Exemption from tax of newly established industrial undertakings.

With reference to the assessment of the assessee-Bank in the assessment years 1952-53 and 1953-54 the corresponding years of account were the calendar years 1951 and 1952 -the Tribunal referred two questions under section 66 (1) of the Income-tax Act for the determination of this Court. The first question ran:

“ The asscssee having followed regularly the cost basis for valuing its securities and shares till 31st December, 1950, whether the aforesaid losses of Rs.5,91,250 and Rs.18,471 arising out of writing them down to the market price shown as item B in paragraph 5 supra, are deductible for assessment years 1952-53 and 1953-54 respectively.”

The relevant facts for the determination of this question were never in dispute. The assessee which carries on a banking business held securities and shares as part of its stock-in-trade or circulating capital. These securities and shares were all along valued at cost both at the commencement and at the close of each year of account. In 1950 the assessee-Bank claimed a loss on the basis of the fall in the market prices, but without changing the basis of valuation it had all along adopted, and without any entries in its books of account. That claim was disallowed in the assessment year 1951-52. The fall in the market prices of the securities which began in 1950 continued in 1951, and to a lesser extent in 1952. To meet that abnormal fall the Reserve Bank allowed the scheduled banks to value their holdings of securities at the current market prices and adjust the resulting loss against the current profits or against the amounts permitted to be drawn from the statutory reserves. The assessee-Bank valued the securities at cost at the commencement of 1951, but valued them at the market value at the end of 1951. The market value was considerably lower at the end of 1951. The difference was Rs.5,91,250, which the assessee-Bank claimed as a trading loss in the assessment year 1952-53. Consistent with the valuation at the end of 1951 the valuation at the commencement of the next year of account 1952 was at the market value. At the end of 1952 the securities were valued again at the market value, which had registered a further fall during that year. The difference between the opening valuation and the closing valuation in 1952 was Rs.18,471, which the assessee claimed as a loss in the corresponding assessment year 1953-54. Both items were shown as trading losses in the books of account.

The Department declined to deduct these losses in computing the assessable income of the assessee-bank under section 10, mainly on the ground that the assessee-Bank was not entitled to change the basis of valuing the closing stock of securities from cost to market value, as that was highly detrimental to revenue. The Tribunal agreed with the Department and recorded:

“ Any system of accounting maintained by the assessee must include an acceptable basis for valuing its stock-in-trade too. If an assessee goes on altering his basis from time to time, the profits of the year cannot correctly be determined and will become distorted. In this case, the differential basis of valuation of opening and closing stocks will create an anomaly to the extent that a part of the previous year’s loss would become included in the year of account. . . . the loss claimed cannot be allowed as a deduction......”

It should be taken as well settled that a person engaged in business, who adopts the mercantile system of accounting is bound to value his unsold stock at the end of his year of account to balance his books. But he has the option of valuing the closing stock either at cost or at market value, if the market value is lower than the cost price. The theory that underlies the accepted principle, that the closing stock could be valued at the option of the assessee at cost or market value whichever was lower -was explained by the Supreme Court in Chainrup Sampatram v. Commissioner of Income-tax1. Their Lordships quoted with ap