Holding

A taxpayer’s consistently applied "cost or market value whichever is lower" method of valuing stock‑in‑trade for income‑tax purposes is permissible and cannot be discarded by the department even if the statutory balance sheet shows cost alone.

Summary

United Commercial Bank, a nationalised bank, valued its investments at cost in the statutory balance sheet but, for income‑tax returns, valued the same stock‑in‑trade at the lower of cost or market value, a practice it had followed consistently for over thirty years and which the tax department had accepted. The bank claimed a notional loss on the closing stock of securities for AY 1982‑83, which the Commissioner of Income Tax rejected, leading to an appeal that was upheld by the Income Tax Appellate Tribunal. The Calcutta High Court reversed, holding that the bank could not use a different valuation method for tax purposes than that shown in its balance sheet. The Supreme Court allowed the appeal, holding that a method of accounting consistently employed by a taxpayer cannot be discarded by the department and that under Section 145 the taxpayer may use the "cost or market whichever is lower" method to determine real taxable income, even if the balance sheet reflects cost alone. Consequently, the High Court order was set aside and the bank’s claim of notional loss was allowed.

Issues considered

Whether a taxpayer may employ a valuation method for stock‑in‑trade (cost or market value whichever is lower) for income‑tax purposes that differs from the method used in the statutory balance sheet.
Whether a method of accounting consistently adopted for thirty years can be disregarded by the tax authorities.
Whether Section 145 of the Income‑Tax Act empowers the Assessing Officer to recompute income when the taxpayer’s accounting method does not disclose true income.
Whether the requirements of the Banking Regulation Act, 1949 (Sections 29 and 53) preclude using a different valuation method for tax assessment.

Legislation cited

Banking Regulation Act, 1949s. 29, s. 53
Income Tax Act, 1961s. 145, s. 256(1), s. 263

Subjects

Income TaxStock valuationCost or market lowerSection 145Banking Regulation ActNotional lossConsistent accounting methodNationalised bank

Judgment

;
A UNITED COMMERCIAL BANK, CALCUTTA
v.
COMMISSIONER OF INCOME TAX,
WEST BENGAL-III CALCUTTA.

SEPTEMBER 29, 1999
B
[D.P. WADHWA AND M.B. SHAH, JJ.]

Income Tax Act, 1961-S.145-Stock-in-trade (investments}-Valua-
tion of-Nationalised Bank-Valuing its stock-in-trade at cost in balance sheet
C and valuing the same at cost or market value whichever was lower for the
purposes of Income Tax-Method followed consistently for thirty years and
accepted by Department-Assessment year 1982-83-Assessee Bank submit-
ting tax return claiming notional loss on account of valuation of closing stock
of securities at market value-Permissibility of-Held, closing stock can be
D valued at cost or market value whichever was lower--Method adopted by a
tax payer consistently cannot be discarded by the Department on the ground
that he should have adopted a different method of keeping accounts or of
valuation-Assessee Bank's claim allowed-Banking Regulation Act, 1949
Ss.29 and 53.

E Appellant-assessee, a Nationalised Bank, had been valuing its stock-
in-trade at cost in its balance sheet. However for the purposes of Income
Tax return, it had been valuing the very same investment at cost or market
value whichever was lower. The said method of valuation was adopted
consistently for the least 30 years and was accpeted by the Department.
F Central Government by a Notification dated 12.5.1982, exempted the as~
sessee bank from mentioning its market value of the investments under
different sub-heads separately within brackets in the balance sheet. For
the Assessment Year 1982-83, assessee Bank claimed notional loss on
account of closing stock of securities at market value, which ws allowed
G by Inspecting Assistant Commissioner of lricome Tax. However, Commis-
sioner of Income Tax rejected the claim holding that assessee Bank had
no right to calculate profit or loss in trading account by excluding it from
its own final accounts. On appeal, Income Tax Appellate Tribunal allowed
the deduction of notional loss from book profit on the ground that the
assessee Bank was following the same method of valuation for claiming
H loss consistently for the last 30 years. On reference, High Court came to
254
UNITED COMMERCIAL BANK v. C.I.T. 255
the conclusion that since the Bank had not followed the method of cost A
or market value whichever was lower, in preparing accounts consistently,
it could not claim notional method of stock valuation only for the pur-
poses of Income Tax. Hence the present appeal.

Allowing the appeal, the Court
B
HELD : 1. It is an established rule of commercial practice and ac-
ccountancy that closing stock can be valued at cost or market value
Whichever is lower. In the balance sheet, if the securities and shares are
valued at cost but from that no firm conclusion can be drawn, a taxpayer is
free to employ, for the purpose of his trade, his own method of keeping
accounts, and for that purpose, to value stock-in-trade either at cost or
c
market price. Hence, for the purpose of income tax whichever method is
adopted by the assesee a true picture of the profits and gains, that is to say,
the real income is to be disclosed. For determining the real income, the
entries in a balance sheet required to be maintained in the statutory form,
may not be decisive or conclusive. In such cases, it is open to the Income Tax D
Officer as well as the assessee to point out the true and proper income while
submitting the income tax return. Under S.145 of the Act, in a case where
accounts are correct and complete but the method employed is such that in
the opinion of the Income Tax Officer, the income cannot be properly
deduced therefrom, the computation shall be made in such manner and on E
such basis as the Income Tax Officer may determine.
[262-D; 263-A-B; 265-E; 267-E-F]
Chainrnp Sampatram v.
Commissioner of Income Tax, West Bengal,
(1953) 24 ITR 481 and UCO Bank v. CIT, (1999) 237 ITR 889, relied on.

State of Travancore v. CIT, Kerala, (1986) 158 ITR 192 and Commr. F
of Income Tax v. British Paints India Ltd., (1991) 188 ITR 44, held inap-
plicable.

Navnit Lal (C) Javeri v. K.K Sen, (1965) 56 ITR SC 198 and Keshavji
Ravji & Co. v. CIT, (1990) 183 ITR 1 SC, referred to.
G
2. A method of accounting adopted by .the tax payer 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 instant case, the assessee consistently for 30 years,
was valuing the stock-in-trade at cost for the purpose of statutory balance H
256 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A sheet, and for the income tax return, valuation was at cost or market
value whichever was lower. That practice was accepted by the Department
and there was no justifiable reason for not accepting the same. Prepara-
tion of the balance sheet in accordance with the statutory provision would
not disentitle the assessee in submitting income tax return on the real
B taxable ,income in accordance with a method of accounting adopted by the
assessee consistently and regularly. That cannot be discarded by the
departmental authorities on the ground that the assessee was maintaining
balance sheet in the statutory form on the basis of the cost of the invest-
ments. In such cases, there is no question of following two different
methods for valuing its stock-in-trade (investments) because the Bank
C was required to prepare balance sheet in the prescribed form and it had
no option to change it. For the purpose of income-tax, what is to be taxed
is the real income which is to be deduced on the basis of the accounting
system regularly maintained by the assessee and that was done by the
assessee in the instant case. [268-E; 269-G-H; 270-A-B]

D Mis. Investment Ltd. v. 1he CIT, Calcutta, 77 ITR 533, relied on.

3. In the instant case, Central Government in exercise of the powers
conferred by S. 53 of the Banking Regulation Act, 1949 and on the recom-
mendation of the Reserve Bank of India, permitted the assessee not to
E disclose the market value of its investment' in the balance sheet required
to be maintained as per the statutory form. But as the assessee was
maintaining its accounts on mercantile system, he was entitled to show
his real income by taking into account market value of such investments
in arriving at the real taxable income. [268-A-B]

F CIVIL APPELLATE JURISDICTION: Civil Appeal No. 11888 of
1995.

From the Judgment and Order dated 25.7.91 of the Calcutta High
Court in l.T.R. No. 73 of 1989.

G Ramesh Singh, Ms. Bina Gupta, J.S. Goswami and Ms. Vanita Bhar-
gava for the Appellant.

Ranbir Chandra and S.K. Dwivedi, for the Respondent

Dr. D.P. Pal, Ms. Somitra Choudhari, Ms. Priya Hingorani and
H Aman Hingorani for the Intervenor.
UNITED COMMERCIAL BANK v. C.I.T. [SHAH, J.] 257

The Judgment of the Court was delivered by A
SHAH, J. This appeal is filed by UCO Bank, Calcutta against the
judgment and order dated 25th July, 1991 passed by the High Court of
Calcutta in Income Tax Reference No. 73 of 1989. At the instance of
revenue, the Income Tax Appellate Tribunal referred the following two ·
questions for the opinion of the High Court under Section 256( 1) of the B
Income Tax Act, 1961 for the assessment year 1982-83 :

"1. Whether on the facts and in the circumstances of the case, the
Tribun~l is justified in law in cancelling the CIT's order under Section 263
of the Income-tax Act holding that the case of State Bank of Travancore v. C
CIT, Kerala (158 ITR 102) is not applicable to the facts of the present
case?

2. Whether on the fact and in the circumstances of the case, the
Tribunal is correct in law in holding that the notional loss in the investment
trading (India) to the extent of Rs. 7,45,35,029 by working out a difference D
between,he book value of shares as shown in the final account and their
market price as on the last due of the accounts, is admissible to be
deducted from the book profits of the assessee bank?"

The High Court answered both the questions in the negative and in
favour of the revenue and arrived at the conclusion that stock valuation of E
shares shown in Bank's final accounts could not be permitted to be
revalued at market value for income tax purposes only.

The aforesaid questions arise in the context of the fact that appel-
lant-assessee Bank submitted return for the assessment year 1982-83 con- F
tending that there was·notional loss of Rs. 7,45,35,029 on account of closing
stock of securities at the market value. The Inspecting Assistant Commis-
sioner of Income Tax, Assistant Range-Ill, Calcutta by the assessment
order dated 19th March, 1985 accepted the same. The €ommissioner of
Income Tax, West Bengal by order dated 9th March, 1987 under Section
263 of the Income .Tax Act, 1961 (hereinafter referred to as 'the Act') set G
aside the said assessment order by holding that the Bank had no right to
calculate profit or loss arising out of investment trading account as it has
excluded it from the preparation of its own final accounts. Unless a Bank
itself accepts the position by incorporating such loss or profit in the final
accounts, it would have no right to put across such hypothetical loss for H
258 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A the purpose of income tax assessment. The practice followed by the Bank
is entirely contrary to the decision rendered by this Court in State of
Travancore v. CIT Kera/a, (1986) 158 ITR 102. The assessee was following
mercantile system of according and loss claimed by the assessee had not
been debited in the books of accounts.

B Against that order, Bank preferred an appeal before the Income Tax
Appellate· Tribunal. The Tribunal by order dated 14th October, 1988
arrived at the conclusion that it is established on facts that assessee had
claimed the loss by following the same method which it was following for
the last 30 years and the principle laid down by this Court in State Bank
C of Travancore v. C./. T., Kera/a (1986) 158 ITR 102 was not applicable to
the facts of the present case. Hence, the order passed by the CIT under
Seetion 263 was set aside. Against the said judgment and order at the
instance of the revenue, the aforesaid two questions were referred for the
opinion of the High Court.

D Answering the said questions, the High Court observed that the
assessee hits not valu.ed the stock of shares and securities in it\'! books of -
accounts in accordance with the method "cost or market price whichever
is lower"; if this method is not followed in writing and preparing accounts
consistently, the assessee cannot claim a notional method of stock valuation
E only for computation of income by the tax authorities and the submission
made by the assessee .clearly goes against Section 145(1) of the Act. The
Court further observed that the book results can be rejected by the tax --
'
authorities only if the method adopted by the assessee is either defective
or if the system adopted does not disclose a proper and true income. The
Court further held that mere fact that the system followed by the assessee
F had not been questioned in the past, is no ground, to say that it should be
accepted all along as there is no estoppel in these matters.

We may mention at this stage that the learned Counsel, Mr.
Debiprosad Pal sought an intervention to appear in this matter on behalf
G of the United Bank of India. It was contended by him that the same
question is involved in matters pertaining to other banks which are
governed by the Banking Regulation Act, 1949 and we have permitted him
to make his submission on the question of law involved.

It has been pointed out by the learned Counsel for the appellant that
H preparation of balance sheet by the assessee bank is governed by the
UNITED COMMERCIAL BANK v. C.LT. [SHAH, J.] 259

provisions of the Banking Regulation Act, 1949. Section 29, inter alia, A
provides that at the expiration of each calendar year, every banking com-
• pany incorporated in India in respect of all business transacted by it, shall
prepare a balance sheet and profit and loss account with reference to that
year in the Forms set out in the Third Schedule or as near thereto as
circumstances admit. In the prescribed form in the column of Property and
Assets, Item 4 provides for mentioning the investments thus :
B

"Investments (stating mode of valuation e.g. cost or market value (t).

(i) Securities of the Central and State Governments and other
Trustee securities, including Treasury Bills of the Central and
Provincial Governments.
c
(ii) Shares (classifying into preference, ordinary, deferred and
other classes of shares and showing separately shares fully paid up
and parly paid up) ...
D
(iii) Debentures or Bonds

(iv) Other investments (to be classified under proper heads)

(v) Gold"
E
Note (t) reads as under :

"Where the value of the investments shown in the outer column
of the balance sheet is higher than the market value the market
value shall be shown separately in brackets":
F
Further, in exercise of the powers conferred by Section 53 of the
Banking Regulation Act, 1949, the Central Government, on the recommen-
dation of the Reserve Bank of India had issued a notification for the
assessee Bank for the assessment that provisions of Note (f) appended to .
Form 'A' in the Third Schedule to the said Act shall not apply to the
United Commercial Bank in respect of its balance sheet as on the 31st G
December, 1981 which, when the value shown in the inner column against
any of the sub-heads (ii), (iii), (iv) and (v) of item 4 of the Property and
Assets side of the said Form, exceeds the market value of the investments
under that sub-head, shows separately within brackets the market value of
the investments under the sub-head. H
260 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A On the basis of the said notification, the assessee Bank did not
mentioned market value of the investments under the sub-heads separately
within the brackets, in the balance sheet.

Learned Counsel for the appellant-assessee further pointed out that
B the requirement of disclosing the value of closing stocks of shares and
securities at cost and mentioning the market price, if lower within the
brackets has now been dispensed with by Circular dated 20th June, 1992
issued by the Reserve Bank of India. By this Circular, standard investment
in securities other than approved securities are to be classified under
'Current' category and valued at market price or at cost whichever is less
C and depreciation is to be provided for the shortfall, if any.

From the aforesaid form of the prescribed balance sheet, it is evident
that Scheduled Nationalised Banks were directed to put the value of shares
and securities at cost and if the market value is lower, it was to be shown
D separately in brackets. Now, the question would" be when such a Bank is
submitting its statutory return of income, whether it can disclose in its
return its real profit and/or loss on the basis of market value of securities
and shares? It has been pointed out that the balance sheet or the audited
accounts maintained on the basis of the investment in shares at cost would
not disclose the real profit or loss of the Bank in view of the fact that
E depreciation in the value of the shares or fall in the market value of the
shares and securities is not provided in the audited accounts. Learned
Counsel for the appellant submitted that even though in the balance sheet
maintained by the assessee, market price of the shares and securities is not
mentioned, yet for determining the real income of the assessee Bank, the
F said price is required to be taken into account. And, for that purpose since
years, the assessee Bank was submitting income tax returns after taking into
account the market price of such shares and securities which has been
accepted by the Department without any objection. He also submitted that
not making of proper entries in the balance sheet could hardly be a ground
for not assessing the real income.
G
For the reasons, the Central Government had issued Notification
dated 12th May, 1982 permitting the assessee bank not to disclose in
brackets the market value of the investment under the sub-heads in inner
column against any of the sub-heads (ii), (iii), (iv) and (v) of Item 4 of the
H assets side of the prescribed form. It is also undisputed that :
UNITED COMMERCIAL BANK v. C.l.T. [SHAH, J.] 261

(a) the appellant is a Nationalised Bank and therefore 1s A
governed by the Banking Regulation Act, 1949.

(b) The appellant follows mercantile systems of accounting both
for Book keeping purpose as well as for tax purposes.

(c) The appellant consistently and for over 30 years prior to the B
assessment year in dispute (1982-83) has been valuing its
stock- in-trade (investments) 'at cost' in the balance sheet
whereas for the same period of time the appellant has been
valuing the very same investment 'at cost or market value
whichever is lower' for income tax purposes. C
In the background of the aforesaid facts, we would state that it is an
established rule of commeroial practice and accountancy that closing stock
can be valued at cost or market price whichever is lower. In Chainmp
Sampatram v. Commissioner of Income Tax, West Bengal, (1953) 24 ITR
481, this Court explained the underlying reasons for the said practice thus: D
'It is wrong to assume that the valuation of the closing stock
at market rate has, for its object, the bringing into charge any
appreciation in the value of such stock. The true purpose of
crediting the value of unsold stock is to balance the cost of
those goods entered on the other side of the account at the E
time of their purchase, so that the cancelling out of the
entries relating to the same stock from both si.des of the
account would leave only the transactions on which there
have been actual sales in ·the course of the year showing
the profit or loss actually realised on the year's trading. As F
pointed out in paragraph 8 of the Report of the Committee
on Financial Risks att~ching to the holding of Trading
Stocks, 1919,

"As the entry for stock which appears in a trading account is
merely intended to cancel the charge for the goods purchased G
which have not been sold, it should necessarily represent the
cost of the goods. If it is more or less than the cost, then the
effect is to state the profit on the goods which actually have
been sold at the incorrect figure ..... From this rigid doctrine
one exception is very generally recognised on prudential H
262 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A grounds and is now fully sanctioned by custom, viz., the
adoption of market value at the date of making up accounts,
if that value is less than cost. It is of course an anticipation
of the loss that may be made on those goods in the following
year, and may even have the effect, if prices rise again, of
attributing to the following year's results a greater amount of
B profit than the difference between the actual sale price and
the actual cost price of the goods in question." (extracted in
paragraph 281 of the Report of the Committee on the Taxa-
tion of Trading Profits presented to British Parliament in
April, 1951).
c
While anticipated loss is thus t(lken into account, anticipated profit
in the shape of appreciated value of the closing stock is not brought
into account, as 110 prudent trader would care to show increased
profit be/ore its actual realisation. This is the theory underlying the
D rule that the closing stock is to be valued at cost or market price
whichever is the lower, and it is now generally accepted as an
established rule of commercial practice and accountancy. As profit~
for income tax purposes are to be computed in conformity with
the ordinary principles of commercial accounting, unless, of
course, such principles have been superseded or modified by
E
legislative enactments, unrealised profits in the shape of ap-
preciated value of goods remaining unsold at the end of an ac-
counting year and carried over to the following year's in a business
that is continuing are not brought into the charge as a matter of
practice, though as already stated, loss due to a fall in price below
F cost is allowed even if such loss has not been actually realised. As
truly observed by one of the,learned Judges in Whimster & Co. v.
Commissioner of Inland Revenue, (12 Tax Cas. 813, 827),

"Under this law (Revenue Law) the profits are the profits
G realised in the course of the year: What seems an exception
is recognised where a trader purchased and still holds goods
or stocks which have fallen in value. No loss has been
realised. Loss may not occur. Nevertheless, at the close of the
year he is permitted to treat these goods or stocks as of their
H market value." (Emphasis supplied)
UNITED COMMERCIAL BANK v. C.I.T. [SHAH, J.) 263

With regard to maintenance of accounts this Court in Mis. Investment A
Ltd. v. The C.l. T., Calcutta, (77 ITR 533) observed as under :

"In the balance-sheet, it is true, the securities and shares are valued
at cost, but no firm conclusion can be drawn from the method of
keeping accounts. A tax-payer is free to employ, for the purpose
B
of his trade, his own method of keeping accounts; and for th.at
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 c
employed may be discarded only if in the opinion of the taxing
authorities income of the trade cannot be properly deduced there-
from. Valuation of stock at cost is one of the recognised methods.
No inference may therefore arise from the employment by the
company of the method of valuing stock at cost, that the stock D
valued was not stock-in-trade." (Emphasis added)
•
The learned Counsel for the Revenue submitted that once the asses-
see has finalised his accounts as per the statutory provisions, then it is not
permissible for him to adopt for the income tax purposes a method
different from the one on the basis of which his final accounts were E
prepared. For this purpose, he relied upon the decisions rendered by this
Court in the State Bank of Travancore v. CIT, (1986) 158 ITR 102 and
Commissioner of Income Tax v. British Paints India Ltd., (1991) 188 ITR
44. In our view, the submission made by the learned Counsel has no
substance. In the case of the State Bank of Travancore (supra), this Court p
considered the question whether interest on 'sticky' advances debited to
the customers account but taken to 'Interest Suspense Account' can be
termed as accrual income. In that context, majority view was where the
interest ·has accrued and the assessee has debited the accounts of the
debtor, the difficulty of recovery would not make its accrual non-accrual.
Before discussing the question involved, the Court after considering G
provisions of the Income Tax Act observed thus :

"It is settled that the income of the assessee will have to be
determined according to the provisions of the Act in consonance
with the method of accountancy regularly employed by the asses- H
264 SUPREME COURT REPORTS (1999] SUPP. 3 S.C.R.

A see. The method of accounting regularly employed by the assessee
helps the computation of income profits and gains under Section
28 of the Act and the taxability of that income under the Act will
then have to be determined. The question is, whether the income
which has been computed according to the method of accounting
followed regularly by an assessee can be diminuted or diminished
B by any notion of real income. This has to be judged in the light of
the well-settled principles."

After considering various decisions, the Court has laid down inter-
alia, the following propositions :
c
"(1) It is the income which has really accrued or arisen to the
assessee that is taxable. Whether the income has really accrued or
arisen to the assessee must be judged in the light of the reality of
the situation. (2) The concept of real income would apply where
there has been a surrender of income which in theory may have
D
accrued but in the reality of the situation, no income had resulted
because the income did not really accrue. (3) Where a debt has
become had, deduction in compliance with the provisions of the
Act should be claimed and allowed. (4) Where the Act applies,
the concept of real income should not be so read as to defeat the
E provisions of the Act. (5) If there is any diversion of income at
source under any statute or by overriding title, then there is no
income to the assessee. (6) The conduct of the parties in treating
the income in a particular manner is material evidence of the fact
whether income has accrued or not. (7) Mere improbability of
F recovery, where the conduct of the assessee is unequivocal, cannot
be treated as evidence of the fact that income has not resulted or
accrued to the assessee. After debiting the debtor's account and
not reversing that entry-but taking the interest merely in suspense
account cannot be such evidence to show that no real income has
accrued to the assessee or been treated as such by the assessee.
G (8) The concept of real income is certainly applicable in judging
whether there has been income or not but, in every case, it must
be applied with care and within well-recognised limits."

In the light of the aforesaid proposition by majority view, it was held
H that the additions of the ·sums representing interest on sticky advances as
UNITD COMMERCIAL BANK v. C.I.T. [SHAH, J.] 265

income was justified. A
- Even applying the aforesaid tests laid down by this Court, what is
taxable under the Act is the really accrued or arisen income. On the basis
of the method of accountancy regularly employed by the assessee, the real
income is pointed out in the income-tax return submitted. by the assessee.
This cannot be ignored by holding that in a balance sheet which is required B
to be statutorily maintained in a particular form, market value of the shares
and securities is not mentioned or is mentioned in brackets. The decision
in the case of State Bank of Travancore does not lay down any rule that
whatever is not mentioned in the prescribed statutory balance sheet is not
to be taken into account for deciding real taxable income. C

At this stage, we would mentioned that the aforesaid case of State
Bank of Travancore was considered (in the case of assessee bank) by this
Court in UCO Bank v. CIT, (1999) 237 ITR 889. After referring to the
decision in State Bank of Travancore case (supra) the Court observed :
D
"Under Section 145 of the Income-tax Act, 1961, income charge-
able under the head "Profit and gains of business or profession"
or "income from other sources" shall be computed in accordance
with the method of accounting regularly employed by the assessee;
provided that in a case where the accounts are correct and com-
E
plete but the method employed is such that in the opinion of the
Income-tax Officer, the income cannot properly be deducted
therefrom, the computation shall be made in such manner and on
such basis as the Income-Tax Officer may determine. In the present
case, the method eniployed is entirely for a proper detennination of
income. 11 F

Thereafter, the Court further observed :

"The very fact that the assessee, althoagh generally using a mer-
cantile system of accounting, keeps such interest amounts in a ·
suspense account and does not bring these amounts. to the profit ·' G
and loss account, goes to show that the assessee is following a
mixed system of accounting by which such interest is included in
its income only when it is actually received. Looking to the method
of accounting so adopted by the assessee ·in such cases, the cir-
culars which have been issued are consistent with the provisions H
266 SUPREME COURT REPORTS (1999) SUPP. 3 S.C.R.

A of Section 145 and are meant to ensure that assessees of the kind
specified who have to account for all such amounts of interest on
doubtful loans are uniformly given the benefit under the circular
and such interest amounts are not included in the income of the
-
assessee until actually received if the conditions of the circular are
satisfied."
B
Thereafter, the Court explained the decision in case of State Bank
of Travancore by observing that relevant circular of the Board was not
pointed out to the Court and that majority decision in the said case cannot
be looked upon as laying down that a circular which is properly issued
C under Section 119 of the Income-tax Act for proper administration of the
Act and for relieving the rigour of too literal a construction of the law for
the benefit of the assessee in certain situations would not be binding on
the departmental authorities. The Court held that this would be contrary
to the ratio laid down by the Bench of five judges in Navnit Lal (C) Javeri
v. K.K. Sen, (1965} 56 ITR SC 198. The Court further held that in fact State
D Bank of Travancore v. CIT, (1986} 158 ITR 102 SC, has already been
distinguished in Keshavji Ravji and Co. v. CIT, (1990} 183 ITR 1 SC, by a
Bench of three judges in a similar fashion and "it is held only as laying
down that a circular cannot alter the provisions of the Act."

E The learned counsel for the Revenue further relied uponthe decision
in Commissioner of Income-Tax v. British Paillts India Ltd., (1991} 188 ITR
44. In our view, the said decision would not in a way advance the contention
raised by the respondent. The Court while dealing with the contention of
the assessee for valuation of the raw material without taking into account
any portion of the cost of manufacture, held that the question of fact which
F the Assessing Officer must necessarily decide is whether or not the method
of accounting followed by the assessee discloses true income and observed
thus:

"It is a well recognised principle of commercial accounting to enter
in the profit and loss account the value of the stock-in-trade at the
G
beginning and at the end of the accounting year at cost or market
price, whichever is the lower."

The Court further considered Section 145 of the Act and observed
that what is to be determined by the officer in exercise of the power is a
H question, of fact, that is, whether
. or not income chargeable under the Act .
UNITED COMMERCIAL BANK v. C.l.T. [SHAH, J.) 267

can be properly deduced from the books of accounts and the question must A
be !lecided with reference to the relevant material and in accordance with
the correct pri11ciples. The Court also observed :

"Where the market value ha~ fallen before t_he date of valuation
and, on that date, the market value of the article is less than its
actual cost, the assessee is entitled to value the articles at market B
value and thus anticipate the loss which he will probably incur at
the time of the sale of the goods. Valua~ion of the stock-in-trade
at cost or market value, whichever is the lower, is a matter entirely
within the discretion of the assessee. But whichever method he
adopts, it should disclose a trne picture of his profits and gains. If, c
on the other hand he adopts a system which does not disclose the
true state of affairs for the determination of tax, even if it is ideally
suited for other purposes of his business, such as the creation of
a reserve, declaration of dividends, planning and the like, it is the
duty of the Assessing Officer to adopt any such computation as he D
deems appropriate for the proper determination of the true income
of the assessee. This is not only a right but a duty that is placed
on the officer, in terms of the first proviso to Section 145, which
concerns a correct and complete account but which in the opinion
of the officer, does not disclose the true and proper income~"
E
Hence, for the purpose of income tax whichever method is adopted
by the assessee a true picture of the profits and gains, that is to say, the
real income is to be disclosed. For determining the real income, the entries
in a balance sheet required to be maintained in the statutory form, may not
be decisive or conclusive. In such cases, it is open to the Income Tax F
Officer as well as the assessee to point out the true and proper income
while submitting the income tax return. In Kedamath Jute Mfg. Co. Ltd. v.
Commissioner of Income Tax (Central), Calcutta, (1971) 82 ITR 363, this
Court has negatived the contention that "if an assessee under misapprehen-
sion or mistake fails to make an entry into the books of account and
although, under the law, a deduction must be allowed by the Income-Tax G
Officer, assessee will loss the right of claiming or will be debarred from
being allowed that deduttion." The Court held that whether the assessee
is entitled to the particular deduction or not will depend upon 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 H
.
268 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

J A account be decisive or conclusive in the matter. In the present case, the
question is slightly different. For reasons, Central Government, in exercise .~
; '
of the powers conferred by Section 53 of the Banking Regulation Act, and
on the recommendation of the Reserve Bank of India, permitted the
assessee not to disclose the market value of its investment in the balance
sheet required to be maintained as per the statutory form. But as the
B assessee was maintaining its ac<;ounts on mercantile system, he was entitled
to show his real income by taking into account market value of such
investments in arriving at real taxable income. On that basis, therefore,
Assessing Officer has taxed the assessee.

c From the decisions discussed above, it can be held :

(1) That for valuing the closing stock, it is open to the assessee
to value it at the cost or market value, whichever is lower;

(2) In the balance sheet, if the securities and shares are valued
D at cost but from that no firm conclusion can be drawn. A
taxpayer is free to employ for the purpose of his trade, his
own method of keeping accounts, and for that purpose, to
value stock-in-trade either at cost or market price;

(3) A method of accounting adopted by the tax payer consistently
E and regularly cannot be discarded by the departmental
authorities on the view that he should have adopted a dif-
ferent method of keeping accounts or of valuation;

(4) The concept of real income is certainly applicable in judging
whether there has income or not, but in every case, it must
F be applied with care and within their recognised limits;

(5) Whether the income has really accrued or arisen to the
assessee must be judged in the light of the reality of the
situation; and
G (6) Under Section 145 of the Act, in a case where accounts are
correct and complete but the method employed is such that
in the opinion of the Income Tax Officer, the income cannot
be properly deduced therefrom, the computation shall be r::
made in such manner and on such basis as the Income-Tax
H Officer may determine.
UNITED COMMERCIAL BANK v. C.I.T. [SHAH, J.] 269

In the. present case, the High Court has disallowed the claim of the A
appellant after holding thus :

(a) The entries made by the assessee in its books of account is
not determinative of the question whether the assessee has
earned any profit or suffered any loss;
B
(b) The ·method of accounting namely "at cost or market value
whichever is lower" followed by the appellant for valuing its
stock-in-trade (Investment) for income tax purpose is the
correct and the permissible method in law. If this method is
not followed in writing and preparing accounts consistently, C
the assessee cannot claim a notional method of stock valua-
tion only for computation of income by the Tax authorities
without following the same method in writing and preparing
accounts.

(c) Since stock valuation .is admittedly a method of accounting D
the assessee Bank can claim the benefit of stock valuation "at
cost or market value, whichever is lower" only if such method
is actually followed and adopted by him in preparing the final
accounts. Without following this method in preparing the
accounts, which are required to be prepared and presented
under Section 29 of the Banking Regulation Act, 1949 in the
E
form set out in the third Schedule thereto, the assessee Bank
cannot be permitted to claim a loss on revaluation by claiming
different method of stock valuation notionally for income tax
purposes only.
F
In our view, as stated above consistently for 30 years, the assessee
was valuing the stock-in-trade at cost for the purpose of statutory balance
sheet, and for the income tax return, valuation was at cost or market value
whichever was lower. That practice was accepted by the Department and
there was no justifiable reason for not accepting the same. Preparation of
the balance sheet in accordance with the statutory provision would not G
disentitle the assessee in su1:Jmitting income tax return on the real taxable
income in accordance with a method of account adopted by the assessee
consistently and regularly. That cannot be discarded by the departmental
authorities on the ground that assessee was maintaining balance sheet in
the statutory form on the basis of the cost of the investments. In such cases, H
270 SUPREME COURT REPORTS [1999] SUPP. 3 S.C.R.

A there is no question of following two different methods for valuing its
stock-in-trade (investments) because the Bank was required to prepare
balance sheet in the prescribed form and it had no option to charge it. For
the purpose of income tax as stated earlier, what is to be taxed is the real
income which is to be deduced on the basis of the accoun~ing system
B regularly maintained by the assessee and that was done by the assessee in
the present case.
.
In the result, the appeal is allowed. The impugned order passed by
the High Court is set aside. The questions referred by the Tribunal are
answered in favour of the assessee and against the revenue.
c Ordered accordingly. There shall be no order as to costs.

S.V.K. Appea\ allowed.