N.V. Balasubramanian, J.@mdashAt the instance of the Revenue, the following two questions of law have been referred to this Court by the
Income Tax Tribunal, Chennai, for our opinion u/s 256(1) of the IT Act, 1961 :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the order passed u/s 263 of the IT Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to revenue
deduction amounting to Rs. 14,27,799 on account of revaluation of securities, when such securities are to be classified in ''Investment account'' in
the light of the Supreme Court''s decision in Vijaya Bank Ltd. Vs. Additional Commissioner of Income Tax, Bangalore, "".
2. The assessment year, with which we are concerned is 1982-83. The assessee filed its return of income for the said assessment year admitting an
income of Rs. 21,12,483. The assessee enclosed along with the return a statement and claimed a deduction of a sum of Rs. 14,27,799 towards
depreciation on the depreciated value of investments, which according to the assessee, represented the difference between the book value and
market value of the securities. The AO in the assessment granted the benefit of revenue deduction in respect of the deficiency, which arose in
valuation of the securities at market value. It is relevant to mention here that though the assessee had shown in its books of account the provision
for the sum of Rs. 1,00,000, the ITO allowed the entire deduction of Rs. 14,27,799 as claimed by the assessee. The CIT in exercise of his powers
u/s 263 of the IT Act, 1961 (hereinafter referred to as the Act) set aside the order of the AO on the ground that the order of the AO was
erroneous and prejudicial to the interest of the Revenue. The assessee preferred an appeal before the Tribunal as against the order of the CIT.
3. The Tribunal set aside the order passed by the CIT u/s 263 of the Act on the ground that the provision for the entire claim of Rs. 14,27,799
was not made by the assessee due to non- availability of funds and it also held that the assessee was entitled to the revenue deduction in respect of
the said deficiency in the valuation of the securities. The Tribunal also held that the method of valuing the Government securities adopted by the
assessee at market value or cost, which was lower, had all along been accepted by the Department and, therefore, that the assessee was entitled
to the revenue deduction in respect of the deficiency and allowed the appeal preferred by the assessee. At the instance of the Revenue the question
of law earlier referred to have been referred to us.
4. Heard Mrs. Pushya Sitharaman, learned senior Central Government standing counsel and Mr. P.P.S. Janardhana Raja, learned counsel
appearing for the assessee.
5. We find that the CIT had interfered with the order of the ITO invoking his powers u/s 263 of the Act when he found that during the previous
year relevant to the assessment year in question, the assessee has changed the method of valuation in valuing the securities. According to him, up to
the asst. yr. 1975-76 the assessee was valuing the investments at the cost price and thereafter the assessee had changed the method of valuation of
the securities and followed the method of valuing of the same at cost or the market value, whichever was lower. The CIT, however, held that
during the year under consideration the assessee had once again changed the method of valuation in the books of account and valued the
investment neither representing the market value at the end of the relevant previous year nor the book value, but some other figure and in this
process the assessee had claimed the deduction of Rs. 14,27,799 as deficit in the value of the securities which was allowed by the AO. The
Tribunal, however, proceeded on the basis that the assessee had valued the Government securities at market value and the CIT did not dispute the
fact of the assessee had valued the assets at the market value. We find that this view of the Tribunal is incorrect as the CIT has found that the
assessee had not valued the investments at the end of the accounting year either at cost or at the market value, but changed the method of
valuation, which represented neither the market value nor the book value of the investments. The Tribunal therefore proceeded on the assumption
that the CIT did not question the right of the assessee to value the investment as the order of the CIT shows that the CIT was of the opinion that
the assessee had changed the method of valuation of its investments. Since the Tribunal has not considered the factual issue in the mode adopted
by the assessee to value the securities and also not decided the question whether the CIT was correct in his observation that the assessee had
valued the securities neither at market value nor at the book value, we are of the opinion that the Tribunal should consider the question afresh
regarding the allowability of the deduction as the allowability of the entire amount claimed by the assessee would depend upon the correctness of
the method of valuation adopted by the assessee in valuing its investments.
6. The Tribunal also held that the investments of the assessee are its stock-in-trade and that is the reason for the second question being referred to
us. Learned counsel for the assessee brought to the attention of this Court the decision of the Supreme Court in Commissioner of Income Tax Vs.
Karnataka State Co-operative Apex Bank, , wherein the Supreme Court has considered the question of income from investments made by a Bank
in compliance of the statutory provisions to enable it to carry a banking business and the Supreme Court held that the placement of investments
being imperative for the purpose of carrying on banking business, the income therefrom would be income from the assessee''s business. No doubt,
in Vijaya Bank Ltd. Vs. Additional Commissioner of Income Tax, Bangalore, it was held by the Supreme Court that the price paid for the
purchase of the securities was in the nature of capital outlay. However, we are not expressing any opinion on the second question, as we are of the
view that the Tribunal should consider the factual issue whether the assessee has valued the investment at cost price or market price, and whether
the assessee is entitled to the deduction in respect of the deficiency in valuing the securities and if the assessee is entitled to the deduction, whether
the assessee is entitled to deduction of the entire deficiency though the provision in the account had been made for a sum of Rs. 1,00,000. Hence,
without answering the question of law referred to us, we remit the matter back to the Tribunal and the Tribunal is directed to consider the questions
afresh in accordance with law. No costs.
