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TAXAP/1879/2009 6/ 6 ORDER
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX
APPEAL No. 1879 of 2009
With
TAX
APPEAL No. 1880 of 2009
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COMMISSIONER
OF INCOME TAX-IV - Appellant(s)
Versus
VADILAL
FINANCIAL SERVICES LTD - Opponent(s)
=================================================
Appearance
:
MR MR BHATT, SR.
ADV. with MRS
MAUNA M BHATT for Appellant(s) : 1,
MR SN SOPARKAR, SR.ADV. with
MS BHOOMI M. THAKORE MRS and SWATI SOPARKAR for Opponent(s) :
1,
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CORAM
:
HONOURABLE
MR.JUSTICE AKIL KURESHI
and
HONOURABLE
MS JUSTICE SONIA GOKANI
Date
: 18/07/2011
ORAL
ORDER
(Per
: HONOURABLE MR.JUSTICE AKIL KURESHI)
1. Revenue
has preferred these two appeals to challenge the common judgment of
the Tribunal dated 17.4.2009. Following question has been commonly
framed in both the appeals:-
“Whether
the Appellate Tribunal is right in law and on facts in reversing the
order passed by the CIT(A) and thereby deleting the disallowance of
loss on account of diminution in the value of current investment
debited in P & L A/c. though the auditor had shown the said loss
to be an expenditure of capital nature?”
2. Brief
facts leading to the present appeals are as follows:-
2.1 The
assessee is a non-banking finance Company. For the assessment year
1996-97 the assessee debited to its Profit and Loss Account an
amount of Rs.19,55,325/- as diminution in the value of investments.
2.2 The
case of the assessee was that such diminution arose on account of
prudential norms for accounting which the assessee debited and which
in any case were in tune with the norms issued by the Reserve Bank of
India ( “RBI” for short) and which the assessee was
required to follow.
2.3 The
Revenue, however, did not accept this change brought about by the
assessee in its accounting and relied on the Auditor’s report,
wherein in clause 4(i), the Auditor had stated that the above amount
was expenditure, which was capital in nature.
2.4 The
decision of the Assessing Officer in this regard being adverse to the
assessee, the same was carried in appeal. CIT(Appeals) confirmed the
order of the Assessing Officer, whereupon the assessee approached the
Tribunal. The Tribunal referred to and relied on various decisions of
the Apex Court and different High Courts and, in particular, in the
case of United Commercial Bank vs. Commissioner of Income-tax
reported in [1999] 240 ITR 355(SC), and ruled in favour of the
assessee.
3. The
Revenue has approached this Court against the judgment of the
Tribunal by virtue of which above question was decided in favour of
the assessee with respect to two assessment years i.e Assessment Year
1996-97 and 1997-98 by the common judgment.
4. Appearing
for the Revenue learned Senior Advocate Mr. M.R.Bhatt vehemently
contended that the Tribunal committed error in accepting the
assessee’s version, particularly, when the Auditor in his report
treated the expenditure as capital in nature. He submitted that the
assessee had changed the method of accounting abruptly in the year
1996-97. In Previous years assessee was following a wholly different
pattern. He, therefore, submitted that the Tribunal ought not to have
interfered with the orders of the two Revenue authorities.
5. On
the other hand, learned Senior Advocate Mr.S.N.Soparkar appearing for
the assessee opposed the appeals contending that the assessee, as a
non-banking finance company, was required to carry out the directives
of RBI. The accounting method adopted by the assessee on and from
assessment year 1996-97 was to bring the same in tune with the
directives of the RBI. Even otherwise, prudence required and
permitted the assessee to evaluate the stock at the market value or
cost, whichever is lower. He pointed out that in subsequent years
also the assessee had followed the same accounting method.
6. Reliance
was placed on the decision of Apex Court in the case of Chainrup
Sampatram vs. Commissioner of Income-tax reported in [1953] 24 ITR
481, wherein it was observed as under:-
“Again, it
is misconception to think that any profit ” arises out of the
valuation of the closing stock” and the situs of its arising or
accrual is where the valuation is made. As already stated, valuation
of unsold stock at the close of an accounting period is a necessary
part of the process of determining the trading results of that
period, and can in no sense be regarded as the ” source” of
such profits. Nor can the place where such valuation is made be
regarded as the situs of their accrual. The source of the profits and
gains of a business is indubitably the business, and the place of
their accrual is where the business is carried on. As such profits
can be correctly ascertained according to the method adopted by an
assessee only after bringing into the trading account his closing
stock where ever it may exist, the whole of the profits must be taken
to accrue or arise at the place of carrying on the business. ”
7. Reliance
is also placed on the decision in the case of United Commercial Bank
vs. Commissioner of Income-tax reported in [1999] 240 ITR 355(SC),
wherein the Apex Court held and observed as under:-
” 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 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 taxpayer 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.
(4) 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 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.
(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 made in such manner and on such basis as the
Income-tax Officer may determine.
****
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 disentitle the assessee in submitting
the income-tax return on the real taxable income in accordance with
the 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 the balance-sheet in
the statutory form on the basis of the cost of investments. In such
cases, there is no question of following two different methods for
valuing its stock-in-trade (investments) because the bank was
required to prepare the balance-sheet in the prescribed form and it
had no option to change 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 accounting system regularly maintained by
the assessee and that was done by the assessee in the present case.”
8. Reliance
was also placed on the decision of Commissioner of Income-tax vs.
Nainital Bank Ltd. reported in [2009] 309 ITR 335, wherein the
Division Bench upheld the decision of the Tribunal in somewhat
similar background.
9. We
find that the Tribunal has examined the issue at considerable length.
The Tribunal noted that the assessee being an non banking finance
company , it was regulated by the guidelines issued by the RBI. Its
current investments were in the nature of stock-in-trade. The
assessee had followed the recognized method of accounting which in
turn recognized the principle of anticipating all losses but not
providing for any profit until and unless it is realized. The
Tribunal formed the opinion that the assessee was bound to change the
method of accounting for valuation of closing stock from stock at
cost or market value whichever is lower and also provided for any
loss so incurred in the books of accounts. The Tribunal noted that
there was no allegation that the same method was not being followed
in the subsequent years. The Tribunal, therefore, concluded that
change in the method of accounting of valuing the closing stock of
the shares and securities from cost to cost or market value whichever
is lower was a loss incurred during the year in question.
10. We find
that the observations and conclusions of the Tribunal are based on
the principles set out by the Courts in various decisions, in
particular, in the case of Chainrup Sampatram vs. Commissioner of
Income-tax (supra) and United Commercial Bank vs. Commissioner of
Income-tax (supra). The assessee, following the accounting principles
as recognized and changing its method of accounting in tune with the
RBI guidelines by valuing its closing stock at cost or market value
whichever is lower for the year in question, and treated the
resultant difference as loss suffered during the year under
consideration. Simply because the Auditor treated the amount
differently, in our opinion, would not preclude the assessee from
claiming it as a loss if law otherwise permitted.
11. We do not
find any question of law arises. Tax Appeals are, therefore,
dismissed.
(Akil Kureshi,
J. )
(Ms. Sonia
Gokani, J. )
sudhir
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