TMI Blog1988 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... rade of the banking business of the assessee. The assessee is a banking company. The matter has arisen out of the order in respect of the assessment year 1975-76 for which the accounting year ended on December 31, 1974. In the revised return filed by the assessee, a sum of Rs. 17,12,230 was sought to be written off as depreciation on account of fall in the market value of investments made by the assessee. The Income-tax Officer found that, all along, the assessee was valuing the investments at cost. There was no departure from this method at any time in the past. He disallowed the assessee's claim to write off the difference between the cost of investment and the market value of the same amounting to Rs. 17,12,230 against the closing stock value of investment adopted in the published balance-sheet. On appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld its claim and held that the securities being the stock-in-trade of the banking business, it is open to the assessee to value the stock at cost or market value, whichever is lower. It was further held by him that even if the method of valuation in the past had been different, the assessee had the right to change ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock which would be carried through from year to year and the assessee cannot be allowed to arbitrarily change the method of accounting as regards the basis for stock valuation to suit its purpose. In British Paints India Ltd. v. CIT [1978] 111 ITR 53, 62, on review of various earlier decisions, the Calcutta High Court has evolved the following principles on the question of valuation of closing stock : "(1) The true purpose of valuation of the unsold stock is to balance the cost of these goods entered on the other side of the account at the time of their purchase or production, so that cancelling out of the entries, relating to the same stock from both sides of the account, would leave only the transactions on which there have been actual sales in the course of the year showing profit or loss actually realised on the year's trading. (2) For the purpose of income-tax, the object of valuation of unsold closing stock is not to bring into charge any depreciation in the value of such stocks. (3) For the purpose of the aforesaid valuation, it is necessary to determine what in all circumstances represent the cost of stock-in-trade and work-in-progress. What is and what is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples appear to be well settled, i.e., that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is thus clear that irrespective of the basis adopted for valuation in the earlier years, the assessee had the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, at any time, provided the change was bona fide and followed regularly thereafter. Although the Income-tax Officer had taken that stand in the assessment order, the aforesaid propositions were not disputed either in the first appeal or before the Tribunal. The Department also did not dispute the quantum of loss claimed by the assessee which is also indicated in the balance-sheet as on December 31, 1974, in which after stating the face value of the securities and bills, the approximate market value is also mentioned which is lower than the cost. However, this loss was not debited to the profit and loss account. The fact that the securities formed part of the stock-in-trade of the assessee bank and that it was a trading loss w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." In Bank of Cochin Ltd. v. CIT [1974] 94 ITR 93 (Ker), the question that arose for consideration was whether the bank could value its securities at the market price which was lower than the cost price when it had been valuing them at cost in the past. For the year in question, the assessee had claimed certain loss by valuing the closing stock of securities at the market price which was lower than the cost to that extent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opening stock and closing stock of the same accounting year must necessarily be valued on one and the same basis. It is permissible, therefore, for the assessee to adopt either the market value or the cost price to value the closing stock as long as such change in the method of valuation is adopted bona fide and is thereafter continued year after year. In a year where the opening stock value adopted is in one method and closing stock in another, there is bound to be some anomaly in the year of change, but that will get ironed out and absorbed in course of time as the new method of valuation of stock is going to be applied on a permanent basis thereafter in later years. I derive support for this view from CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) and British Paints India Ltd. v. CIT [1978] 111 ITR 53 (Cal). It was submitted for the Revenue that the loss had not been adjusted in the books of account and it is only at the time of assessment that such change of stand in method of valuation of stock has been taken by filing revised return. Merely because the assessee has to maintain statutory accounts and they do not contain entries regarding this loss, will not by it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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