UNITED COMMERCIAL BANK, CALCUTTA vs. COMMISSIONER OF INCOME TAX, WEST BENGAL-III CALCUTTA.

CIVIL APPEAL No. 11888/1995Supreme Court1999 INSC 44929 September 1999Bench: 2 JudgesAuthor: D.P. WADHWA, M.B. SHAH B UNITED COMMERCIAL BANK, CALCUTTA17 pages
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What were the facts?

The assessee, United Commercial Bank, a nationalized bank, prepared its balance sheet valuing stock-in-trade (investments) at cost. However, for income tax purposes, it consistently valued these investments at cost or market value, whichever was lower, for at least 30 years, a method accepted by the Department. For Assessment Year 1982-83, the bank claimed a notional loss on closing stock of securities valued at market value, which was initially allowed by the Inspecting Assistant Commissioner. The Commissioner of Income Tax rejected this claim, stating the bank could not calculate profit or loss for tax purposes by excluding it from its final accounts. The Income Tax Appellate Tribunal allowed the deduction. The High Court, on reference, ruled against the bank, holding that since it did not consistently follow the cost or market value method in its accounts, it could not claim a notional stock valuation for income tax.

What did the Supreme Court hold?

The Supreme Court allowed the appeal, setting aside the High Court's order. The Court held that it is an established rule of commercial practice that closing stock can be valued at cost or market value, whichever is lower. A taxpayer is free to employ their own method of keeping accounts and valuing stock-in-trade to disclose the real income. The Court emphasized that a method of accounting adopted consistently and regularly by a taxpayer cannot be discarded by departmental authorities simply because they believe a different method should have been used. The bank had consistently valued its stock-in-trade at cost for its statutory balance sheet and at cost or market value, whichever was lower, for its income tax return, a practice accepted by the Department for 30 years. The Court found no justifiable reason to discard this practice. The preparation of a balance sheet in accordance with statutory provisions does not disentitle the assessee from submitting an income tax return based on real taxable income derived from a consistently adopted accounting method. The Court noted that the Central Government had permitted the assessee not to disclose market value in the balance sheet, but as the bank maintained accounts on a mercantile system, it was entitled to show its real income by considering the market value of investments. The questions referred by the Tribunal were answered in favour of the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was justified in law in cancelling the Commissioner's order under Section 263 of the Income Tax Act, 1961, holding that the case of State Bank of Travancore v. CIT, Kerala (158 ITR 102) was not applicable? 2. Whether, on the facts and in the circumstances, the Tribunal was correct in law in holding that a notional loss in investments, calculated as the difference between book value and market price, is admissible for deduction from the assessee bank's book profits? Assessee's Contentions: The assessee argued that it consistently followed the method of valuing closing stock at cost or market value, whichever was lower, for income tax purposes for 30 years, and this practice was accepted by the Department. They contended that the preparation of a statutory balance sheet at cost should not prevent them from claiming real taxable income based on a consistently followed method for tax returns. They relied on the principle that a taxpayer is free to employ their own method of accounting for trade purposes to disclose real income. Revenue's Contentions: The revenue contended that the assessee could not calculate profit or loss for tax purposes by excluding it from its own final accounts. They argued that the method of valuing stock at cost or market value, whichever was lower, should have been consistently followed in preparing the accounts, and a notional valuation solely for income tax purposes was impermissible.

Which sections of the Income-tax Act were involved?

Section 145,Section 263,Section 53,Section 29

AI-generated summary — verify with the full judgment below

A B UNITED COMMERCIAL BANK, CALCUTTA v. COMMISSIONER OF INCOME TAX, WEST BENGAL-III CALCUTTA. SEPTEMBER 29, 1999 [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 mar

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