S.A. Hakeem, J.
1. In these references under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, has referred the following common questions of law for the opinion of this court :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the interest of Rs. 4,15,343 taken directly to the interest suspense account is not assessable to income-tax
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in approving the system of valuation of stock-in-trade adopted by the assessee for the present assessment ?'
2. In our opinion, the first question is wholly covered by the ruling of the Supreme Court in State Bank of Travancore v. CIT : 158ITR102(SC) . Accordingly, it is answered in the negative and in favour of the Revenue.
3. The second question relates to the valuation of the stock-in-trade 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 over to the present method, provided such change is bona fide and followed thereafter. It is noticed by the Commissioner (Appeals) that in all the immediately preceding five years wherein the assessee had valued the securities at cost, the market value was higher than the cost in four years and only in one year it was less. It is because of the huge difference between the market value and the cost as on December 31, 1974, that the assessee must have thought it fit to switch over to the method of valuing the securities at cost or market price, whichever is lower. The Commissioner (Appeals) further held that it is not necessary to value the opening and closing stock of a year on the same basis. Holding that what is to be assessed is the real income of the bank, he directed the allowance as claimed. On further appeal by the Revenue regarding the valuation of the stock-in-trade, the Tribunal upheld the order of the Appellate Assistant Commissioner in accepting the method of valuation of closing stock adopted by the assessee. Aggrieved by this order of the Tribunal, the Revenue has brought up this reference on the question set forth earlier in this order.
4. The main contention of Mr. K. Srinivasan, learned counsel for the Revenue, is regarding the legality of a change in the method of valuation of closing stock from the cost value to market value. It is not disputed that the assessee is at liberty to adopt either cost value or market value for the purpose of valuation. However, the grievance of the Department was that the assessee who had been adopting only cost price had changed the method of valuation in the revised return and in the absence of such change being bona fide, there is no justification for the Tribunal approving the changed method of valuation of stock-in-trade adopted by the assessee for the first time. It is further urged by learned counsel that the ruling of the Supreme Court in the case of Chainrup Sampatram v. CIT : 24ITR481(SC) , relied upon by the Appellate Assistant Commissioner and the Tribunal, is only an authority to say that the assessee is at liberty to adopt either the cost price or market price, but the same cannot be read to justify the view that it can adopt the cost price for opening stock and the market price in respect of the closing stock in the same year. It is further urged that there should be a definite method of valuation 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.
5. In British Paints India Ltd. v. CIT : 111ITR53(Cal) , on a 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 profit or gain in these circumstances must necessarily be one of fact, and fact to be ascertained by the tests of ordinary business.
(4) There are no statutory rules for making this valuation and the ordinary method of commercial accounting must be followed except in so far as there is any specific statutory provision requiring otherwise. The method must be fair to the taxpayer and fair to the Revenue. Traders are allowed to value their unsold stock and work-in-progress either 'at cost or market price, whichever is lower. This is, however, a shorthand way of expression; it is not a rule of law. It is a workable method recognised in tax law. It must be adopted in commercial sense in consonance with accounting practice. Anticipated losses and profits for the aforesaid purpose are permissible, provided, however, there is a market in the ordinary sense, and the anticipation is backed by consistency of the method followed and the method followed is supported by recognised accounting principles, and
(5) Whatever is the method, it must be one recognised by accounting practice and sanctioned by commercial practice. The method adopted must be regularly followed over the periods. But the method adopted and regularly followed by the assessee and accepted by the Revenue should not be departed from unless there is good reason for the same. If, however, the method adopted and regularly followed by the assessee does not result in the determination of the true profits for tax purposes even for one particular year, or there is some other good reason, the Revenue is entitled to reject the method followed and value the stocks upon such basis as will result in the determination of true profits.'
6. In the present case, the Income-tax Officer has disallowed the assessee's claim regarding the valuation on three grounds, viz., (i) that all along the assessee had valued the investments in securities at cost and there were no compelling reasons for departure from established practice; (ii) to adopt one method for opening stock and a different method for valuing the closing stock would result in distortion of the true profits earned by the assessee; and (iii) that the loss had not been written off in the assessee's books of account.
7. On the application of the principles laid down by the Supreme Court in the leading case of Chainrup Sampatram v. CIT : 24ITR481(SC) , two principles 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.
8. 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 was also not disputed at any point of time. Hence, the only question that remains for consideration is whether the assessee is entitled to value the stock at cost or market value, whichever is lower, notwithstanding the fact that the assessee had failed to debit the anticipated trading loss in its books of account.
9. In Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) , where the assessee had made no provision in its books with regard to certain tax liability and the claim for allowance having been made in a revised return, it was held thus (p. 366) :
'An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed ......
10. The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account, although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter.'
11. In CIT v. Shoorji Vallabhdas and Co. : 46ITR144(SC) , where the assessee had claimed that it was not taxable on the entire amount even though credit entries for them had been made in the books of account, it was entitled to a lesser amount by virtue of a subsequent agreement, it was held thus (headnote) :
'The subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account .... The assessee had, in fact, received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable.
12. Income-tax is a levy on income. Though 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 sub-sequent 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.'
13. In Bank of Cochin Ltd. v. CIT : 94ITR93(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. This loss was not debited to the profit and loss account, but it was directly adjusted against devaluation profit made by the assessee. Still, it was not taken to be a valid ground for disallowing the claim of the assessee and the loss was held to be allowable. Similarly, in Indo-Commercial Bank Ltd. v. CIT : 44ITR22(Mad) , the loss had been charged to reserve and there was no debit for it in the profit and loss account. Still, it was not held to be a valid ground for disallowing the claim of the assessee and the loss was held allowable. In the instant case, it is not disputed that as on the valuation date, the market value of the securities was less than the cost price to the extent of the loss claimed by the assessee which is indicated in the balance-sheet itself. As such, it is rightly held by the Appellate Assistant Commissioner that the bank had incurred a substantial loss by the fall in the value of its securities, which is an important factor to be considered in computing the income of the bank. Ignoring this loss would certainly distort the real income of the year. The appellate authority has also taken note of the fact that these losses had arisen due to change in the bank rate during the year a similar position as in Indo-Commercial Bank v. CIT : 44ITR22(Mad) .
14. In the facts and circumstances of the case and the rulings referred to above, I am of the opinion that the Tribunal was justified in approving the method of valuation adopted by the assessee for the relevant assessment year. In that view of the. matter, question No. 2 referred is answered in the affirmative and against the Revenue.
Rajendra Babu, J.
15. I concur and wish to supplement what has already been stated by my Lord, as follows :
16. The contention of the Revenue is that in order to reflect true profits, change in the method of valuation of stock should be applied to both the opening stock as well as the closing stock and it is not open to the assessee to apply a new method to the closing stock alone without reference to the opening stock. The value of the closing stock in the previous year must be the value of opening stock in the succeeding year and, therefore, if the argument of the Revenue is accepted, there cannot be a change in the valuation at all. However, the effect of the ruling in Chainrup Sampatram v. CIT : 24ITR481(SC) is that there is no rule that the 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. : 149ITR759(Mad) and British Paints India Ltd. v. CIT : 111ITR53(Cal) .
17. 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 a change of stand in method of valuation of stock has been taken by filing a revised return. Merely because the assessee has to maintain statutory accounts and they do not contain entries regarding this loss, will not by itself be sufficient to discard this stand of the assessee. The assessee had, in fact, incurred substantial losses, as found by the Commissioner (Appeals) and the Tribunal, by the fall in the value of its securities and ignoring this loss would not give rise to correct trading results and the balance-sheet also indicated this position correctly and so this objection to allow the change in the method of valuation of stock has no substance.
18. The Commissioner (Appeals) found that the Revenue had not questioned the bona fides of the assessee in adopting the change in the method of valuation and the same had been followed in the subsequent years also and this finding has been reiterated by the Tribunal.
19. These findings and the position of law as set out above will reveal that the contentions raised by the Revenue have to fail and the view of the Tribunal has to prevail.