TMI Blog1961 (3) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, 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." Their Lordships proceeded: "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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the option once exercised was final and that the assessee bank could not claim a second opportunity to exercise its option, and thereby change the basis of valuation. The same plea, that a mode of valuation once adopted can never be changed, was presented in a different form. The learned counsel for the department submitted that the mode or method of valuing the closing stock was a method of accounting within the meaning of section 13. Section 13 permitted an assessee to choose his method of accounting. But what section 13 required was that that method of accounting should be regularly employed. The further submission of the learned counsel was that arbitrary changes at the will of the assessee would be inconsistent with the statutory requirement of regular employment of the chosen method of accounting, and therefore no change from a system of accounting regularly employed in the past was ever permissible. We accept as correct the contention of the learned counsel for 'the department, that the method an assessee adopts for valuing his closing stock is a "method of accounting" within the meaning of section 13. At any rate, it is an integral part of the method of accounting know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost instead of at market value was the method adopted by the assessee.bank down to the end of 1950. It was a method of accounting within the meaning of section 13. The question is, whether section 13 or any other concept of revenue law bars an assessee from changing his method of accounting. As has been repeatedly pointed out by courts, it is the assessee and not the department that has the choice of the method of accounting. The department is bound by the choice of the assessee, except in the cases specified in the proviso to section 13. The method of accounting chosen by an assessee can be rejected by the department if it was not regularly employed. Even if it was established to have been regularly employed by an assessee, the department can reject the accounts as the basis for the computation of the income of the assessee, if the income cannot be properly deduced from the accounts based on the system of the assessee's choice. Section 13, however, does not expressly or impliedly sanction a rejection of the assessee's accounts, if nothing more is established than that the assessee has changed his method of accounting. If an assessee bona fide changed, his method of accounting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax v. Chari and Ram [1949] 17 ITR 1 (Mad.) to which we have already adverted, there was no express decision on the question whether an assessee could change his method of valuation. In that case the method of valuation was changed and the right to effect that change was not challenged. The assessee's claim to have his profits assessed on the changed basis of valuation was upheld by the court. The learned counsel for the department relied on the observations of the Privy Council in Commissioner of Income-tax v. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56 and extracts from which we set out earlier in another context. That however is not authority for the proposition for which the learned counsel contended, that no change is ever permissible, in the sense that a change in the method of accounting with nothing more brings into play the proviso to section 13. The learned counsel for the department next referred to a decision of the Hyderabad High Court, Vithal Reddi v. Hyderabad Government ILR [1953] Hyd. 326. The same learned judges reaffirmed their views in Commissioner of Income-tax v. Sri Kishenlal Badrilal [1956] 29 ITR 443 (Hyd.). In Vithal Reddi s case (supra) the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mandatory provisions of section 13. Neither principle nor authority bars an assessee from substituting one method of accounting for another at his choice. The effect of section 13 is not that the choice of the method of accounting can be made only once by an assessee. Is there anything then to differentiate the method of valuation of the closing stock, viewed either as a method of accounting by itself or as an integral part of a method of accounting ? In other words, while the assessee can exercise more than once his option to choose his method of accounting as a whole, can he be denied the right to exercise his right a second time to choose the method of valuing his closing stock, provided, of course, the change is bona fide and he further satisfies the statutory requirement of section 13 that the new or changed system of valuation is for regular adoption and not merely for purposes of assessment in the year in question ? As we said, we accept as sound the principle laid down in Sarupchand v. Commissioner of Income-tax [1936] 4 ITR 420 (Bom.). Extending that principle to changes in the method of valuation of closing stock, the position we reach is that an assessee is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll illustrate our point by an example. Suppose the bank valued its unsold securities at cost, Rs. 100 in 1948, 1949 and 1950, despite the fact that in 1949 the market value fell to Rs. 90 and to Rs. 80 in 1950. Suppose the market value at the close of 1951 was Rs. 70 and the bank valued its closing stock at Rs. 70, Rs. 30 would be the anticipatory loss, on which a claim for deduction could be based. If in 1952 there is a further fall from Rs. 70 to Rs. 60 and the securities are sold at the market value of Rs. 60 all that could be claimed as loss is Rs. 10, the difference between Rs. 70 and Rs. 60. If, however, the market value registers a rise, and the security is sold at a market value of Rs. 110, the assessee bank would be assessed to a realised profit of Rs. 40 the difference between Rs. 60 and the book value, Rs. 70. If the sale is at a market value of Rs. 75, five rupees which constituted the difference would be treated as a profit in 1952 though the sale was below the original cost price. It should be remembered that stock-in-trade are not held permanently but are held only for sale. When securities are treated as part of the stock-in-trade of a bank, that they are not so qui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee bank held in the India Cements Ltd. the assessee bank received Rs. 40,856 and Rs. 10,690 respectively as dividends in 1951 and 1952. The specific claim of the assessee bank, that these amounts were exempt from taxation under section 15C(4) was advanced for the first time before the Appellate Assistant Commissioner. He rejected it. Independently of section 15C(4), the Appellate Assistant Commissioner directed a deduction of Rs. 7,122 from Rs. 40,856 in the assessment year 1952-53. It was really the claim for the balance that could have been in issue before the Tribunal. In rejecting the assessee's claim the Tribunal recorded : "The exemption granted under section 15C(4) should in our opinion originate from the company in whose proceedings alone the question of any application of the benefits of section 15C to which it may be due, could be considered on its merits .... So long as the assessee is unable to obtain a proper certificate, from the cement company that its dividends or any part thereof was exempted under section 15C the benefit conferred by section 15C(4) is not available to it." In our opinion the Tribunal was not right in holding that unless the company that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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