1998-VIL-125-ITAT-JAI

Equivalent Citation: ITD 068, 069, TTJ 063, 226,

Income Tax Appellate Tribunal JAIPUR

Date: 07.01.1998

BANK OF RAJASTHAN LTD.

Vs

INSPECTING ASSISTANT COMMISSIONER.

BENCH

Member(s)  : R. K. GUPTA., C. L. BOKOLIA.

JUDGMENT

Per C.L. Bokolia, AM --- These three appeals are based on identical facts and common grounds of appeal. All these appeals are, therefore, being decided by a common consolidated order for the sake of convenience.

2. These appeals are preferred by the assessee against the order of the CIT(A) on the ground that the CIT(A) has grossly erred in confirming the disallowance by the Assessing Officer of the claim of loss of Rs. 89,73,054 for the assessment year 1982-83, Rs. 79,76,559 for the assessment year 1983-84 and Rs. 1,11,42,536 for the assessment year 1984-85 which is highly unreasonable, unjustified and deserves to be deleted.

3. The facts of these cases are that the assessee was doing banking business and during the years under consideration, it has claimed losses on account of revaluation of Central and/or State Governments and other securities due to fluctuations in the market. The claim of the assessee is that it is holding shares and securities as stock-in-trade and was carrying on the business accordingly. Shri N.M. Ranka, appearing on behalf of the assessee started with the argument that the reasoning so given while rejecting the book version and its claim for loss is not based on correct footing. It is stated that the appellant is a scheduled bank to which the provisions of Banking Regulation Act, 1949 are applicable and its main business is banking business, finance business, shares and securities business which was being carrying on for the last several years and also accepted by the department. Appellant has to purchase and sale and also hold shares and securities both Governmental and semi-Governmental as stock-in-trade during the banking business. In the past, there was no such fluctuation in the yield rate of Government securities and as such there was no variation in the market value of Government and semi-Government securities. However, from the year 1981 or so, the securities were issued with a higher rate of interest and hence the market value of old securities which was about 3% or so has considerably gone down on account of which appellant had incurred the loss. The new securities were issued from 7% to 9% and due to which the market value of old securities has dwindled down. As such, nobody would like to give face value or more price for the old securities. Hence the loss was due to low yield securities and the same was shown by the appellant. It is also stated that all the securities are quoted in all stock exchanges and the rate quoted was taken into account for arriving at the difference between the cost price and the real market value. In view of this, the valuation so made by taking into consideration, the cost or market value whichever is less is stated to be on a correct footing. It is also stated that every new securities of higher yield are being issued due to which there will be a continuous further loss every year. The loss claimed is not due to fluctuation of market rate but the market rate is continuously going down and due to which the value is also decreasing. Hence, it is a real loss according to the appellant due to issue of higher yield rates by the Government. A reference is also made to section 6 of the Banking Regulation Act, 1949 and the same is quoted verbatim in the written submissions. On the basis of the said clause 6, it is stated that the appellant-bank is allowed to deal in shares and securities and this was the main object of the appellant-bank. It is also stated that whatever loss or profit has been taxed in the past by way of business profit or loss, the same cannot be ignored. It is further stated that the department has accepted the shares and securities as stock-in-trade from year to year and in view of the same, the loss ought to have been allowed. It is further stated that the basic principle of accountancy, provides for valuing the closing stock on the basis of the cost price or market price whichever is less and the appellant-bank is also following the same method of valuation. An option is available with the appellant and the same has been exercised keeping in view the value in the market rate. As such the claim of loss should have been accepted. A reference is also given to the decision in CIT/ CEPT v. Chari & Ram [1949] 17 ITR 1 (Mad.) in regard to the method of valuation of closing stock at either of the two cost or market rate whichever is less. It is also stated that it is a real loss due to lower rate of quotation in the stock exchange. As such it constituted a business loss which is to be allowed by way of deduction. It is further stated that the books of account are being maintained on the basis of mercantile system and in such a situation, there is no question of any notional loss and whatever loss or profit is there, that has to be shown and accepted. The observation made in the impugned asst. order of treating it as a notional loss is stated to be against the factual position. A reference is also made to the decision in Whimster & Co. v. IRC[1925] 12 TC 813. Another reference is made to Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC), Indo Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.) and CIT v. National & Grindlays Bank Ltd [1983] 13 Taxman 420 (Mad.) as also to certain other cases. It is stated that the decisions refer-red to in the impugned assessment order relate to different set of circumstances and cannot be made applicable to the facts of the present case. It is also stated that the other observation of not showing it in the trading or profit and loss account is also not correct inasmuch as the accounts are maintained as per the provisions of Banking Regulation Act which specifically provides for a separate form for preparation and publishing the accounts and which is not like the accounts of other companies under the Companies Act, 1956. In view of this, the accounts have to be prepared in the manner provided in the Act and in all bank cases to which the Banking Regulation Act, 1949 is applicable, the accounts are maintained in a similar fashion. Under this Act separate trading account is not prepared. As such, the question of showing in the debit side of opening stock and showing the closing stock on the credit side does not arise. It is also stated that it cannot be shown in the profit and loss account because no column for showing of opening and closing stock is prescribed. As such, the observation so made is stated to be not well justified. It is also stated that as per the Banking Regulation Act, it is shown on the assets side of the balance-sheet and there was no alternative to show it differently than provided for by the statute. It may be that the Companies Act provides for showing the opening stock as also closing stock on two different sides but there is no such provision in accounts in a different form win not change the basic principle and taxing the income or loss under the provisions of the I.T. Act, 1961. A reference is also made to the decision reported in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) to the effect granting any allowance or taxing any income. The accounting in a particular year or so accounting in the books of account is not a test for allowing or taxing any income or loss. As such, the entry or no entry in the books of account is stated to be irrelevant for the purpose of taxation. As such, the contention of the appellant is that simply because it was not shown in the trading account either by way of opening stock or closing stock, the claim of the appellant cannot be rejected. The reference to the decision reported in Reform Flour Mills (P.) Ltd v. CIT[1981] 132 ITR 184 (Cal.) is stated to be not well justified inasmuch as that related to a different set of circumstances and was in fact pertaining to certain accrued interest on loans for the purpose of taxation while it is not so in the case of the appellant. It is also stated that the loss is claimed by the appellant by showing the value of shares and securities at a lesser market price on the basis of stock exchange quotations was well justified and also in accordance with the principles of accountancy for valuing the closing stock at cost price or market price whichever is less. It is further stated that in the earlier years there was not much fluctuation in the yield rate of shares and securities though the appellant has opted for valuing the stock-in-trade at stock price or market price whichever is less only during the year under consideration. It was under a bona fide belief and as such the change in method of valuing the closing stock was correct and also followed in the subsequent years. In view of this, the change in valuing the closing stock being under a bona fide belief due to decline in the market rate should be accepted and the loss has to be allowed. It is also stated that the reference given to the different decisions as per the impugned asst. order is not correct and the case of the appellant stands on a different footing. In support of its plea, it has also refer-red to the decisions reported in Indo Commercial Bank Ltd 's case and National & Grindlays Bank Ltd.'s case as also the decision of the ITAT, Calcutta Bench reported in ITA No. 1641, dated 19-10-86. As such, the crux of the appellant's contention is that the loss claimed may be directed to be allowed as there is no infirmity in valuing the closing stock/stock-in-trade as per the market rate.

4. As against this, the Sr. D/R strongly argued and totally relied upon the orders passed by the AO as well as the CIT(A). While deciding the issue, the CIT(A) has observed:

"...it appears that the treatment meted out to the appellant's claim as per different facts discussed in the impugned assessment order is well in order and deserves to be confirmed. It may be seen that the valuation of closing stock normally arises where there is a separate trading a/c, P & L a/c and balance-sheet. It is true that in normal circumstances, the stock is to be valued as per the principle of accountancy which provided for valuation of closing stock at cost or market rate whichever is less. But a perusal of the different facts available on record indicates that there was no trading account whatsoever maintained by the appellant and on the contrary it has only a balance-sheet which was maintained under the Banking Regulation Act and details of income and expenditure on the basis of different schedules. If so, it hardly appeals to logic that there was any scope for valuing the closing stock in absence of any trading a/c which otherwise was not maintained. If the stock referred to by the appellant in regard to securities and shares was not shown in the trading a/c, there was no justification at all in valuing the said stock in accordance with the principle of accountancy by taking into consideration the cost or market value whichever is less. As there was no trading a/c which was not maintained by the appellant and it has only a balance-sheet and the income and expenditure account on the basis of different schedules that was available, the plea of the appellant of applying the principle of accountancy for the purpose of claiming the loss due to fall in the market rate appears to be without any merit. This is also in view of the fact that if the closing-stock has not entered into computation of trading results or profit and loss account as a result of showing the outcome of trading results on the credit side of the P & L a/c, there can be no basis at all for revaluing the closing stock which otherwise has not appeared at all in the trading a/c. In the course of appeal hearing, the appellant has furnished a prepared trading a/c by showing certain opening stock purchases profit on the debit side and showing certain sales and closing stock valued on the basis of market price. A note is also appended to the said trading a/c which otherwise in reality was not in existence at all as per the audited accounts and in the said note, it is stated that closing stock is valued as per the market price which was less than the cost and the profit on sale of shares and securities has been taxed as business profits. The attempt made by the appellant by casting a trading a/c in the course of appeal hearing also cannot come to its rescue firstly because there was no trading a/c maintained by the appellant as per the books of a/c or the audited accounts and secondly because if what the appellant says for valuing the closing stock on the basis of cost or market rate whichever is less is considered as carrying any weight whatsoever the fact cannot be lost sight of that the same principal is invariably to be applied in valuing the opening stock also inasmuch as the application of two different types of methods for the purpose of valuing the opening stock and the closing stock will give an altogether distorted picture and will not reflect the correct state of affairs of the trading results. This is duly supported by the decisions reported in 99 ITR 574-577- 8 (Delhi) as also in [1990] 4 ITC 245-246 (PC) AIR [1930] PC 56. If it is so, then there will not be any difference on account of which the appellant has otherwise shown certain loss and claimed it to be admissible. Valuation of closing stock at the end of the year is undoubtedly an essential part for determining the true trading profit of that year and as there was no trading account, the plea of the appellant for allowing the loss due to valuation of closing stock can hardly be accepted as correct. For the purpose of income tax, the object of valuation of unsold closing stock is not to bring into charge any depreciation in the value of such stock as observed by the Supreme Court as per the decision reported in 24 ITR 481, 495. In view of this, the effort of the appellant for claiming the loss on the basis of the depreciation having occurred in the value of shares and securities cannot be accepted. Furthermore, a perusal of the balance sheet maintained by the appellant shows that the shares and securities were held not by way of closing stock but by way of investments and since the shares and securities constituted investments, there was hardly any justification in treating the same as a stock for the purpose of any valuation. Valuation will be reflected only in regard to stock and not in regard to investments which otherwise will not loose any value as such being investment only. It may be that as and when any part of the shares or security is disposed of, there may be some loss on account the value prevailing at the relevant point of time but that by itself will not indicate that appellant was justified in revaluing the value of the investments shown in its balance-sheet pertaining to the shares and securities, etc. The investment made by the appellant in the shares and securities continued to be investment only and could not have been treated as converted into stock or stock-in-trade. In view of the same as well, the contention of the appellant could not have been treated as admissible under the provisions of law. The plea of the appellant it has maintained the accounts under the Banking Regulation Act and as such no trading account was maintained may be factually correct, but while determining the income or loss under the provisions of IT Law, the factual position in respect of the trading activity, etc., cannot be lost sight of and since there was no trading activity as such there could not have been any trading a/c and in absence of any trading a/c also there was no question of showing any closing stock for the purpose of valuation and thereby claiming any deduction due to difference in the market rate. The contention of the appellant of bonafidely changing the system of accounting in respect of the valuation, can hardly survive in view of the factual position as referred to above. Taking into-consideration the totality of the facts as discussed above coupled with the reasoning given in the impugned assessment order, it appears that the claim of the appellant has correctly been negatived and hence no interference on this account is called for.'

5. We have examined the facts of these cases as well as the arguments put forth by the rival parties and material placed on record. We have also examined the case laws relied upon. It is a matter of common knowledge that the principles of res judicata are not applied to tax matters. Each assessment year is independent to each other and the income computed independently. It, therefore, follows that the decision taken or the facts accepted in earlier years are not necessarily to followed in later years. We, therefore, do not believe in the arguments of the Id. A/R that since the Department has accepted investment in question as stock-in-trade in earlier years, the same deserves to be accepted in the years under appeal.

6. The Income-tax Act, 1961 is an independent code in itself. Total income or loss to be computed has to be in accordance with the provisions of the I.T. Act. Procedure to be followed for completion of assessment and the total income to be computed has been elaborately codified in the I.T. Act itself. We are, therefore, of the confirmed opinion that for computation of total income under the I.T. Act, norms and/or the procedure laid down by the RBI cannot be followed under the I.T. Act. The norms and various procedures prescribed by the RBI to its subsidiary or scheduled banks is in order to regulate and effectively conduct the business and to control the mandatory aspect of the company.

7. If the conduct of the assessee is examined with reference to the material placed on record, it is very much clear from the printed balance-sheet and other relevant material that the assessee himself has clubbed the value of shares and securities under the head 'Investment'. Investment is always capital in nature and cannot be treated as stock-in-trade. It is only the stock-in-trade which can be valued at the close of the accounting period. Investment has to be consistently valued at the cost price and profit and loss would arise from the investment only at the stage when the same are finally sold/transferred or disposed of. It is also observed from the balance-sheet that the assessee himself has not carried out the alleged revaluation of the stock and securities in its books of a/c. In the books of a/c, the value of the so-called stocks and securities has always been consistently made at the cost price. It is only for the purposes of income-tax, the assessee has named the same as stock-in-trade and revalued it on the basis of the prevailing market price at the end of the closing year. This cannot be accepted as an appropriate course of action or reasonable so far as Income-tax Act is concerned. In Calcutta High Court in the case of CIT v. UCO Bank [1993] 200 ITR 68, observed:

"The assessment of a bank for the assessment year 1982-83 had been completed and a loss of more than Rs. 7 crores had been allowed. The CIT found that the loss on revaluation of shares and securities was never provided by the assessee-bank in its final accounts; but, for arriving at the taxable income, it had deducted a notional loss from the book profits by working out the difference between the book value of shares as shown its final accounts and the market price as prevailing on the last day of the previous year. The CIT revised the assessment holding that the assessee bank could not claim a loss which was not taken into account while preparing the final accounts, particularly when this loss related to notional revaluation of shares and securities. The Tribunal found that the loss arising on such revaluation had always been accepted by the department in earlier years in completing the income-tax assessment of the bank. The Tribunal cancelled the order of the CIT. On a reference:

Held, (i) that the ITO was not bound by the method of stock valuation accepted by him in making the assessment in the earlier years."

Then again

"(ii) that the assessee in his case had not valued its stock of shares and securities in its books of a/c in accordance with the method 'cost or market price, whichever is lower'. This was as an admitted position. A claim for loss based on a notional valuation of stock-in-trade only for tax purposes could not be permitted. The Tribunal was not justified in cancelling the order of the CIT and allowing the loss.'

In a different context, the Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd v. Addl. CIT [1996] 218 ITR 438/84 Taxman 640 held that:

"Held, dismissing the appeal, that it was clearly understood in banking parlance that circulating capital was that which was put into circulation or turned over to earn profits. Govt. securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in Govt. securities placed with the State Bank of India or the RBI could not be regarded as an essential part of the assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Hence the interest on Govt. securities placed with the State Bank of India or the RBI, could not qualify for exemption under section 81 (now sec. 80P) of the I.T. Act."

8. The Rajasthan High Court has an occasion to deal with such type of issues in the case of CIT v. Rajasthan State Co-operative Bank [1997] 223 ITR 55 and observed:

"...that simply because the permission was not taken from the Registrar, Co-operative Societies, for investment in a particular mode, the income derived will not change its character. However, a perusal of the Rajasthan Co-operative Act and the Rules makes it clear that the interest earned on investments in Govt. securities by the bank is not a banking business as the said investment is neither of circulating capital nor stock-in-trade of the co-operative bank as it has no absolute or infettered right to withdraw the same whenever it likes. It can be withdrawn only in the proceedings of winding up of the co-operative society. The income from investment of reserve funds was not entitled to special deduction under section 80P of the I.T. Act, 1961."

9. The A/R of the assessee elaborately argued in regard to the method of accountancy and valuation of stock-in-trade. So far as these two aspects are concerned, there is no dispute that the assessee follows the mercantile system of accounting and that stock-in-trade requires a revaluation at the end of the closing of accounting period to arrive at correct amount of profit or loss earned/suffered by the assessee. But the issue involved here is altogether different.

10. After considering the full facts of this case and the discussions above, we are of the opinion that investment in Government securities cannot be held as stock-in-trade. It is definitely long-term investment and, therefore, capital in nature. Profit or loss on such investment would arise only when this type of asset is finally transferred, sold or discarded. It cannot be revalued at the time of closing of each accounting period. Investments are always valued on the basis of cost price. Under the circumstances, we do not find any infirmity in the order passed by the CIT(A). This ground of appeal for all these three assessment years, therefore, stands dismissed.

11. The assessee has taken two other grounds of appeal, in Appeal No. 21 1/JP/90 for assessment year 1984-85. The first ground is in regard to disallowance under sec. 37(3A) of the Act. On this account it is contended that disallowance of expenses of Rs. 1,58,074 is not legal under sec. 37(3A) of the Act. It is said to be not in the spirit of taxation laws and discretionary in nature. It was also argued that the provisions of section 37(3A) is unconstitutional and a writ has been filed before the Rajasthan High Court on this account. Altenatively it was argued that insurance, repairing charges, road taxes, etc., are not vehicle expenses and similarly, the room rent of meeting and conference room rent are not includible under hotel expenses. Similarly, the table calenders, pen and keys are not office use and should not be clubbed as advertisement expenses.

12. The provisions, of section 37(3A) are very clear and unambiguous. These provisions were introduced by the Finance Act, 1983 with effect from 1-4-84 and withdrawn with effect from 1-4-86. Section 37(3B) referred all the expenditure on this account which says that advertisement, publicity, sales promotion, running and maintenance of aircrafts and motor crafts and payments made to hotels are all includible under this section.

13. After considering the full facts, we are of the opinion that they are constitutionally valid and the action of the Assessing Officer as well as CIT(A) is reasonable and justified. This ground also fails.

14. The next ground taken for this assessment year is in regard to the disallowance of Rs. 2,250 on account of provisions of section 80VV. The provisions of section 80VV are very clear which reads as under:--

"Sec. 80VV -- Deduction in respect of expenses incurred in connection with certain proceedings under the Act.-In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination of any liability under this Act, by way of tax, penalty or interest:

Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees.'

According to this provision any expenditure on account of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination of any liability under this Act is restricted to Rs. 5,000 only. Under these circumstances, we do not find any reason to interfere with the order of the CIT(A) on this account also.

15. The appeal filed by the assessee for all these three years are treated as dismissed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.