Commissioner Of Income-Tax vs Bank Of Baroda
2003 Latest Caselaw 352 Bom

JUDGMENT

S.H. Kapadia, J.

1. For the assessment year 1982-83, the Tribunal has referred the following question for our opinion under Section 256(1) of the Income-tax Act, 1961, at the instance of the Department :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to deduction on account of depreciation in the value of investments and, consequently, debiting disallowance of Rs. 11,82,35,007 ?"

Facts :

The assessee is a nationalised bank. The assessee-bank had in its possession, during the relevant assessment year, shares and securities worth several crores. The method of valuation followed by the assessee was to value investments at cost or market value whichever was lower. During the year of account, depreciation with regard to securities held by the assessee was to the tune of Rs. 11,82,35,007. The assessee-bank claimed deduction. This was disallowed by the Income-tax Officer. The assessee-bank went in appeal to the Commissioner of Income-tax (Appeals), who took the view that the said investments were rightly valued at the end of the year at cost or market value whichever was lower and the difference arising as a result of this valuation had to be allowed to the assessee as a loss. The assessee carries on business as a banking company. This order of the Commissioner of Income-tax (Appeals) was confirmed by the Tribunal. Therefore, the Department has come by way of this reference.

Arguments :

Mr. R. V. Desai, learned senior counsel appearing on behalf of the Department, contended that the securities were not held as stock-in-trade. That, they were held as investments and, consequently, the assessee-bank was not entitled to value such investments on the principle of cost or market value whichever was lower. It was argued that the securities were held by the assessee-bank as permanent investments.

Findings :

We do not find any merit in this argument. In the case of United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), the assessee-bank had submitted a return for the assessment year 1982-83 contending that there was a notional loss of Rs. 7.45 crores on account of closing stock of securities valued at market price which fell below the cost. The Income-tax Officer accepted the said loss vide assessment order dated March 19, 1985. However, the Commissioner of Income-tax intervened by order dated March 9, 1987, under Section 263 of the Income-tax Act. By the said order, the Commissioner set aside the order of assessment holding that the assessee-bank had no right to calculate profit or loss arising out of the investment trading account as the said account did not form part of the final account of the assessee-bank. That, since the investment trading account was not incorporated in the final account, the assessee-bank had no right to calculate profit or loss arising out of the investment trading account. In that matter, the assessee-bank was following the mercantile system of accounting and the loss claimed by the assessee was not debited in the profit and loss account. Against the order of the Commissioner under Section 263 of the Act, the assessee-bank preferred an appeal to the Tribunal which took the view that the assessee had claimed the loss by following the same method which it was following for the last 30 years. Consequently, the order passed by the Commissioner under Section 263 was set aside. Against the said order of the Tribunal, two questions were referred for opinion to the High Court. Answering the said questions, the High Court observed that the assessee-bank had not valued the stock of shares and securities in its books of account in accordance with the method of "cost or market price whichever is lower" ; if this method was not followed in preparing the investment trading account, then the assessee-bank cannot claim notional loss/notional method of stock valuation for computing income. The High Court took the view that the book results could be rejected by the Income-tax Officer under Section 145(1) of the Income-tax Act if the method adopted by the assessee-bank did not disclose a proper and true income. That, merely because in the past the system followed by the assessee-bank was not questioned was no ground to say that it should be accepted for all times. Consequently, the matter came before the Supreme Court. The apex court came to the conclusion that preparation of balance-sheet by the assessee-bank was governed by the Banking Regulation Act, 1949. That, under the Third Schedule to that Act, the balance-sheet and profit and loss account have been prescribed. That, in the prescribed form, there is a column "property and assets". Item 4 provides for investments (mode of valuation, i.e., cost or market value). Note (f) in column 4 states that where the value of the investments was higher than the market value, the market value shall be shown separately. Further, under Section 53 of the Banking Regulation Act, 1949, the Central Government on the recommendation of the Reserve Bank of India had issued a notification for banks in respect of the assessments to the effect that Note (f) shall not apply to the United Commercial Bank in respect of its balance-sheet. On the basis of the said notification, the United Commercial Bank did not mention the market value of the investments. In the circumstances, the Supreme Court came to the conclusion that from the form of the prescribed balance-sheet, it was evident that the nationalised banks were directed to put the value of shares and securities at cost and if the market value was lower than the cost then, it was to be shown separately in brackets. Before the Supreme Court, however, it was argued on behalf of the Department that the balance-sheet/audited accounts maintained on the basis of the investment in shares at cost would not disclose the real profit/loss of the bank in view of the fact that depreciation in the value of the shares or fall in the market price of the shares and securities was not provided for in the audited accounts. On the other hand, it was argued on behalf of the assessee-bank that even though in the balance-sheet the market price of the shares and securities was not mentioned yet, for determining the real income of the assessee, the said price was required to be taken into account. That, for the last 30 years, the assessee-bank was submitting income-tax returns after taking into account the market price of such shares and securities which was accepted by the Department. It was submitted that not making proper entries in the balance-sheet could hardly be a ground for not assessing the real income. The Supreme Court came to the conclusion on the above arguments that where the market value of shares and securities had fallen below the cost before the date of valuation and where on the date of valuation, the market value is less than the actual cost then the assessee was entitled to value the articles at market price and the assessee was entitled to claim the loss which the assessee would probably incur at the time of the sale of shares and securities. That, whichever method the assessee adopts, it should disclose the true picture of profits and gains. That, for determining the real income, the entries in the balance-sheet were required to be maintained in the statutory form. However, such entries in the balance-sheet were not decisive or conclusive. In such cases, it was open to the Income-tax Officer and the assessee to ascertain the true and proper income while submitting the income-tax returns. That, for valuing the closing stock, it was open to the assessee to value the stock at cost or market price whichever is lower. That, the assessee was valuing the stock-in-trade at cost for the purposes of statutory balance-sheet but, for the purposes of the income-tax return, the assessee was valuing the stock-in-trade at cost or market value whichever was lower and that practice was accepted by the Department for 30 years. Consequently, the Supreme Court allowed the appeal filed by the United Commercial Bank. In our view, the judgment of the Supreme Court in United Commercial Bank's case [1999] 240 ITR 355 squarely applies to the facts of this case. In fact, the present case before us is on a stronger footing because in the case of United Commercial Bank, the loss was not debited to the profit and loss account whereas in this case, as can be seen from the working at pages 25 and 26 of the paper-book, the loss of Rs. 11,82,35,007 has been debited to the profit and loss account which is reflected as a provision for liability in the balance-sheet and the shares and securities were valued at cost on the assets side.

2. For the reasons given hereinabove, we answer the above quoted question in the affirmative, i.e., in favour of the assessee-bank and against the Department.

3. Accordingly, the reference is disposed of with no order as to costs.