1. The ITO computed the assessee's total income for the assessment year 1977-78 in the following manner :Loss as per profit and loss account (-)50,839Add : Dividend for separate consideration 174 Speculation profit 5,90,530 (-)5,90,704 (-)6,41,543 letter dated 1-12-1982 4,64,547 (-) 1,76,996 business profit 5,90,704 (+)4,13,808 In determining the income as aforesaid the ITO rejected the assessee's contention that due to change in the method of valuation of closing stock of shares and debentures from the 'cost' method followed in the past, to 'cost or market rate whichever was lower', there was a loss to the extent of Rs. 4,64,547 on the basis of the IAC's order under Section 144B of the Income-tax Act, 1961 ('the Act'), the relevant portion of which reads as follows : The company has all along been valuing the closing stock of shares at cost. As assessee can change its method of valuation of closing stock provided it is bona fide. During the accounting year under consideration, the company earned a huge profit of Rs. 5,90,530 from speculation in shares. So the reason for changing the method of valuation in this particular year is not far to seek. The company has changed the method of valuation of the shares during the year in order to set off the loss of Rs. 4,64,547 arising on account of such valuation against the aforesaid speculation profit and to reduce it so that it does not pay the taxes which the company would have been liable to pay. In these circumstances, the change of method of valuation has not been bona fide.
The Commissioner (Appeals) agreed with the aforesaid finding of the IAC by observing, inter alia, vide paragraphs 23 and 24 of his order that 'the appellant suddenly and arbitrarily chose to change the method of accounting, simply because it suited its purpose. Such self-serving change cannot be regarded as bona fide'. In support of this finding, the Commissioner (Appeals) observed that the bulk of the shares which the assessee held was on account of equity shares of Lynx Machinery Ltd. which was valued at the beginning of the year, i.e., 1-7-1975 at Rs. 7,78,635 for 1,33,100 shares, but at the end of the year, i.e., 30-6-1976 the very same shares have been valued at the rate of Rs. 1.76 each at Rs. 1,99,056. The Commissioner (Appeals) in this connection observed that the market value of the aforesaid shares varied from Rs. 5.24 per share as on 31-3-1965 to Rs. 1.56 per share as on 31-3-1977.
There was, therefore, no rationale behind the change effected during the year in the method of valuation of the shares as at the end of 30-6-1976, i.e., the last day of the accounting year relevant for the assessment year under appeal. The Commissioner (Appeals) vide paragraph 27 of his order further, held that 'It is well settled that an itemised trading loss (the loss occasioned by the valuation of stocks at market price, in a falling market is a specie of trading loss) can be taken into account only in the year in which the loss arose. The accumulated past losses, which were not claimed in the respective years, cannot be allowed as a deduction in a subsequent year'. The Commissioner (Appeals) in paragraph 8 of his order also observed that 'if we treat the appellant-company as an investor in shares, the loss in question must be held to be capital loss, and hence not revenue-deductible'.
2. The assessee is in appeal against the said order of the Commissioner (Appeals). A number of grounds have been raised which centre around the contention raised in ground No. 6 to the effect that the 'Commissioner (Appeals) erred in holding that the change in the method of valuation was not made bona fide on the wrong grounds that the said change was effected with a view to set off the profit earned in speculation during the year and that it represented the accumulated losses of the past years, ignoring completely the facts that the appellant has all along been following such changed method regularly in subsequent years'.
3. The assessee's learned Counsel brought to our notice the assessee's letter dated 3-1-1983 which was submitted before the ITO explaining that the actual loss incurred due to change effected in the method of valuation of closing stock amounted to Rs. 4,64,547 and that the assessee incurred a loss of Rs. 81,000 on sale of shares. It has been stated that before the ITO the assessee submitted extracts from the proceedings of the minutes of the meeting of the board of directors held on 7-7-1975 which recorded the reasons for effecting the change in the valuation of closing stock of shares and debentures in the following manner : The chairman informed the Board that the closing stock of shares and debentures have all along been valued 'at cost'. But there has been fluctuations and steep fall in the value of the shares and debentures held by the company over a number of years. Because of the said reason, the chairman felt that the closing stock of shares and debentures valued 'at cost' does not reflect the correct financial position of assets. To present a true and correct financial position of the assets, he suggested to change the method of valuation of closing stock of shares and debentures from 'at cost' to 'at cost or market rate whichever is lower'. The first of such valuation of closing stock shall be made on the close of the running accounting year, i.e., on 30th June, 1976 and the said new method shall be regularly followed subsequently year after year.
Thereafter, the following resolution was moved and passed : Resolved that the method of valuation of the closing stock of shares and debentures followed by the company so far be and is hereby changed from 'at cost' to 'at cost or market rate whichever is lower' and the closing stock of said asset as on the 30th June, 1976, i.e., at the end of the running accounting year of the company shall be made 'at cost or market rate whichever is lower' and the said new method shall be regularly followed subsequently year after year.
It has been pointed out that in the assessment years 1978-79 and 1979-80 the ITO accepted the changed method of valuation adopted by the assessee for the first time in 1977-78 as he did not make any adjustment to the opening and closing stock figures as reflected in the balance sheets for the accounting years ending June 1977 and 1978 on the basis of his order for the assessment year 1977-78. It has been stated that the assessee in the past followed the cost method of valuation of shares which was one of the recognised methods and during the assessment year under appeal it changed its method of valuation by following another recognised method, which was permissible and for this proposition he relied on the decisions in Indo Commercial Bank Ltd. v.CIT  44 ITR 22 (Mad.), CIT v. Eastern Bengal Jute Trading Co.
Ltd.  112 ITR 575 (Cal.), CIT v. Rajasthan Investment Co. (P.) Ltd.  113 ITR 294 (Cal.), Reform Flour Mills (P.) Ltd. v. CIT  114 ITR 227 (Cal.) and Snow White Food Products Co. Ltd. v. CIT  141 ITR 861 (Cal.).
The departmental representative, in reply, with reference to the Calcutta High Court decision in the case of British Paints India Ltd. v. CIT  111 ITR 53 stated that the method adopted and regularly followed over the periods and accepted by the revenue should not be departed from unless there is good reason for the same. He also referred to another decision of the Calcutta High Court in the case of Garden Reach Workshop Ltd. v. CIT  132 ITR 814 for the proposition that there must be some overriding reasons for the change in the method of accounting followed by the assessee. A reference was made to the decision of the Madras High Court in the case of CIT v. Sri Visweswardas Gokuldas  14 ITR 110 wherein it has been held that the proviso to Section 13 of the Indian Income-tax Act, 1922 gives the ITO full liberty of action if he is satisfied that the method adopted by the assessee does not allow of a correct assessment of the profits.
In that case it has been pointed out that the assessee in the past valued its stocks at the cost price both at the beginning and at the end of the year. In the subsequent year, the assessee opened the account with stocks valued at cost price and closed it with a valuation at the market price which was much higher than the cost price. The ITO, valued the stocks both at the beginning and at the end of the year at cost and thereby made addition by resorting to the proviso to Section 13 which was upheld by the High Court. He also referred to various other decisions in support of the Commissioner (Appeals)'s order that a change effected in the method of valuation of shares by the assessee, unless for bona fide reasons, cannot be accepted. Decisions relied on are : CIT v. Achrulal  6 ITR 255 (Nag.), Kanwalnen Hamir Singh v. CIT  6 ITR 675 (All.), Chouthmal Golapchand, In re  6 ITR 733 (Cal.) and Investment Ltd. v. CIT  77 ITR 533 (SC).
Finally the departmental representative referred to the Supreme Court decision in the case of Workmen of Associated Rubber Industry Ltd. v.Associated Rubber Industry Ltd.  157 ITR 77 and stated that the method of valuation of shares adopted by the assessee during the year under appeal was a device to reduce the profits of the assessee and, therefore, the assessee's claim that it incurred a loss of Rs. 4,64,547 was liable to be rejected.
4. There is no finding of the ITO or the Commissioner (Appeals) that the assessee is an investor in shares. Neither there is a finding that the assessee carried on business as a dealer in shares. Nonetheless, the ITO's order reveals that the dividend income received during the relevant previous year amounted to Rs. 174 only. That apart, the ITO accepted the loss disclosed by the assessee of Rs. 81,000 on sale of shares. It is also on record that the assessee derived speculation profit of Rs. 5,90,530, shown in the profit and loss account as 'difference in share transactions (net)'. We have, therefore, to proceed on the basis, that the assessee held the shares as stock-in-trade in its business of share dealings.
5. Both the IAC and the Commissioner (Appeals) held that the change effected during the year in the method of valuation of shares held as closing stock from cost basis adopted in the past to 'cost or market value whichever was lower' was not bona fide. There was no overriding reason for effecting the change which resulted in a substantial reduction of the assessee's income. The Commissioner (Appeals) was also of the opinion that the resultant loss arising out of valuation on valuing the closing stock of shares on a different basis was in fact the accumulated past losses which could not be allowed deduction against the trading profits for the year under appeal. It has been held by the Madras High Court in the case of Indo Commercial Bank Ltd. (supra) that the assessee is entitled to change his method of valuation provided it is bona fide and provided further it is a method of valuation for regular employment by the assessee and not merely for the year in question. It has further been held that the assessee had the option of adopting the well-known system of valuing the closing stock at the market price and the assessee having regularly adopted the same system, the requirements of Section 13 were satisfied. It has been observed that the change in the method of valuation even if it is detrimental to the revenue was not a relevant factor in deciding whether the assessee had the right to change the basis of valuation. It has further been observed vide Indo Commercial Bank Ltd.'s case (supra) as under : ... A notional or anticipatory loss resulting from a valuation of the closing stock, which an assessee is permitted to take into account in ascertaining his trading profits, stands on no different footing. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, if the latter was less than the cost price. If the revised basis of valuation is continued thereafter the profits and losses thereafter would be correctly computed....
The aforesaid decision of the Madras High Court has been referred to by the Calcutta High Court in the case of Snow White Food Products Co.
Ltd. (supra) wherein at p. 872 it has been observed that 'the law appears to be settled that an assessee is entitled to change his regular method of accounting by another regular method and such a change can be effected in respect of a part of the assessee's income'.
The Supreme Court in the case of Investment Ltd. (supra) observed as follows : ... 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 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 account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deducted therefrom....
The assessee as we have seen earlier had been valuing the shares held in its business at cost in the past, which is a recognised method of valuation as has been held by the Supreme Court in the aforesaid case.
The assessee during the assessment year under appeal changed the method of valuation of closing stock of the shares held by it to cost or market price whichever was lower. The changed method of valuation is also one of the recognised methods of valuation of unsold stock [see British Paints India Ltd.'s case (supra)]. Section 145 of the Act, lays down that if an assessee regularly employs a method of accounting his income should be computed in accordance therewith. A recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accounting is substituted by another regular method, the same result will follow.
Only in a case where the assessee changes his regular method of accounting by another method and does not follow the change regularly thereafter, it might be possible for the assessee by introducing successive changes in his methods of accounting to exclude items of his income in the computation of his total income. In this context, the Calcutta High Court in the case of Snow White Food Products Co. Ltd. (supra) observed at page 874 that 'if an assessee regularly employs a method of accounting his income should be computed in accordance therewith. The section, in its terms, does not require any enquiry into the bona fides of the assessee in following a regular method'. It has been further observed that "only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the expression 'good faith' and 'bona fide' occur in the observations in the earlier judgment noted earlier." The earlier judgments referred to in this context are the decisions of the Calcutta High Court in the cases of Eastern Bengal Jute Trading Co.
Ltd. (supra) and Rajasthan Investment Co. (P.) Ltd. (supra). The High Court on a due consideration of the Calcutta High Court decisions in the case of Chouthmal Golapchand (supra) and Reform Flour Mills (P.) Ltd. (supra) held that where it is found that an assessee has changed his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change, Snow White Food Products Co. Ltd.'s case (supra) at page 874. The assessee's learned Counsel furnished before us copies of the ITO's orders for the assessment years 197 8-79 and 1979-80 from which it reveals that the ITO accepted the changed method of valuation of the shares adopted for the first time for the assessment year 1977-78. Therefore, on the ratio of the decision in the case of Snow White Food Products Co. Ltd. (supra) we are of the opinion that the change effected during the previous year relevant for the assessment year 1977-78 in the method of valuation of shares from 'cost' method of valuation to 'cost or market, price whichever was lower', in the facts and circumstances of the case, has to be accepted, being bona fide. It is, therefore, not necessary to consider the remaining case laws relied on by the departmental representative, viz., Achrulal's case (supra), Kanwalnen Hamir Singh's case (supra) and the Madras High Court decision in the case of Sri Visweswardas Gokuldas (supra). The Supreme Court decision in the case of Workmen of Associated Rubber Industry Ltd. (supra) on which reliance has been placed by the departmental representative is not relevant for the present purpose as it cannot be said that the change effected during the assessment year in the method of valuation of shares was a device with a view to avoid taxation. The point for consideration before us is whether by effecting a change in the method of valuation of closing stock of shares income chargeable to tax can be computed properly in terms of Section 145. We have already, found that the assessee by effecting a change adopted a recognised method of valuation which the assessee followed consistently in the assessment years 1978-79 and 1979-80 and no evidence has been produced before us to show that the change so effected has not been followed consistently by the assessee in the years subsequent to the assessment year 1979-80. We would, accordingly, by setting aside the Commissioner (Appeals)'s order direct the ITO to allow the loss incurred in valuing the closing stock of shares at 'cost or market price whichever was lower', after due verification.