1. Appeals bearing IT Appeal Nos. 327 and 380 of 1978-79 are cross-appeals for the assessment year 1976-77 and the remaining appeal pertains to the assessment year 1975-76. Since these appeals involve related issues, these are disposed of by a consolidated order for the sake of convenience. Before we set out the issues, it is necessary to record the factual background from which they emanate and this is as under.
2. The assessee is the State Bank of Patiala. As the very name suggests, the assessee is a banking institution. Under the Banking Regulation Act, 1949, the assessee is required to maintain a specified percentage of its assets in liquid form. Inter alia, Section 24 of the Banking Regulation Act requires that after the expiry of two years from the commencement of this Act, every banking company shall maintain in India in cash, gold or unencumbered approved securities (emphasis supplied), valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than the prescribed percentage of the total of its time and demand liabilities in India. There is an Explanation to this section which gives an inclusive definition of, 'unencumbered approved securities'.
According to this Explanation, such securities shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of as detailed thereunder. At the time, when these assessment proceedings were going on, according to the manager, general department of the assessee, this percentage of the liquid assets required to be so maintained was 34 per cent of the total time and demand liabilities of the bank. The bank in this regard, therefore, has to make investment in the Government and other trustee securities which are approved in compliance of the above provisions of the Banking Regulation Act. The bank finds the Government securities available in bulk and also approved for investment and, therefore, makes investment generally in these securities in view of the statutory requirements of the Banking Regulation Act.
3. The practice followed by the assessee with regard to these securities was that their purchase price was debited in its books of account and the securities were shown as such in the final accounts for each of the assessment years of the bank. Whenever, these securities were sold by the assessee, the difference in positive or negative form was not earlier considered as the trading profit or loss. In fact, the assessment for the year 1973-74, appearing at pages 15 and 16 of the assessee's paper book, shows that the profit, if any, arising from change of such securities was considered as capital gains. It appears that for the assessment year 1974-75, the issue did not come up for appellate consideration as there was no dispute about it. However, for the assessment year 1975-76, the assessee-company claimed a loss of Rs. 29,127 incurred by it on securities switched over with State Bank of India and further, claimed the loss of Rs. 14,27,868 as a deduction from its total income on account of loss arising from valuation of the Government and other trustee securities held by the bank at the end of the accounting period relevant to this assessment year, in view of the statutory obligation under the Banking Regulation Act.
4. For the assessment year 1976-77, for which the previous year was calendar year 1975, the assessee claimed deduction of Rs. 7,89,558 as loss on valuation of securities held in the manner described above. The ITO considered these claims but rejected it on the ground that such a claim for deduction as business loss could be entertained if the assessee was holding the securities as stock-in-trade and was then engaged in regular business of purchase and sale of securities. He also observed in his impugned order for the assessment year 1975-76 that the assessee had earlier sold some securities and the profit thereon had been assessed to tax as capital gains and not as business profit. The ITO further observed that 'it seems that the loss has been claimed on the basis of valuation of securities at the close of the year and there is no loss on the purchase and sale thereof. Since it has been stated by the assessee that some of the securities which have been sold, were purchased more' than 5 years back, the nature of loss, therefore, will be as that of long-term capital loss. Hence, it is not deductible from the profits of the current year.' The ITO also noted that even otherwise it was only a book loss because earlier, the securities were being valued at cost and only on sale of such securities the profit or loss was worked out. It was for the first time, according to him, that the assessee worked out the loss on the difference between the market value and the book value of these securities for the assessment year 1975-76.
5. For the a sessment year 1976-77, the representative of the assessee emphasised before the ITO that the securities were held as stock-in-trade of the bank and as such the bank was entitled to value the securities either at cost or at market price, whichever is less.
Certain decisions were quoted before him for his consideration. The ITO observed that the securities were not part of the stock-in-trade of the assessee. According to him, there had been no change in the securities held by the assessee 'for the last number of years'. According to him, this indicated that only surplus funds of the bank had been invested in the securities to earn income. On such facts, according to him, the claim of the assessee was incorrect. He disallowed it.
6. For the assessment year 1976-77, the assessee had also claimed an amount of Rs. 70.92 lakhs as a deduction under Section 40A of the Income-tax Act, 1961 ('the Act'). The ITO in this regard observed that, 'perusal of the details filed goes to show that the assessee bank has claimed gratuity liability pertaining to earlier years, i.e., 1971 to 1974. If the assessee fulfils the condition as laid down in sectidn 40A(7)(b)(ii), it can make the claim for the earlier years and the same would be considered'. According to him, the provision for gratuity on the basis of certificate of actuary relating to the assessment year 1976-77 was only Rs. 9,63,500. This was considered as admissible and allowed by the ITO. Thus, out of Rs. 70.92 lakhs claimed by the assessee, the deduction for a sum of Rs. 9,63,500 only was allowed. The balance of Rs. 61,28,500 was disallowed but in the computation of the total income, the ITO has taken the figure of Rs. 61,29,000.
7. The assessee felt aggrieved and took these assessments in appeal before the first appellate authority.
8. The first appellate authority in this case is the Commissioner (Appeals). The learned Commissioner (Appeals) made the order for the assessment year 1976-77 on 28-81978. Since he had made the order for the assessment year 1976-77 on 28-8-1978, insofar as the appeal for the prior year, i.e., the assessment year 1975-76 is concerned, he followed his reasoning in his order dated 22-12-1978 for that year. Therefore, we take up for consideration his order for the assessment year 1976-77 first. The learned Commissioner (Appeals) took into consideration, the treatment given to the profit or loss arising from the sale of securities in the earlier years in the case of the assessee and found that earlier, it was considered as capital gains or loss. According to him, therefore, this practice indicated that the assessee-bank itself had always considered the purchase of these securities as investment and from that point of view, profits or losses thereon were shown by the assessee and assessed by the ITO as capital gains or losses. He, therefore, agreed with the ITO that securities were held by the bank by way of investments and, therefore, loss on their valuation was not admissible as a deduction in computing the total income of the assessee in any of the assessment years under appeal.
9. Having so disposed of the issue of deduction of loss on account of securities, the learned Commissioner (Appeals) took up the matter with regard to claim for deduction of the sum of Rs. 70,92,000. This claim he disposed of as under: 6. The fifth and sixth ground relates to the claim of provision of gratuity made by the appellant and was disallowed amounting to Rs. 61,29,000 out of Rs. 70,92,000 claimed as a provision on the grounds that the same pertained to the earlier years, i.e., 1971 to 1974. It was explained by the A.R. that the amount represented the contribution made by the bank towards gratuity fund approved by the CIT vide his letter Judl/I/Gratuity/Fund/SHP/72-73/31616, dated 11-12-1972 effective from 1-1-1970 and in terms of Rule 104 read with Section 36(1)(v) it would be admissible being initial contribution towards an approved gratuity fund because the same represented the contribution as calculated on the actuarial valuation and calculations vide certificate from the Fellow of the Institute of Actuaries, London, made available in this regard. That being the position, the appellant will get a relief of Rs. 61,29,000 under this head.
Now, out of the above impugned orders of the learned Commissioner (Appeals), the assessee is aggrieved with the confirming of the order of the ITO for the assessment year 1975-76, holding that the securities were held by the assessee as not stock-in-trade and thereby, confirming the addition of Rs. 14,27,868. For the assessment year 1976-77, there are cross-appeals. The assessee is aggrieved with the order of the Commissioner (Appeals) for not accepting its claim for deduction of the amount of Rs. 7,89,558. In its first ground, it is pointed out that the learned Commissioner (Appeals) erred in confirming the addition made by the ITO by disallowing the claim of the appellant on account of loss in securities. The word used in the ground is 'revaluing' the securities but later on the learned counsel for the assessee amended this word 'revaluing' with the word 'valuing' the securities. As the entire gambit of the treatment given to the securities by the assessee in its books of account in the course of its business has to be gone through by us, the substitution of the word was allowed. Insofar as the cross-appeal of the revenue is concerned, the grievance projected is that the Commissioner (Appeals) erred in holding that the sum of Rs. 61,29,000 representing 'provision of gratuity' is an allowable deduction under Section 36(1)(v) of the Act and thereby, deleting the addition made by the ITO.10. The learned counsel for the assessee, who had the privilege to argue his appeal first, submitted that insofar as the securities are concerned, the issue is: whether, on the facts and in the circumstances of the case, the securities, namely, the Government and trustee securities, held by the bank, constituted its stock-in-trade for the years under appeal or were held as investments on capital account Having so framed the issue, he submitted that the authorities below were unduly influenced with the method and manner in which the securities and sale thereof were treated in the earlier assessment years. He submitted that firstly, the statement of the authorities below that there was no change in securities and there was no purchase and sale of securities during the last several years was factually wrong. In this regard, he invited our attention to pages 6 to 13 of the first paper book filed, wherefrom he indicated that in the calendar year 1972, relevant to the assessment year 1973-74, the assessee purchased securities of the face value of Rs. 4,09,49,900. Similarly, the assessee purchased securities for the assessment years 1974-75 to the extent of Rs. 5,43,94,100. He also indicated that there were purchases in the similar manner for the assessment years 1975-76 and 1976-77. These details appear at pages 6 to 9 of the paper book. He also pointed out that there was redemption of securities, during the calendar year 1972, relevant to the assessment year 1973-74 and in such redemption there was surplus of Rs. 25,197.74. Similarly for the calendar year 1973, there was redemption of securities resulting into loss of Rs. 5,375. Similar figures for the assessment years 1975-76 and 1976-77 have been given. These details appear at pages 10 to 13 of the first paper book of the assessee. The learned counsel for the assessee submitted that in the income-tax proceedings, the principles of res judicata and estoppel are not applicable. For this, he placed reliance upon the ratio of the following judgments: New Jehangir Vakil Mills Co.
Ltd. v. CIT  49 ITR 137 (SC) and M.M. Ipoh v. CIT  67 ITR 106 (SC).
He, therefore, contended that the authorities below instead of following the decisions taken in the earlier assessments should have given a fresh look to the issues raised before them but they have failed to do so. The orders made by them are, therefore, not giving proper perspective of the facts and the issues involved and are as such not justified.
11. Coming to the issue involved, he submitted that the loss arising on account of valuation of the securities by the assessee by treating them as stock-in-trade is admissible in view of the judgment of the Kerala High Court in the case of Bank of Cochin Ltd. v. CIT  94 ITR 93 and another judgment of the same Court in the case of Malabar Co-operative Central Bank Ltd. v. CIT  101 ITR 87. It was submitted that for the years under appeal, the assessee had started valuing the securities either at market price or cost, whichever was lower. This method had been adopted from the assessment year 1975-76 and has been regularly followed for the subsequent assessment years. In this regard, he submitted that in the assessment year 1978-79, the assessee followed the same method for valuing the securities and took the difference into the profit and loss account. He in this regard pointed out that there was profit of Rs. 15,71,548, which was taxed by the ITO as capital gains. But in appeal, the learned Commissioner (Appeals) vide his order dated 24-11-1981, relating to the assessment year 1978-79, appearing at pages 43 to 52 of the paper book, accepted the contention of the assessee and directed that the said profit be treated as business income. Thus, hepointed out that there were even on this issue, very clearly two reasonable views possible as the authorities below in the case of the assessee for the years under appeal had taken a contrary view to what has been adopted by the Commissioner (Appeals) in the assessee's case for the assessment year 1978-79. He further pointed out that for the assessment year 1977-78, a simiiar issue is in appeal. The Bench had enquired of him as to how the interest on these securities had been taxed by the ITO for the assessment years 1975-76 to 1977-78. In this regard, the learned counsel for the assessee submitted figures of the interest from securities amounting, respectively, to Rs. 1,84,16,840, Rs. 2,06,82,076 and Rs. 2,42,69,576 for the assessment years 1975-76 to 1977-78, taxed under the head 'interest on securities'. He, however, contended that for the years under appeal, income from interest on securities and even in the earlier years, nevertheless, partakes the character of business income of the assessee in view of the judgment of the Supreme Court in the case of United Commercial Bank Ltd. v. CIT  32 ITR 688. He contended that mere crediting or debiting a particular amount under a particular head by the assessee, cannot and should not determine its taxability under that head and that it should be taxed under the proper head in accordance with law. In nutshell, his argument was that whatever method had been adopted by the assessee, in accounting for the interest on the securities and the difference between the purchase and sale when they were sold in the earlier years, should be considered as immaterial for determining the issue in appeals before us now. If the proper perspective, according to him, is kept in view about the nature and the method of functioning of the assessee-bank, there cannot be any doubt that the income from interest on securities and the sale and purchase difference is nothing but business income of the assessee and should be treated as such for taxation purposes. He contended that when an assessee bona fide changes the method of accounting and satisfies the department that he intends to adopt a changed method of accounting thereafter, or that he has in fact adopted it thereafter, the claim of the assessee should be accepted. For this proposition he relied on the Madras High Court judgment in the case of Indo-Commercial Bank Ltd. v.CIT  44 ITR 22 and another judgment of the Supreme Court in the case of Investment Ltd. v. CIT  77 ITR 533.
12. The learned counsel for the assessee argued with regard to the switched over transactions of the assessee for each of the assessment years under appeal and contended that the exchange of one security for another could be described as a realisation of the security resulting in profit and relied on the iudgment of the Calcutta High Court in the case of Orient Trading Co. Ltd. v. CIT  131 ITR 477.
13. The ITO had referred to the judgment of the Supreme Court in the case of United Commercial Bank Ltd. (supra) and, according to him, if the tests laid down by the Supreme Court were applied, the assessee's case would show that the securities were held as capital investment and not stock-in-trade. Adverting to this aspect of the matter dealt in by the ITO for the assessment year 1976-77, the learned counsel for the assessee submitted that the observations made by the Hon'ble Court in that case are not applicable to the facts of the case before us because the Banking Regulation Act was not on the statute book when the said judgment was delivered and anything said therein, cannot blindly be applied to the facts of this case.
14. Opposing these submissions, it was contended on behalf of the revenue that the assessee has no reason to change the method of accounting, earlier adopted by it in the treatment given to the securities in its books of account. The orders of the authorities below are, therefore, fully justified and required no change at the instance of the assessee. It was also contended that reliance placed by the assessee on the Kerala High Court judgment in the case of Bank of Cochin Ltd. (supra) is unwarranted because in that case the issue was of the moneys kept by the bank in other banks. It was contended that the business of the assessee is not dealing in securities and, therefore, neither the interest on such securities can be treated as business income nor the profit or loss arising on sale thereof can be treated as business income. The authorities below were, therefore, fully justified in the treatment given to the claim of the assessee for the two years under appeal.
15. The revenue argued its appeal bearing IT Appeal No. 380 of 1978-79 with regard to the observations of the learned Commissioner (Appeals) in his impugned order regarding the sum of Rs. 70.92 lakhs. The ground taken by the revenue originally was that the learned Commissioner (Appeals) erred in holding that the sum of Rs. 61,29,000 representing 'provision of gratuity'is an allowable deduction under Section 36(1)(v). The revenue has filed what is described as additional grounds and, inter alia, in these grounds marked as 4, 5 and 6 projected different aspects of the same problem. We have admitted these grounds for our consideration as the issue involved before us required consideration and decision on various facts which have been projected in these grounds by the revenue. The revenue contended that the learned Commissioner (Appeals) gave a very summary disposal with regard to the issue of deduction of Rs. 61,29,000 and did not make a reasoned order.
In this regard, the learned departmental representative particularly brought to our notice the one line disposal made by the learned Commissioner in allowing the claim of the assessee. The learned counsel for the assessee, on the other hand, submitted that the order has been made by the learned Commissioner (Appeals) and it may reasonably be inferred that he had considered all aspects of the case before accepting the claim of the assessee.
16. We have given very careful consideration to the rival submissions and before we go to the consideration of the issue of taxability of the interest on securities and of the profit or loss arising from their sale or method of valuing or valuation of switching over, we would first like to dispose of the issue involved in the appeal of the revenue pertaining to provisions for gratuity. As pointed out earlier, in the statement of the facts which have to be taken into consideration for determining the issues involved in these appeals, the ITO had to consider the claim of the assessee with regard to the sum of Rs. 70.92 lakhs and he pointed out that the claim was relatable to the assessment years 1971-72 to 1974-75. He also pointed out that the amount actually relatable to the assessment year under appeal was only Rs. 9,63,500.
Having allowed the amount relating to the year under appeal, the ITO added the amount of Rs. 61,29,000 which we have pointed out should be, according to these figures, Rs. 61,28,500 on the ground that this was not admissible for the year under appeal. Now, when this issue had come up before the learned Commissioner (Appeals), he should have noticed that the ITO had referred to the provisions of Section 40A in considering this claim. Section 40A came on the statute book by way of insertion by the Finance Act, 1968, with effect from 1-4-1968. Section 40A(7) was inserted by the Finance Act, 1975 with effect from 1-4-1973.
In other words, it has retrospective effect from the assessment year 1973-74 and this supersedes the general principle as regards liability for gratuity. On the general principles of law, the obligation to pay gratuity or other retiring benefits for the services rendered by the employees of the assessee in an year is a definite and not contingent liability. If such a liability had been actuarially valued, it was deductible even if the employer did not transfer the amount of the liability to a trust fund and this was deductible under Section 36.
However, with the amendment in law by the insertion of Sub-section (7), the gratuity is deductible only in three cases: (i) where it is paid or has become payable from the accounting period; (ii) where a contribution is made towards an approved gratuity fund or the provision is made for such contribution; and (iii) where a contribution is made towards an unapproved gratuity fund held under a trust.
Clause (6)(ii) of this sub-section makes a special provision for deduction of liability for gratuity for the assessment years 1973-74 to 1975-76 to mitigate partially the injustice that may arise from the retrospective operation of this sub-section. There are certain conditions to be satisfied and the matter requires very careful consideration with regard to such matters. But when we see the order of the learned Commissioner (Appeals), we are constrained to observe that the grievance of the revenue is fully justified. After recording the amounts required to be deducted and the contentions of the assessee, what the Commissioner (Appeals) has done is as under: That being the position, the appellant will get a relief of Rs. 61,29,000 under this head.
We cannot consider this as a satisfactory disposal of the important issue that was brought before him. Various aspects of the law and accountancy involved in this claim should have been gone through by him and a reasoned order given to the satisfaction of both the sides so far as the various aspects of the problem were involved. It is a different matter if even then one of the parties could have been an aggrieved party but the grievance that the revenue is projecting now before us could not have been validly made. Since the learned Commissioner (Appeals) has not disposed of the appeal properly on merits, we have no other alternative but to set aside his order on this issue and direct him to dispose of this issue de novo in accordance with law after affording reasonable opportunity of being heard to both the sides and after considering all the aspects of the matter, legal as well as factual, and make a reasoned order. We order, accordingly. This disposes of the appeal of the revenue and this has to be considered allowed for statistics.
17. Now we come to the appeals of the assessee for the two assessment years under appeal where the issue involved is only one that we have already stated in detail supra. Before we come to the issue, we would like to record what is the law on the issue which we have to take into consideration to decide the issue.
18. The Privy Council in the case of Punjab Co-operative Bank Ltd. v.CIT  8 ITR 635, while considering the issue of taxability of profits derived from sale of shares and securities by the bank from the angle of income as such or capital gains, made observations as to what is the business of a bank and this is what their Lordships recorded: ... In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous dipositors place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence....
In the case of United Commercial Bank Ltd. (supra), the Privy Council decision in Punjab Co-operative Bank Ltd.'s case (supra) was projected to their Lordships of the Supreme Court and their Lordships in the ratio of this judgment have held that "income from 'interest on securitie' falls under Section 8 of the Income-tax Act, 1922, and not under Section 10 of the 1922 Act, it cannot be brought under a different head of income, viz,, 'profit and gains of business' under Section 10, even though the securities are held by a banker as part of his trading assets in the course of his business". But their Lordships considered this issue again in the case of CIT v. Cocanada Radhaswami Bank Ltd.  57 ITR 306 (SC) and observed that income from securities, which formed part of the assessee's trading assets, was part of its income from business and, therefore, the loss incurred in the business in the earlier years could be set off against the income from securities also in the succeeding years. At page 311, their Lordships of the Supreme Court have observed that the decision of the said Court in the case of United Commercial Bank Ltd. (supra) did not lay down any different proposition. It held, after an exhaustive review of the authorities, that under the scheme of the Indian Income-tax Act, 1922 ('the 1922 Act') the head of income, profits and gains enumerated in the different clauses of Section 6 of the 1922 Act were mutually exclusive, each specific head covering items of income arising from a particular source. On that reasoning, the Court pointed out that it was held that even though the securities were part of the trading assets of the company doing business, the income therefrom had to be assessed under Section 8 of the 1922 Act. Thereafter, the Hon'ble Court has made very significant observations that, 'this decision does not say that the income from securities is not income from the business.' The above judgment of the Supreme Court clearly shows that in the case of a banking company, whose business is banking, interest on securities has to be treated as income from business, irrespective of the head under which it may have been or is taxed.
19. This point was further clarified by the Orissa High Court in the case of CIT v. Orissa State Co-operative Housing Corpn. Ltd.  104 ITR 157 where the Court held that though for the purposes of computation of income, interest on securities is separately classified, income by way of interest on securities would not cease to be part of income from business if the securities are part of the trading assets of the assessee. Whether a particular income is part of income from business falls to be decided not on the basis of the provisions of the section dealing with it but on commercial principles. Again the Delhi High Court in the case of Snam Progetli S.P.A. v. Addl. CIT  132 ITR 70 has observed that the question to be seen in such a case is whether the interest income is derived also from what may be described as business activity. If it is so derived, then the mere fact that it is taxed under a different section will make no difference. The approach to the problem has, therefore, to be dissociated from the section under which the tax is imposed on the form of income.
20. The Supreme Court observed in the case of Investment Ltd. (supra), that a taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. In the case of Bank of Cochin Ltd. (supra), the Kerala High Court has held that it is a sound commercial practice to value the closing stock at cost or market price, whichever is lower.
The mode of valuation of a closing stock can be changed by the assessee provided such changed method is followed regularly. In that case, the assessee had adopted the method of valuing the stock at cost price from 1960 to 1965. In 1966, the assessee adopted the market price which was lower and in the subsequent years, i.e., 1967 and 1968, the assessee adopted the cost price which was lower than the market price. The assessee changed the method of valuation and adopted the method of valuation of the closing stock at cost or market price, whichever was lower and followed it in the subsequent assessment years. This was approved by the Court and the action of the assessee was justified.
21. We have to examine the case of the assessee in the light of the above position of law. We have already set out the facts of the case.
From these facts, it becomes clear that in carrying on the business of banking, the act of making investment in the Government securities and in trustee securities is an essential incident of the assessee's business. In fact, it is a sine qua non in view of the provisions of Section 24 of the Banking Regulation Act for the assessee to carry on the business in a lawful manner. Therefore, when the assessee makes investments in the Government securities and in trustee securities up to a level prescribed by the statute or even beyond that, what the assessee is doing is only meeting one of the requirements of carrying on the business and this requirement is, in fact, a part of the carrying on of the business of the assessee. These investments, therefore, are in the ordinary course of the business of the assessee.
The issue, however, is how the income therefrom or the profits or losses arising either fom their sale of switching over or valuation has to be treated.
22. The law pointed out above clearly shows that though, for the purposes of meeting the requirements of the Act, interest on securities can be taxed as income under the head 'Interest on securities' yet, in this process this income does not lose its character as that of business income of the assessee. This is as good business income as income actually taxed under the head 'Profits and gains of business or profession' in the computation of total income of the assessee. But, the issue before us is not the taxation of the income which is taxed under the head 'Interest on securities'. The issue is limited to the treatment to be given to the difference arising out of the valuation of the securities at the end of the previous year relevant to the assessment years under appeal. This issue can easily be decided in view of the guidelines provided by the Hon'ble Courts to which we have adverted to in the paragraphs above. These guidelines clearly show that the assessee has the right to value the securities either at market price or at cost or the lower of the two. This is in accordance with law and the commercial principles of accountancy. The objection of the revenue has been two-fold. The first objection of the revenue is that the assessee has itself been treating the difference arising out of the switching over or sale of securities as capital gains or capital loss and, therefore, the assessee cannot be allowed to change that method and claim the difference as ordinary profit or loss incurred in carrying on the business of the assessee. The second objection of the revenue is that the securities are actually investments by the assessee and any difference arising out of their valuation or purchase or sale has to be treated as something pertaining to the investment and taking into consideration the statutory period of holding these investments, the profit or loss will be long-term or short-term on the facts of each transaction.
23. It is now well settled that the principles of estoppel and res judicata do not apply to the income-tax proceedings. On this issue, the learned counsel for the assessee has cited two judgments which we have adverted to in para 10 above. In the case of MM. Ipoh (supra), the Hon'ble Supreme Court after considering a number or authorities on the issue decided earlier held that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for the assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of the assessment, the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive.
Therefore, insofar as the first objection of the revenue is concerned, it can, be said to have no substance because as pointed out by their Lordships of the Supreme Court, the facts of each of the assessment years have to be considered along with the law applicable to that assessment year and in such consideration, the decisions arrived at in the earlier assessment years do not stand as an estoppel. In this context, the conduct of the assessee for the earlier years in treating the difference arising out of the sale of securities, their switching over or their valuation is not material for consideration of the issue for the years under appeal especially when the facts are different and the claims of the party and the treatment given by the party in the books of account to this issue is different from what it was in the immediately preceding assessment years.
24. For the assessment years under appeal, the assessee has valued the securities on the method of market price or cost or lower of the two.
The securities have been treated as trading assets. This treatment given by the assessee to the securities, considered in juxtaposition, the requirement of banking institution for investments in the Government securities or easily realisable securities in view of the provisions of the Banking Regulation Act and the ordinary commercial principles pointed out by the Privy Council in the case of Punjab Co-operative Bank Ltd. (supra) is fully justified. The assessee has changed this method from the assessment year 1975-76 and has consistently followed this method thereafter. The assessee was entitled in law to do so and the revenue was not entitled in law to interfere in this method. It is very clear from the authorities considered by us and the principles laid down in such authorities in this order.
25. If the issues involved in these two appeals by the assessee are seen in this perspective, it becomes clear that the decisions taken by the authorities below were neither in accordance with the facts of the case nor in accordance with law. The assessee's claim, therefore, was wrongly rejected. The assessee is entitled to claim as ordinary business loss arising account of valuation of the Government and trustee securities at the end of the previous year relevant to each of the assessment years under appeal. This the assessee has done. The assessee has followed this method consistently even in the subsequent assessment years. This is permissible method in law. This is also permissible on account of commercial principles of accountancy in carrying on the business of a banking institution. Therefore, the claim of the assessee is admissible. For each of the assessment years, the claim of the assessee is accepted and is directed to be allowed. We set aside the orders of the authorities below on this issue and direct the ITO to accept the claim of the assessee in recomputing the income while giving effect to this order.
26. Appeals of the assessee allowed and the appeal of the revenue is considered allowed for statistics.