TMI Blog2016 (7) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... nconsistent with the accounting principles. - Decided in favour of assessee Disallowance of claim of bonus - Held that:- As per final accounts, bonus a/c and Profit and Loss a/c, find there was a liability of Bonus payable only which was paid by appellant before the due date for furnishing the return of income on the previous year. The Auditors have given the necessary comments in this regard in the Audit Report. Under the circumstances and on the facts, AO is not justified in disallowing the bonus paid before the due date of filing the return and hence, addition cannot be sustained. - Decided in favour of assessee - ITA No. 507/PN/2014 - - - Dated:- 2-5-2016 - Shri R. K. Panda, AM And Shri Vikas Awasthy, JM For the Assessee : Shri Sunil Ganoo For the Revenue : Shri K.K. Mishra ORDER Per Vikas Awasthy, JM The present appeal filed by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-I, Nashik dated 08-01-2014 for the assessment year 2010-11. 2. The brief facts of the case as emanating from records are: The assessee is a Co-operative Society engaged in the banking business. The assessee filed its return of income for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of ₹ 12,76,657/- to the profit and loss account. Therefore, the same was disallowed by the Assessing Officer. The Commissioner of Income Tax (Appeals) deleted the additions merely on the ground that the Auditor has given necessary comments in this regard in the Audit report for the assessment year 2010-11. The ld. DR prayed for reversing the findings of Commissioner of Income Tax (Appeals) and restoring the order of Assessing Officer on both the issues. 4. Au contraire Shri Sunil Ganoo appearing on behalf of the assessee vehemently supported the findings of Commissioner of Income Tax (Appeals) in deleting the additions. The ld. AR submitted that the main objection raised by the assessee against change of method in valuation of stock is the refund of advance tax claimed by the assessee. The apprehension of the Assessing Officer was without any basis. The ld. AR further submitted that the assessee can change the method of valuation in a bonafide manner. There is no bar restricting the assessee to change the method of valuation. In support of his submissions, the ld. AR placed reliance on the following decisions : i. Commissioner of Income Tax Vs. Modern Terry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arupchand vs CIT (1936) 4 ITR 420 (BOM) . It is further observed that Bonafide change in the basis of valuation stock of securities is permissible where new method is followed thereafter regularly. It cannot be rejected on the ground that it is detrimental to Revenue, as held in the case of Indo commercial Bank Ltd vs CIT [1962] 44ITR 22 (Mad). Similar view is also laid down in the decisions CIT vs Corporation Bank Ltd [1988] 174 ITR 616 (kar); United Commercial Bank v. Commissioner of Income Tax [1999] 106 Taxman 601/240 ITR 355 (SC); Echke Ltd vs IT [2008] 173 Taxman 79(Guj), and CIT vs Modern Terry Towels Ltd [2013] 357 ITR 750 (Born) and Syndicate Bank vs. Dy CIT(2013) 26 ITR(Trib) 501(Bag). I find from the submission and information filed by the appellant that the method of valuation .adopted in respect of Government securities is bonfide and it is followed thereafter regularly. 5.4 As regards, Whether RBI's guidelines can override the provision of I T Act , I have carefully considered the submission of the appellant. I observe from the ratios laid down in the decisions relied upon by the appellant that RBI's guidelines cannot override the provision of I T Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chever is lower , which resulted in a loss to the tune of ₹ 8,39,17,500/-. Once a new method of valuation is adopted by the assessee the same must be followed on constant basis in the near future though in the year of change the valuation will have impact upon the valuation of closing stock but the same shall be ironed out in the subsequent years due to valuation of opening and closing stock on the same basis. The above findings were observed by the Hon'ble Court in the case of CIT Vs. Corporation Bank 174 ITR 616 (Karnataka). In this case the bank was valuing the securities held as stock in trade on Cost basis and subsequently changed the method of valuation to Cost or market price whichever is lower. It was held by Hon'ble Court that the assessee has right to change the method of valuation of closing stock provided the change is bonafide and the same method is regularly followed thereafter. The plea of revenue that the change method of valuation should be applied for both opening and closing stock was rejected by the Court. It was held by the Hon'ble Court that in the year of change there shall be some impact upon profit of the company but the same shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the opinion that the assessee Bank is holding various Government Securities in order to comply with the statutory liquidated ratio. The bank would have to hold requisite percentage of deposits in the form of cash, gold, government or approved securities. The government securities held for the purpose of comply with the SIR has been held to be stock in trade and therefore value of the same as on 31st March has to be made and there is any depreciation the same should be allowed as a revenue deduction. However, the RBI has issued Circular wherein they have classified the investment made to comply with SIR requirement as 'Held to maturity' (HTM), 'Available for sale' (AFS) and 'Held for Trade' (HFT). Based on the RBI Circular lower authorities came to the conclusion that investment in Government Securities which are classified under the head HTM cannot be considered as stock in trade and therefore depreciation in value of such securities cannot be allowed as a deduction. The Apex Court in the case of UCO Bank Ltd Vs CIT reported in 240 ITR 355 = (2002- TIOL-851-SC-IT) has held that value of the securities at cost or market value whichever is less should be ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such transfer should be fully provided for. The appellant has furnished a copy of the Board of Directors resolution No.11(6) passed in the meeting held on 30/05/2010 in regard to revaluation of the Government Security which is as follows :- Resolution No.11(6) On reviewing of the Balance Sheet, Protit .and Loss Account and Investment details of Government Securities of the Financial Year 2009-10. It seems that, Book Value of Investment in Government Securities is at ₹ 80,77,25,652/- where as it's Market Value as on 31/03/2010 was at ₹ 71,72,55,000/-. It means that Investment Government Securities has declined by ₹ 8,39,17,500/-. Upto now, our bank has taken valuation of Government Securities as per original Value (At Cost). Therefore, the Net Profit shown is not actual; it's only on the paper. Hence it is decided that at the time of filing the Income Tax Return for the F.Y. 2009-2010, the valuation of all Government Securities are to be adopted at Cost Price or Market Price, whichever is lower. According to the above, Valuation of the all our investment in Government Securities from the date of 31/03/2010 is valued as per ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be maintained is 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 been 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 Regulations. The RBI Regulations, the Companies Act and IT Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts. It is not decisive or conclusive in the matter. For the purpose of LT. Act whichever method is adopted by the assessee, a true picture of the profits and gains i.e., real income is to be disclosed. For determining the real income, the entries in the balance sheet required to be maintained in the statutory form may not be decisive or conclusive. It is open to the ITO as well as the assessee to point out true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock has come up before the Hon'ble Bombay High Court in the case of Commissioner of Income Tax Vs. Modern Terry Towels Ltd. (supra). In the said case the assessee was regularly following the method of valuing closing stock on the basis of net realizable value. During the period relevant to the assessment year 1997-98 the assessee changed the method of valuation of its closing stock from the net realizable value to the cost or market price, whichever is lower. As a consequence of the change in the method of valuing the closing stock the valuation of closing stock went down by ₹ 6.17 crores. The Assessing Officer did not accept the explanation offered by the assessee for change in the method of valuing the closing stock, viz., accounting standard AS-2. In first appeal the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee and deleted the addition. The Department carried the matter in appeal before the Tribunal. The Tribunal upheld the findings of Commissioner of Income Tax (Appeals). Thereafter, the matter travelled to the Hon'ble High Court. The Hon'ble High Court held as under: 19. This High Court in Melmould Corporation v. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to change his method of valuation provided it is bonafide and the changed method is regularly followed. The method adopted should be in accordance with the provisions of the Act and accepted principles of accountancy. 8. In the present case, the Revenue has not pointed out any infirmity in the method adopted by the assessee for valuation of stock. The appeal pertains to the assessment year 2010-11, the ld. AR has stated at the Bar that the assessee is following the changed method of valuation of stock even today. The ld. DR has not controverted the statement made by the ld. AR. Since, the method of valuation of stock has been regularly adopted by the assessee this shows the bonafide of assessee in changing the valuation method. Reduction in profit due to change in valuation method of stock cannot be a reason to reject the claim of assessee. Whenever, there is change in method of accounting, there would be aberrations in the financial results. We do not find infirmity in the well reasoned and detailed findings given by the Commissioner of Income Tax (Appeals). It is not the case of the Revenue that the method of valuation of stock adopted by assessee is inconsistent with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the bonus of ₹ 12,76,657/-. It is, therefore, requested to your kind honour that the addition may please be deleted. 6.2 I have carefully considered and verified the facts of the case. As per final accounts, bonus a/c and Profit and Loss a/c, I find there was a liability of Bonus payable to the extent of ₹ 15,96,166/- only which was paid by appellant on 09-08-2010 i.e. before the due date for furnishing the return of income on the previous year. The Auditors have given the necessary comments in this regard in the Audit Report for AY. 2010-11. Under the circumstances and on the facts, AO is not justified in disallowing the bonus which was paid on 09/08/2010 i.e. before the due date of filing the return and hence, addition cannot be sustained. Thus, addition of ₹ 12,76,657/- is hereby deleted. The A.O. directed accordingly. This ground of appeal is allowed. 10. The ld. DR has not been able to show as to how the findings of the Commissioner of Income Tax (Appeals) on the issue are perverse. The findings of the Commissioner of Income Tax (Appeals) are well reasoned and we concur with the same. We do not find any merit in the ground no. 1 raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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