JAGANMOHAN REDDY, J. - The Income-tax Tribunal at Bombay has referred the follwing questions of law for determination under section 66(I) of the Indian Income-tax Act : (I) Whether the loss of Rs. 4,132 suffered by the assessee in speculation business done in Bombay can be set off against the assessees income from business in Hyderabad in the previous year relevant to the assessment year 1357 F. (2) Whether the assessee was entitled law to value the stock of cotton at the end of the immediately preceding year (and thereby at the commencement of this year) at market rate, though the same was higher than cost price 2. From the statment of the case it appear that the assessee who is a Hindu undivided family submitted his returns for the Samvat year 2003-04 (October 25, 1946, to November 12, 1947). The family gets its income from house property, agriculture, Commission business in the name of Ramnarayan Shivnarayan of Partur and a yarn and cloth business in the name Shivnarayan Bros. at Secunderabad. A return field by the assessee showed a loss of Rs. 4,132 in speculation in Bombay which was sought to be deducted from the profits of the family business. The Income-tax Officer rejected this contention and refused to adjust the amount in computing the profits of the business. On appeal, the Appellate Assistant Commissioner held that the transaction relating to this speculation was controlled from Hyderabad and that the loss should be considered to have accrued within the state. The Appellate Tribunal, however, relying on the case of Commissioner of Income-tax, Bombay v.Murlidhar Mathurawalla Mahajan Association directed the Income-tax Officer to allow the assessee to set off the amount of Rs. 4,132 against his profits from the business in this state. In our view, the Tribunal was right in so directing.Commissioner of Income-tax, Hyderabad v.Baliram Santhobaa held that such a loss incurred in Bombay could be set off against the profits earned in this State. The learned advocate for the Department frankly and quite submitted that in the light of that judgment he cannot press the point raised by the department. Having regard to the view expressed in the aforesaid case, the first question will be answered in the affirmative.
4. With respect to the second question it appears that the assessee has been maintaining his account from Samvat year 1997-98 to Samvat year 2003-04 which is the accounting year corresponding to October 25, 1946, to November 12, 1947, without striking balances or computing profits or losses. It may be well to remember that Hyderabad State had no taxation laws till 1352 F., in which year excess profits tax was levied. Prior to that merchants did not maintain regular accounts, or if they did maintain regular accounts, or if they did maintain regular accounts, they were not in the habit of preparing balance sheets or profit and loss accounts. The assessee appears to be one of those many persons and though he kept regular accounts, he was not in the habit of closing his accounts to profit and loss regularly each year. With respect to the stocks, he merely showed book balances in the cotton account.
5. Before the Hyderabad Income-tax Act was promulgated, it would appear from paragraph 6 of the statement of the case that though the assessee was subject to the Hyderabad excess profits tax up to the chargeable accounting year 1354 F., he had not valued his cotton stock, nor was profit and loss determined even for that period and seems to have escaped assessment. On the introduction of the Indian Income-tax Act, the assessee in order to ascertian his profit and loss from cotton business valued his closing stock prior to the year of account at the market value and showed opening value of that stock in the year of account at the same rate . The stock the closing of the year of account was also valued at market price. The Income-tax authorities rejected this method of valuing opening and closing stocks at market value and computed the profit on the basis of the cost price. On appeal the Appellate Tribunal held, that the assessee had not computed any profits prior to the year of assessment and was of the view that if the book value was taken as the proper opening balance, then it would amount to taking in the relevant account year some profits that might have escaped excess profits tax or business profits tax in the past. For this and also for the reason that the assessee was for the first time computing his profits and losses the Tribunal held that the assessee was entitled to value the opening and closing stocks at the market value or cost price according to his choice.
6. The learned advocate for the Department contends firstly, that the book value which has been shown by the assessee from the year S. 1977 to the accounting S.Y. 2003-04, has been valued at cost and secondly, when the assessee made returns to excess profit tax, he had computed his profit on the basis of valuing the stock at cost. These contentions are repelled by the learned advocate for the assessee who states that throughout balances have been shown as book which do not amount to valuing the opening and closing stocks at cost price, that as the assessee has not followed any regular method of valuing the stock until the year of account he has a right to value the stocks either at market value or cost price, and that it is in exercise of that right he valued the stocks at market rate. With respect to the contention of the learned advocate for the Department that the assessee had valued stocks for the purpose of excess profits tax at cost, we do not find a single passage in the statement of the case which would support this contention.
7. In this case, we find that the assessee has not computed profits and losses by valuing his opening or closing stocks in trade whether at cost price or at market price. For the period from Samvat year 1997-98, to 2000-01 the assessee has merely accounted for the opening balance, purchases during the year, expenses incurred thereon, and sales effected during the year. In this way he computed the balance between the debit and credit items carrying it forward as the book value of stock to the succeeding year.
8. We will now examine the contention advanced on behalf of the assessee that he has a right to value his opening and closing stock at market price. In order to determine profits or losses made during any year of account, the valuation of assets, whether fixed or floating, or lands and buildings, or stocks-in-trade, etc., is essential. From a commercial point of view in order to arrive at a true financial position of business or undertaking it is necessary to show all assets and liabilities at their proper value in a balance sheet. The capital of a business or undertaking at any given date is represented by the surplus of a assets over liabilities at that date. Since any increase or decrease in capital during that period would also indicate the profits or losses made during a given period, the ascertainment of true profits or losses,as also the correctness of the balance sheet, depend considerably upon the manner in which the various assets are valued for purposes of inclusion in the balance sheet. As the correctness of the profits or losses of a business depends to a considerable extent on the valuation placed on the opening and closing stocks-in-trade or other assets, the assessee has been given the option to value them either at cost price or at market price, but if he has adopted one of these methods, he should regularly employ the same method and not change it at his will and pleasure.Vithal Reddy Ranga Reddy v. The Government of Hyderabad after a careful review of the relevant cases dealing with the question of valuing stocks, laid down that where an assessee follows a method of account regularly employet and values his stocks on a particulars basis either at market value or va lue at cost, he cannot be allowed to change that basis. At page 330 we observed as under : "..... The established principle of commercial accounting requires that in the profits and loss account of a merchant or in a manufactures business the value of trading stock in hand at the beginning and at the end of the accounting year should be entered at cost or market price whichever is lower. It is obvious that the closing stock of a year is the opening stock of the next year and the assessee is free to adopt his own method of accounting. He may instead of valuing the stock at cost price or market price whichever is lower, regularly employ the the method of valuing at cost both at the beginning and at the end of every year (irrespective of any fluctuations in the market value) or only at market value irrespective of the question whether such valuation is higher than the cost." 10. The aforesaid observations were made in a case under the Hyderabad Excess Profits Tax Act, but the provision of the said law with respect to this matter being analogous will equally apply to a case of a similar nature arising under the Hyderabad Income-tax Act. It is not doubt true that Vithal Reddy Ranga Reddys case was one where the assessee, who was regularly valuing his opening and closing stocks at cost price, suddenly deviated from this in the fifth chargeable accounting period in which the opening stock was valued at cost price but the closing stock was valued at market price. This case is, however, sought to be distinguished on the ground that where the assessee has not adopted any regular method of valuing stocks, he can only value his stocks either at cost price or at market price whichever is lower; as such it is contended that since the cost price is lower than the market price, the assessee should only be allowed to value the stock at cost price. In our view, this contention has no force. It may be a sound commercial practice for the assessee to adopt the lower of the two methods of valuation, but that is a relief intended to be in favour of the trader enabling him to distribute his losses favourably.
It is the assessee who is given the choice to value his stocks and even though he is not regularly valuing his stocks previously, he is entitled to adopt one of the method for the purposes of his first assessement on the enforment of the Hyderabad Income-tax Act. If this were not so and the Income-tax Officer was given the option to value the stocks at cost price, there could be no question of the assessee ever having a right to choose a method of valuation or of his being free to regularly employ a particular method of valuation, either at market price or at cost price. In those circumstance the choice given to him would, in our view, appear to be Hobsons choice, which is no choice at all.
11. We are equally unable to agree with the contention of the learned advocate for the Department, that the book balances to which the Tribunal has referred would, in effect, mean that the stock had been valued at cost price, for the reason that the book value, as understood in commercial parlance, is the value of property as it appears in the books of a company at a given date. According to circumstances, the book value may be either more or less than the actual market value. In relation to assets subject to depreciation or amortization, the book value is used to represent the cost less the accumulated amounts written off on any given data. To illustrate this concept, let us say, a merchant has purchased 50 bales of cotton at Rs. 100 each and has incurred an expense of Rs. 300 for ginning and pressing. The value of 50 bales would then be Rs. 5,30. During the year he sells 25 bales at Rs. 1 50 each, realising Rs. 3,750. The book balance at the end of the year would be 25 bales of cotton, leaving a book balance on that account Rs. 1,550 which may not represent either the cost price or the market price. In other words, book balance computed after crediting that particular account with the sale price of the item or items of asset stocks sold, whether at a profit or at a loss.
12. Having regard to all the circumstances in this case, as the assessee has not adopted any regular method of valuing his closing stocks, at the market price in the year of accounts is, in our view, justified in law. the assessee having now made his choice will have to follow it regularly.
In the result, question No. 2 will be answered in the affirmative. Let the reference be answered according with costs to the assessee which we assess at Rs. 150.