Important Point
Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting income tax return on the real taxable income in accordance with a method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that assessee was maintaining balance sheet in the statutory form on the basis of the cost of the investments.

Headnote:Income Tax Act, 1961-Section 28(i) r/w Section 145-Business loss/deduction-Trading loss-Bank valuing shares as its stock-in-trade at cost price for statutory balance sheet-For income-tax purposes Bank valuing share at cost or market price whichever was low-Claim of difference between cost and market price as trading loss-Denial on ground Bank could not be permitted to revalue shares at market value for income-tax purposes only - Not sustainable-Method followed by assessee had been accepted by Revenue for over thirty years-For determining real income entries in balance sheet required to be maintained in statutory form not decisive or conclusive-Preparation of balance sheet in accordance with statutory provisions would not disentitle assessee in submitting income-tax return on real taxable income in accordance with method adopted by assessee consistently and regularly-Assessee entitled to deduction of loss as claimed.
       Held : What is taxable under the Act is the really accrued or arisen income. On the basis of the method of accountancy regularly employed by the assessee, the real income is pointed out in the income-tax return submitted by the assessee. This cannot be ignored by holding that in a balance sheet which is required to be statutorily maintained in a particular form, market value of the shares and securities is not mentioned or is mentioned in brackets. The decision in the case of State Bank of Travancore 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. (Para 16)
       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 required 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. (Para 20)
       For reasons, Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on mercantile system, he was entitled to show his real income by taking into account market value of such investments in arriving at real taxable income. On that basis, therefore, Assessing Officer has taxed the assessee. (Para 20)
       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 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 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 case, it must be applied with care and within their recognised limits.
        (5) Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.
        (6) Under Section 145 of the Act, in a case where accounts are correct and complete but the method employed is such that in the opinion of the Income Tax Officer, the income cannot be properly deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine. (Para 21)
       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 income tax return on the real taxable income in accordance with a method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that assessee was maintaining 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 stocks-in-trade (investments) because the Bank was required to prepare 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. (Para 23)

Judgment

Shah, J.-This appeal is filed by UCO Bank, Calcutta against the judgment and order dated 25th July, 1991 passed by the High Court of Calcutta in Income Tax Reference No. 73 of 1989. At the instance of revenue, the Income Tax Appellate Tribunal referred the following two questions for the opinion of the High Court under Section 256(1) of the Income Tax Act, 1961 for the assessment year 1982-83 :-

“1. Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the CIT’s order under Section 263 of the Income-tax Act holding that the case of State Bank of Travancore v. CIT Kerala (158 ITR 102) is not applicable to the facts of the present case?

2. Whether on the facts 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 account and their market price as on the last due of the accounts, is admissible to be deducted from the book profits of the assessee bank?”

2. 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 Bank’s final accounts could not be permitted to be revalued at market value for income tax purposes only.

3. The aforesaid questions arise in the context of the fact that 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 19th March, 1985 accepted the same. The Commissioner of Income Tax, West Bengal by order dated 9th March, 1987 under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) set aside the said assessment order by holding that the 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. Unless a Bank itself accepts the position by incorporating such loss or profit in the final accounts, it would have no right to put across such hypothetical loss for the purpose of income tax assessment. The practice followed by the Bank is entirely contrary to the decision rendered by this Court in State Bank of Travancore v. C.I.T., Kerala1. The assessee was following mercantile system of accounting and loss claimed by the assessee had not been debited in the books of accounts.

4. Against that order, Bank preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal by order dated 14th October, 1988 arrived at the conclusion that it is established on facts that assessee had claimed the loss by following the same method which it was following for the last 30 years and the principle laid down by this Court in State Bank of Travancore v. C.I.T., Kerala (supra) was not applicable to the facts of the present case. Hence, the order passed by the C.I.T. under Section 263 was set aside. Against the said judgment and order at the instance of the revenue, the aforesaid two questions were referred for the opinion of the High Court.

5. Answering the said questions, the High Court observed that the assessee has not valued the stock of shares and securities in its books of accounts in accordance with the method “cost or market price whichever is lower”; if this method is not followed in writing and preparing accounts consistently, the assessee cannot claim a notional method of stock valuation only for computation of income by the tax authorities and the submission made by the assessee clearly goes against Section 145(1) of the Act. The Court further observed that the book results can be rejected by the tax authorities only if the method adopted by the assessee i

Click Here to Read the rest of this document

1999 Supreme(SC) 1127

Cases Referred (7)