2012 (9) TMI 974 - AT - Income Tax

Disallowance of loss on revaluation of the securities - when the taxpayer valued the securities on the basis of the realizable value could it be allowed as loss in the absence of the copies of the balance-sheet of the respective company? - Held that - The RBI issued guidelines to value to unsecured shares on the basis of YTM, i.e. yield to maturity method adopted for valuation of securities. The Kerala High Court has also found that YTM rates have been put out by the PDAI / FIMMDA at periodical intervals. Therefore, when the taxpayer revalued the asset on the basis of the guideline issued by the RBI at realizable value i.e. YTM method suggested by RBI, the taxing authority cannot find fault with taxpayer. As observed by Kerala High Court, the assessing authority has not come out with any suggestion / formula for computation of market value of unquoted shares. It is also not the case of the revenue that the guideline issued by the RBI for valuation is irrational. In these facts and circumstances, this Tribunal is of the considered opinion that the law laid down by the jurisdictional High Court in the cases of Nedungadi Bank Ltd (2002 (11) TMI 29 - KERALA High Court) and Lord Krishna Bank Ltd (2010 (10) TMI 860 - Kerala High Court) is applicable in the case of the present tax payer also. Directed to allow the notional loss claimed by the taxpayer on revaluation of the securities as deduction while computing the total income.

Summary

Issues: Disallowance of loss on revaluation of securities

Analysis:
1. The taxpayer's appeals were against the orders of the Commissioner of Income-tax for the assessment years 2000-01 to 2003-04. The main issue was the disallowance of loss on the revaluation of securities.

2. The taxpayer's representative argued that the loss claimed was due to the revaluation of securities as per RBI norms, but the assessing officer disallowed the claim. The Tribunal directed a reconsideration, but the assessing officer again disallowed the claim citing the absence of balance-sheets from the respective companies. The taxpayer argued that the valuation was based on RBI guidelines and realizable value, as supported by Kerala High Court judgments.

3. The Departmental Representative contended that without the balance-sheets of the companies, the taxpayer couldn't claim any loss on revaluation.

4. The Tribunal considered whether the taxpayer's notional loss on securities revaluation was deductible. Citing the Kerala High Court's judgment in a similar case, it held that the loss should be allowed as a deduction in computing taxable profits.

5. The Tribunal noted that the taxpayer valued the securities based on RBI guidelines and realizable value, as they couldn't obtain balance-sheets. Referring to the Kerala High Court's stance on valuation methods, the Tribunal upheld the taxpayer's claim, as the assessing authority didn't provide an alternative valuation formula.

6. The RBI guidelines recommended valuing unquoted shares using the Yield to Maturity (YTM) method. The Kerala High Court supported this method, emphasizing the lack of a suggested formula by the assessing officer for market value computation. Therefore, the Tribunal directed the assessing authority to allow the taxpayer's claimed loss on securities revaluation.

7. Consequently, all the taxpayer's appeals were allowed, and the orders disallowing the loss on securities revaluation were set aside, following the Kerala High Court judgments.

Order pronounced on September 18, 2012.