COMMISSIONER OF INCOME TAX vs. M/S.CITY UNION BANK LTD

T.C.A.No.268 of 2015 and etc. IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 10.09.2024 CORAM: THE HONOURABLE MR.JUSTICE R.SURESH KUMAR and THE HONOURABLE MR.JUSTICE C.SARAVANAN T.C.A.Nos.268, 269, 272, 273 and 274 of 2015 The Commissioner of Income Tax, Trichy.

... Appellant in all T.C.As. Vs. M/s. City Union Bank Ltd, 149, T.S.R.Big Street, Kumbakonam. ... Respondent in all T.C.As. Prayer in T.C.A.No.268 of 2015: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “B” Bench, Chennai dated 08.07.2011 in ITA.No.935/mds/2010. Prayer in T.C.A.No.269 of 2015: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “B” Bench, Chennai dated 08.07.2011 in ITA.No.770/mds/2010. Prayer in T.C.A.No.272 of 2015: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “B” Bench, Chennai dated 08.07.2011 in ITA.No.937/mds/2010. 1/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. Prayer in T.C.A.No.273 of 2015: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “B” Bench, Chennai dated 08.07.2011 in ITA.No.939/mds/2010. Prayer in T.C.A.No.274 of 2015: Appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “B” Bench, Chennai dated 08.07.2011 in ITA.No.940/mds/2010. For Appellant : Mr.J.Narayanasamy in all T.C.As. For Respondent : Mr.T.Suryanarayana Senior Counsel Assisted by Mr.Manasu Ananthan for M/s.King and Partridge JUDGMENT (Judgment of the Court was delivered by C.SARAVANAN, J.) By this common order, all the Tax Appeals are being disposed of. 2. These appeals arise out of a common order dated 08.07.2011 passed by the Income Tax Appellate Tribunal Bench 'B' Chennai. 2/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 3. By the Impugned Order dated 08.07.2011, the Appellate Tribunal has allowed / dismissed the following appeals filed by the Appellant / Deputy Commissioner of Income Tax Circle – 1, Kumbakonam and the Respondent / Assessee as detailed below:- Table I Appellant / Income Tax Department T.C.A.No. Connected I.T.A.No. Assessment Year Result 268 of 2015 935/Mds/2010 2002-2003 Partly Allowed 269 of 2015 770/Mds/2010 2007-2008 Dismissed 272 of 2015 937/Mds/2010 2004-2005 Dismissed 273 of 2015 939/Mds/2010 2005-2006 Dismissed 274 of 2015 940/Mds/2010 2006-2007 Dismissed Table II Respondent/Assessee I.T.A.No. Assessment Year Result 910/mds/2010 2002-2003 Dismissed 914/Mds/2010 2006-2007 Partly Allowed 915/Mds/2010 2007-2008 Allowed 3/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 4. At the time of admission in all these appeals following substantial question of laws were framed:- Table III Sl. No. Substantial Question of Law Assessment Years Decisions Covering the Issue 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee need not offer interest on accrual basis and assessee can exclude the interest earned from securities on accrual basis for the purpose of income tax even though the assessee is a banking company bound to follow mercantile system of accounting as per Income Tax Act, Indian Companies Act, RBI guidelines? 2002-2003 2004-2005 2006-2007 2007-2008 1. CIT vs. City Union Bank (2007) 291 ITR 144 (Mad) following CIT vs. Tamil Nadu Merchantile

Bank (2007) 291 ITR 137 (Mad) 2. CIT vs. Karnataka Bank (Order dated 12.09.2012 passed by the Hon'ble High Court of Karnataka in ITA 433/2006) 2. Whether on the facts and in the circumstances of the case the tribunal was right in holding that assessee is entitled for deduction of bad debts on the total average outstanding rural advances made by the bank at the end of the accounting year without restricting the deduction to incremental advance made during the year by not appreciating the 2nd limb of section 36(1)(viia) as per which deduction can be allowed only on the incremental advance made during the year? 2002-2003 1. CIT vs. City Union Bank (Order dated 07.03.2022

in TCA.No.961/2020 (for AY 2003-2004) 2. CIT vs. Uttarbanga Kshetriya Gramin Bank (2018)

94 taxmann.com

90 (Calcutta) 3. CIT vs. Canara Bank (2023)

147 taxmann.com

171 (Kar) 4/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that non-rural bad debts written off and debited to reserve account can be claimed as deduction of bad debt under Section 36(1)(vii) when only bad debts written off which are over and above the credit balance in the provision for bad and doubtful debts account would alone be eligible for deduction under the Section? 2002-2003 1. CIT vs. City Union Bank (2007) 291 ITR 144 (Mad) 2. Catholic Syrian Bank vs. CIT (2012) 18 taxmann.com

282 (SC). 3. CIT vs. Karnataka Bank (2008) 175 Taxman 325 (Kar) approved in (2012) 25 taxmann.com 235 (SC) 4. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that balances lying unclaimed with the bank for more than 3 years cannot be treated as income of the assessee? 2004-2005 2006-2007 2007-2008 1. CIT vs. City Union bank (2020) 118 taxmann.com

96 (Madras) 2. CIT vs. Karnataka Vikas Grameen Bank (2017)

79 taxmann.com

359 (Kar) 3. CIT

vs.

Raddi Sahakara

Bank Niyamitha (2017) 88 taxmann.com

560 (Kar) 4. CIT vs. Canara Bank (2020)

122 taxmann.com 86 (Kar) 5. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that depreciation is to be allowed on on account of shifting of securities from available for sales category (AFS) to held to maturity category (HTM)? 2005-2006 2006-2007 1. CIT vs. City Union Bank (2007) 291 ITR 144 (Mad) 2. United

Commercial Bank vs. CIT (1999) 106 Taxman 601 (SC) 3. CIT vs. HDFC Bank Ltd.

(2014)

52 taxmann.com

333 (Bombay) 6. Whether, on the facts and in the circumstances of the case, 2004-2005 2005-2006 1. CIT vs. City Union Bank (2007) 291 ITR 5/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. the Tribunal was right in holding that the assessee is entitled for the deduction with resect to the provision for depreciation on investments under the trading account even though the assessee had valued the closing stock of the investments for the purpose of income tax by ignoring the appreciation in its value and had valued the investments differently in the books of accounts? 144 (Mad) 2. CIT vs. Lakshmi Vilas Bank Ltd (2022) 139 taxmann.com 48 (Mad) 3. United

Commercial Bank vs. CIT (1999) 106 Taxman 601 (SC) 4. Chainrup Sampatram vs. CIT (1953) 24 ITR 481 (SC) 7. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled for deduction of amortization loss/expenses on Government

securities classified as Held to Maturity Category, without capitalising the loss/expenses over the remaining period of maturity of securities? 2002-2003 2004-2005 2005-2006 2006-2007 2007-2008 1. CIT vs. City Union Bank (2007) 291 ITR 144 (Mad) 2. CIT vs. Lakshmi Vilas Bank Ltd. (Order dated 04.11.2020 passed by this Hon'ble Court in TCA No.207/2018) 3. United

Commercial Bank vs. CIT (1999) 106 Taxman 601 (SC) 4. CIT vs. Rajkot Dist Co-op Bank Ltd. (2014)

43 taxmann.com

161 (Guj) 5. CIT vs. Thane Bharat Sahakari Bank Ltd (Order of the Hon'ble Bombay High Court in ITA

No.1117/2013 dated 17.03.2015) 6. PCIT vs. Satara District Central Coop Bank Ltd (Order of the Hon'ble Bombay High Court in ITA

No.718/2015 dated 17.01.2018) 8. Whether the facts and in the circumstances of the case, the 2002-2003 1. CIT vs. Alembic Chemical Works Co. 6/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. Tribunal was right in holding that share listing fees is allowable

revenue expenditure and cannot be treated as capital expenditure? Ltd (1993) 67 Taxman 275 (Guj) 2. CBDT

Circular No.10/67/65 (IT)(A-I) dated 26.08.1965 5. The case was argued at length. The learned counsel for the Appellant/Income Tax Department contended that the Income Tax Appellate Tribunal by relying on the decision of this Court in Commissioner of Income Tax vs. City Union Bank Limited, [2007] 163 Taxman 495 (Madras) practically allowed/dismissed the Income Tax Appeals and allows the Respondent appeals in the above mentioned appeals even though the said decision does not apply to all the cases. 6. Substantial question of law at Sl.No.1, 4 are concerned, it was fairly conceded. The issue was covered by the decision of this Court in the case of Commissioner of Income Tax vs. City Union Bank Limited, [2007] 163 Taxman 495 (Madras) and that of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. vs. Commissioner of Income Tax, [1997] 91 Taxman 26 (SC). 7. In the case of Commissioner of Income Tax vs. City Union 7/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. Bank Limited, [2007] 163 Taxman 495 (Madras) following questions of law were framed:- 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the case of the assessee bank interest on securities has to be assessed only on the basis of the interest due on the half-yearly due dates and the interest accrued as at the end of the assessment year is not to be taken ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim of bad debts in relation to non-rural branches of the assessee-bank is allowable without first setting off against the provision already allowed under section 36(1)(viia) when no distinction is made between advances relating to non-rural and rural advances has been made in section 36(1)(vii)? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reduction of Rs. 47,38,984 claimed by the assessee-bank as diminution in the value of investments is allowable when the loss has been claimed only on notional basis in the adjusted statement filed along with the return of income and not on the basis of any definite method of accounting followed in the books of account? 8/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 8. Operative portion of the Order reads as under:- “7. With regard to the first substantial question of law raised in T.C.(A) No. 22 of 2004 and the first substantial question of law raised in T.C.(A) No. 466 of 2004, the Division Bench of this Court by judgment dated 23-1- 2007 made in T.C.(A) Nos. 15 and 24 of 2003-CIT v. Tamilnadu Mercantile Bank Ltd. [2007] 291 ITR 137 (Mad.), after referring to the decisions in CIT v. Canara Bank [1992] 195 ITR 66 (Kar.). CIT v. Shoorji Vallabhdas & ??. [1962] 46 ITR 144 (SC), H. M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.). Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC), Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC), State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), Godhra Electricity Co. Ltd. v. CIT [1997] 225 ITR 746 (SC) held that the assessee is taxable for interest on securities only on specified dates when it becomes due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years. 8. In view of the ratio laid down in the decisions referred to supra, the first substantial question of law raised in T.C.(A) No. 22 of 2004 and the first substantial question of law raised in T.C.(A) No. 466 of 2004 are answered in favour of the assessee and against the revenue. 9. With regard to the second question of law in T.C.(A) No. 22 of 2004, the only question of law in T.C.(A) No. 196 of 2004 and the second question of law in T.C.(A) No. 466 of 2004, the learned counsel for the assessee submitted that a similar issue has been answered in favour of the assessee in South Indian Bank Ltd. v. CIT [2003] 262 ITR 579(Ker.). 9/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 10. The Division Bench of the Kerala High Court in South Indian Bank Ltd. v. CIT [2003] 262 ITR 579, held that: "The proviso to clause (vii) of section 36(1) and clause (v) of section 36(2) of the Income-tax Act, 1961, were inserted simultaneously with effect from 1-4-1985, by the Finance Act, 1985. The scope of the proviso to clause (vii) of section 36(1) has to be ascertained from a cumulative reading of the provisions of clauses (vii), (viia) of section 36(1) and clause (v) of section 36(2). The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) of section 36(2) simultaneously is only to see that a double benefit in respect of the same bad debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches and advances given from both branches. Having regard to the hazards involved in realising the advances made by rural branches particularly to agriculturists, certainly the assessee-bank might prefer to make provision for bad debt in respect of advances made in the rural branches. As a result of the amendment the scheduled bank will be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the books relating to advances made by the rural branches during the previous year relevant to the assessment year and the credit balance in the provisions for bad and doubtful debts account relating to advances made by the rural branches made under clause (viia). If the bad debt written off relates to debts other than for which provision is made under clause (viia) such debt will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part 10/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. of the debt with reference to which a provision is made under clause (viia), the proviso will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia)." (p. 579) 11. In the instant case, while allowing the claim for bad debts written off in respect of advances made by rural branches, the Commissioner of Income-tax (Appeals) as well as the Tribunal, were of the firm opinion that the assessee has not claimed any debts written off in respect of rural branch in the earlier year. If that be so, we find no error in the order of the Tribunal in holding that the claim of bad debts in relation to non-rural branches of the assessee-bank is allowable. Accordingly, this issue is answered in favour of the assessee and against the revenue. 12. Qua the third question of law in T.C.(A) No. 22 of 2004 is concerned, the Tribunal held that when investments are made in accordance with the requirements of the Act, wherein the market price changed from the value shown in the opening balance and at the end of the year, the same could be allowed as depreciation. 13. That apart, it is a settled law that the assessee is entitled to change the method of valuation of Government securities to market value from cost, and claim depreciation on the difference, vide CIT v. Karur Vysya Bank Ltd. [2005] 273 ITR 510 (Mad.) 14. In view of the ratio enunciated from the decision referred to supra, we find no infirmity in the decision of 11/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. the Tribunal in this regard.” 9. Therefore, the substantial question of law at Sl.No.1 and 4 require no further deliberation as the substantial questions of law has already been answered by this Court in the above case. 10. As far as the substantial question of law at Sl.No.7 and 8 is concerned, the Hon'ble Supreme Court has answered the issues arising in Brooke Bond India Ltd. vs. Commissioner of Income Tax, [1997] 91 Taxman 26 (SC). There the Hon'ble Supreme Court placed reliance on its earlier decision in the case of Punjab State Industrial Development Corpn. Ltd vs. CIT rendered in Tax Reference No.1 of 1990 dated 04.12.1996. Wherein it was held as under:- “We do not consider it necessary to examine all the decisions in extenso because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of a capital expenditure, since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the 12/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram s case” 11. Operative portion of the Order of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. vs. Commissioner of Income Tax, [1997] 91 Taxman 26 (SC) reads as under:- “6. Dr. Pal has, however, submitted that this decision does not cover a case, like the present case, where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as the revenue expenditure. In this connection, Dr. Pal has invited our attention to the submissions that were urged by the learned counsel for the assessee before the AAC as well as before the Tribunal. It is no doubt true that before the AAC as well as before the Tribunal it was submitted on behalf of the assessee that increase in the capital was to meet the need for working funds for the assessee-company. But the statement of case sent by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was under taken by the assessee in order to meet the need for more 13/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. working funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. In any event, the above quoted observations of this Court in Punjab State Industrial Development Corpn. Ltd. 's case (supra)clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.” 12. As far as substantial question of law No.2 and 3 are concerned they rely to deduction under Section 36(1)(vii) and 36(1)(vii)(a) of the Income Tax Act, 1961. Section 36(1)(vii) of the Income Tax Act, 1961 deals with writing off of the actual loss and is applicable to all the industries including banks like the Respondent/Assessee. 13. Section 36(1)(vii)(a) of the Income Tax Act, 1961 on the other hand in addition applies specifically to banks having rural operations for computing the deduction. It has to be read along with Rule 6ABA of the Income Tax Rules, 1962 are relevant. 14/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 14. Although the Tribunal has relied upon the decision of this Court in Commissioner of Income Tax vs. City Union Bank Limited, [2007] 163 Taxman 495 (Madras), in our view the matter would require a proper redetermination as to whether the Respondent/Assessee had correctly computed the deduction under Section 36(1)(vii) (a) of the Income Tax Act, 1961 to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (vii)(a) to Section 36. Proviso to Section 36(1)(vii) relates to cases covered under Section 36(1)(vii)(a) and has to be read with Section 36(2)(v) of the Act. 15. The Hon'ble Supreme Court in the case of Catholic Syrian Bank Limited vs. Commissioner of Income-tax [2012] 18 taxmann.com 282 (SC) has brought out the difference between two Sections and has observed as under:- Income Tax Act, 1961 Section 36 (1) (vii) Section 36(1)(vii)(a) 15/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. Section 36 (1) (vii) deals with general deductions available to a bank and even non-banking business upon their showing that an account had become bad and written off as irrecoverable in the accounts of the assessee for the previous year, satisfying

the

requirements contemplated in that behalf under Section 36(2). The provisions of Section 36(1)(vii) operate in their own field and are not restricted by the limitations of Section 36(1)(viia) of the Act. While the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. 16. Therefore to that extent we are inclined to remit the issue back to the Assessing Officer to re-examine the issue afresh in the light of the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Limited vs. Commissioner of Income-tax [2012] 18 taxmann.com 282 (SC). 17. As far as the substantial question of law at Sl.No.5 is concerned, issue is covered by the decision of the Hon'ble Supreme Court in the case of United Commercial Bank vs. Commissioner of Income- tax, [1999] 106 Taxman 601 (SC), wherein the Hon'ble Supreme court has held as under:- “This appeal is filed by UCO Bank, Calcutta, against the 16/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. judgment and order dated 25-7-1991 passed by the High Court of Calcutta in Income-tax Reference No. 73 of 1989. At the instance of the revenue, the Tribunal referred the following two questions for the opinion of the High Court under section 256(1) of the Income-tax Act, 1961 ('the Act') for the assessment year 1982-83: 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the Commissioner's order under section 263 of the Income-tax Act holding that the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 is not applicable to the facts of the present case ? 2. Whether, on the facts 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 between the 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?” 11. 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 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 17/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 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 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. The 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 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. 13. In the background of the aforesaid facts, we would state that it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price, whichever is lower. In Chainrup Sampatram vs. CIT [1953] 24 ITR 481, this Court explained the underlying reasons for the said practice thus: “... 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 time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides 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 18/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching 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 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 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 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 Taxation of Trading Profits presented to British Parliament in April, 1951]. While anticipated loss is, thus, taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the 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 profits for income-tax purposes are to be computed in conformity with the ordinary 19/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. principles of commercial accounting, unless, of course, such principles have been superseded or modified by legislative enactments, unrealised profits in the shape of appreciated value of goods remaining unsold at the end of an accounting 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 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 [1926] 12 Tax Cas. 813,827. "Under this law (Revenue law) the profits are the profits 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 market value." [Emphasis supplied] (p. 486) 17. 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 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 (supra) 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. 20/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. 22. 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 ITO as well as the assessee to point out the true and proper income while submitting the income-tax return. In Kedarnath Jute Mfg. Co Ltd. vs. CIT [1971] 82 ITR 363, this Court has negatived the contention that 'if an assessee under misapprehension or mistake fails to make an entry into the books of account and although, under the law, a deduction must be followed by the ITO, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. 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 account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act, and on the recommendation of the RBI, 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 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 real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee.' 18. Same view applies the above view. Thus, answer to the 21/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. Substantial Question of Law No.5 will also apply to Substantial Question of Law No.6. 19. Similarly, Substantial Question of Law No.7 is concerned, the issue is answered against the revenue in terms of the decision of the Hon'ble Division Bench in the case of The Commissioner of Income Tax, Trichy vs. The Lakshmi Vilas Bank Limited, Karur, rendered in TCA.No.207 of 2018 dated 04.11.2020. 20. In the result, Substantial Question of Law are answered against the revenue in favour of the Respondent/Assessee. However, for re-examination of the benefit claim under Section 36(1)(vii) and 36(1)(vii)(a) of the Income Tax Act, 1961 are concerned they are remitted back to the Assessing Officer to pass a fresh order on merits and in accordance with law. With these observations and directions, tax case appeals stands disposed of. No cost. 22/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. [R.S.K., J.] [C.S.N., J.] 10.09.2024 Index : Yes/No Internet : Yes/No Speaking Order/Non-Speaking Order Neutral Citation : Yes/No rgm To The Commissioner of Income Tax, Trichy R.SURESH KUMAR, J. and C.SARAVANAN, J. rgm 23/24 https://www.mhc.tn.gov.in/judis T.C.A.No.268 of 2015 and etc. T.C.A.Nos.268, 269, 272, 273 and 274 of 2015 10.09.2024 24/24 https://www.mhc.tn.gov.in/judis