income chargeable under the Act can be properly deduced from the books of account and the question must be decided with reference to the relevant material and in accordance with the correct principles. The court also observed : "Where the market value has fallen before the date of valuation and, on that date, the market value of the article is less than its actual cost, the assessee is entitled to value the articles at market value and thus anticipate the loss which he will probably incur at the time of the sale of the g....
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....investment in the balance-sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on the mercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee. From the decisions discussed above, it can be held : (1) That for valuing the closing stock, it is open to the assessee to value it at the cost or market value, whichever is lower ; (2) In the balance-sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose; to value stock-in-trade either at cost or market price. (3) A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. (4) The concept of real income is certainly applicable in judging whether there has been income or not, but, in every cas....