HAKEEM, J.

(1) IN these references under Section 256 (1) of the INCOME TAX ACT, 1961, the Income -tax appellate Tribunal, has referred the following common questions of law for the opinion of this Court:"1) Whether on the facts and in the circumstances of the case, the Income-tax appellate Tribunal is right in law in holding that the interest of Rs. 4, 15, 343/- taken directly to the interest suspense account is not assessable to income-tax 2) Whether on the facts and in the circumstances of the case, the Income- tax Appellate Tribunal is right in law in approving the system of valuation of stock-in-trade adopted by the assessee for the present assessment "

(2) IN our opinion the first question is wholly covered by the ruling of the Supreme court in State Bank of Travancore v C..T. (158. T. R. 102). Accordingly it is answered in the negative and in favour of the Revenue.

(3) THE second question relates to the valuation of the stock-in- trade of the banking business of the assessee. The assessee is a banking company. The matter has arisen out of the order in respect of the assessment year 1975-76 for which the accounting year ended on 31-12-1974. In the revised return filed by the assessee a sum of Rs.17,12, 230-00 was sought to be written off as the depreciation on account of market fall in the value of investments made by the assessee. The ITO found that all along the assessee was valuing the investments at cost. There was no departure from this method at any time in the past. He disallowed the assessees claim to write off the difference between the cost of investment and the market value of the same amounting to Rs.17,12,230/- against the closing stock value of investment adopted in the published balance sheet. On appeal by the Assessee the CIT (Appeals) upheld his claim and held that the securities being Stock-in-trade of the banking business, it is open for the assessee to value the stock at cost or market value, which ever is lower. It was further held by him that even if the method of valuation in the past had been different, the assessee had the right to change over to the present method, provided such change is bona fide and followed thereafter. It is noticed by the Commissioner that in all the immediately preceding five years wherein the assessee had valued the securities at cost the market value was higher than the cost in four years and only in one year it was less. It is because of the huge difference between the market value and the cost on 31-12-1974 that the as- sessee must have thought fit to switch over to the method of valuing the securities at cost or market price whichever is lower. The commissioner further held that it is not necessary to value the opening and closing stock of a year on the same basis. Holding that what is to be assessed is the real income of the Bank he directed allowance as claimed. In further appeal by the Revenue regarding the valuation of the stock-in-trade the Tribunal upheld the order of the Appellate Commissioner in accepting the method of valuation of closing stock adopted by the assessee. Aggrieved by this order of the tribunal the Revenue has brought up this reference on the question set forth earlier in this order.

(4) THE main contention of Mr. K. Srinivasan, learned counsel for the Revenue is regarding legality of change in the method of valuation of closing stop from the cost value to market value. It is not disputed that the assessee is at liberty to adopt either cost value or market value for the purpose of valuation. However, the grievance of the department was that the assessee who had been adopting only cost price had changed the method of valuation by the revised return and in the absence of such change being bona fide, there is no justification in the tribunal approving the changed method of valuation of stock-in-trade adopted by the assessee for the first time. It is further urged by the learned counsel that the ruling of the supreme Court in the case of Chainrup Sampatram v C..T. (24. T.R. 481) relied upon by the Appellate Commissioner and the tribunal is only an authority to say that the assessee is at liberty to adopt either the cost price or market price, but the same cannot be read to justify the view that he can adopt cost price for opening stock and market price in respect of the closing stock in the same year. It is furter urged that there should be a definite method of valuation of stock which would be carried through from year to year and the assessee cannot be allowed to arbitrarily change the method of accounting as regards the basis for stock valuation to suit his purpose.

(5) IN British Paints India Ltd. v CIT, Calcutta, (111 ITR 53) [LQ/CalHC/1974/242] on a review of various earlier decisions the Calcutta High Court has evolved the following principles on the question of valuation of closing stock : (1) The true purpose of valuation of the unsold stock is to balance the cost of these goods entered on the other side of the account at the time of their purchase or production, so that 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 profit or loss actually realised on the years trading. (2) 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 stocks. (3) For the purpose of the aforesaid valuation, it is necessary to determine what in all circumstances represent the costs of stock-in-trade and working-progress. What is and what is not profit or gain in these circumstances must necessarily be one of fact and fact to be ascertained by the tests of ordinary business. (4) There are no statutory rules for making this valuation and the ordinary method of commercial accounting must be followed except in so far as there is any specific statutory provision requiring otherwise. The method must be fair to the tax payer and fair to the revenue. Traders are allowed to value their unsold stock and work-in-progress either at cost or market price, whichever is lower. This is nowever, a shorthand way of expression; it is not a rule of law. It must be adopted in commercial sense in consonance with accounting practice. Anticipated losses and profits for the aforesaid purpose are permissible, provided however, there is a market in the ordinary sense, and the anticipation is backed by consistency of the method followed and the method followed is supported by recognised accounting principles, and (5) Whatever is the method, it must be one recognised by accounting practice and sanctioned by commercial practice. The method adopted and regularly followed over the periods and accepted by the revenue should not be departed from unless there is good reason for the same. If, however, the method adopted and regularly followed by the assessee does not result in the determination of the true profits for tax purposes, even for one particular year, or there is some other good reason, the revenue is entitled to reject the method followed and value the stock upon such basis as will result in the determination of true profits.

(6) IN the present case the Income-tax Officer has disallowed the assessees claim regarding valuation on three grounds viz. , (i) that all along the assessee had valued the investments in the securities at cost and there were no compelling reasons for departure from established practice; (ii) to adopt one method for opening stock and a different method for valuing the closing stock would result in distortion of the true profits earned by the assessee; and (iii) that the loss had not been written off in the assessees books of accounts.

(7) ON the application of the principles laid down by the Supreme Court in the leading case of Chaninrup Sampatram v C..T. (22. T.R. 481) two principles appear to be well settled. e. , that the assessee is entitled to value the closing stock either at cost price or market value whichever is lower and that the closing stock must be the value of the opening stock in the succeeding year. It is thus clear that irrespective of the basis adopted for valuation in the earlier years the assessee had the option to change the method of valuation of the closing stock at cost or market price whichever is lower at any time provided the change was bona fide and followed regularly thereafter.

(8) ALTHOUGH the. T. O. had taken that stand in the assessment order, the aforesaid propositions were not disputed either in the first appeal or before the Tribunal. The department also did not dispute the quantum of loss claimed by the assessee which is also indicated in the balance sheet as on 31- 12-1974, in which after stating the face value of the securities and bills, the approximate market value is also mentioned which is lower than the cost. However this loss was not debited to the profit and loss account. The fact that the securities formed part of stock- in-trade of the assessee bank and that it was a trading loss, was also not disputed at any point of time. Hence, the only question that remains for consideration is whether the assessee is entitled to value the stock at cost or market value whichever is lower notwithstanding the fact that the assessee had failed to debit the anticipated trading loss in its books of accounts.

(9) IN Kedaranath Jute Mfg. Co. Ltd. v c.. T. (S. C.) (82. T. R. 363), where the assessee had made no provision in its books with regard to certain tax liability and the claim for allowance having been made in a revised return, it was held thus : "an assessee who follows the mercentile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. The main contention of the learned solicitor-General is that the assessee failed to debit the liability in its books of accounts and therefore, it was debarred from claiming the same as deduction either under Sec. 10 (1) or under Sec. 10 (2) (xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some mis-apprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on 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. . . "

(10) IN C..T. v M/s. Shoorji Vallabhdas and co. (46. T. R. 145) where the assessee had claimed that it was not taxable on the entire amount even though credit entry for them had been made in the books of accounts, it was entitled to a lesser amount by virtue of a subsequent agreement, it was held thus :"the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. . . . . . . . The assessee had in fact received only the lesser amount inspite of the entries in the account books, and this lesser amount alone was taxable. Income tax is a levy on income. Though the Income Tax Act takes into account two points of times at which the liability to tax is attracted. , viz, the accrual of the Income or its receipt, yet the substance of the matter is the income. If the income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of accounts. "

(11) IN Bank of Cochin Ltd. v C..T. (94 ITR 93) [LQ/KerHC/1973/31] the question that arose for consideration was whether the Bank could value its security on market price which was lower than cost when it had been valuing them at cost in the past. For the year in question the assessee had claimed certain loss by valuing closing stock of the securities at market price which was lower than the cost to that extent. This loss was not debited to the profit and loss account, but it was directly adjusted against devaluation profit made by the assessee. Still it was not taken to be a valid ground for disallowing the claim of the assessee and the loss was held to be allowable. Similarly in Indo Commercial Bank Ltd. v c.. T. (44. T. R. 22), the loss had been charged to reserve and there was no debit for it to the profit and loss account. Still it was not held to be a valid ground for disallowing the claim of the assessee and the loss was allowable. In the instant case it is not disputed that as on the valuation date the market value of the securities was less than cost price to the extent of the loss claimed by the assessee which is indicated in the balance sheet itself. As such it is rightly held by the appellate Commissioner that the bank had incurred substantial loss by the fall in value of its securities, which is an important factor to be considered in debiting the income of the bank. Ignoring this loss would certainly distort the real income of the year. The appellate authority has also taken note of the fact that these losses had arisen due to change in bank rate during the year a similar position as in Indo Commercial Bank v C..T. (44 ITR 22).

(12) IN the facts and circumstances of the case and the rulings referred to above, I am of the opinion that the Tribunal was justified in approving the method of valuation adopted by the assessee for the relevant asssessment year. In that view of the matter, question No. 2 referred is answered in the affirmative and against the Revenue.

(13) I concur and wish to supplement what has already been stated by my Lord, as follows: the contention of the Revenue is that in order to reflect the true profits, change in the method of valuation of stock should be applied to both opening stock as well as closing stock and it is not open to the assesse to apply new method to closing stock alone without reference to opening stock. The value of the closing stock in the previous year must be the value of opening stock in the succeeding year and therefore if the argument of the Revenue is accepted, there cannot be change in the valuation at all. However, the effect of the ruling in Chainrup sampatram v C.. T. (24. T. R. 481) is that there is no rule that the opening stock and closing stock of the same accounting year must necessarily be valued on one and the same basis. It is permissible therefore for the assessee to adopt either market value or at cost price to value the closing stock as long as such change in the method of valuation is adopted bona fide and is thereafter continued year to year. In a year where opening stock value adopted is on one method and closing stock in another there is bound to be some anamoly in the year of change, but that will get ironed out and absorbed in course of time as new method of valuation of stock is going to be applied on a permanent basis thereafter in coming years. I derive support for this view from 149. T.R. 757 and 111. T. R. 53.

(14) IT was submitted for the Revenue that the loss had not been adjusted in the books of account and it is only at the time of assessment that such a stand of change in method of valuation of stock has been taken by filing a revised return. Merely beause assessee has to maintain statutory accounts and they do not contain entries regarding this loss will not by itself be sufficient to discard this stand of the assessee. The assessee had, in fact, incurred substantial lossess, as found by the commissioner (Appeals) and the Tribunal, by the fall in the value of its securities and ignoring this loss would not have given rise to correct trading results and the balance sheet also indicated this position correctly and so this objection to allow change in the method of valuation of stock has no substance. The Commissioner (Appeals) found that the Revenue had not questioned the bona fide of assessee in adopting the change in the method of valuation and the same had been followed in subsequent years also and this finding has been reiterated by the Tribunal. These findings and the position of law as set out above will reveal that the contentions raised by the Revenue have to fail and the view of the Tribunal has to prevail.