2011 (3) TMI 1625 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 2.25 crores by CIT(A).
2. Consistency in the method of accounting and valuation of stock.
3. Classification of loss on valuation of shares as speculation loss.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 2.25 Crores by CIT(A):
The department challenged the deletion of an addition of Rs. 2.25 crores made by the Assessing Officer (A.O.) on account of the valuation of closing stock. The assessee-company had acquired shares of M/s. Inalsa Appliances Ltd. at Rs. 10/- per share, valuing the opening stock at Rs. 2.5 crores. Due to the liquidation of M/s. Inalsa Appliances Ltd., the shares were revalued at Rs. 1/- per share, resulting in a closing stock valuation of Rs. 25 lakhs. The A.O. rejected this valuation, arguing it was against the provisions of Sec. 145A of the Act, leading to an addition of Rs. 2.25 crores to the assessee's income. The CIT(A) found the assessee's method of valuation bona fide, consistent with Accounting Standard (AS) 13, and directed the deletion of the addition.

2. Consistency in the Method of Accounting and Valuation of Stock:
The assessee argued that the change in the method of valuation was bona fide and aligned with accepted accounting principles, specifically AS-13. The CIT(A) noted that the accounts of the assessee were audited and accepted, with no adverse comments from the A.O. The CIT(A) emphasized that the change in the method of valuation was due to the liquidation of the investee company and was consistently followed thereafter. The CIT(A) cited judicial precedents, including Melmould Corporation v. CIT and CIT v. Delta Corporation, supporting the acceptance of a bona fide change in valuation method. The Tribunal upheld this view, noting that the A.O. did not dispute the rate of valuation or the bona fides of the change.

3. Classification of Loss on Valuation of Shares as Speculation Loss:
The department contended that the loss on valuation of shares should be treated as a speculation loss. However, this issue was not raised in the orders of the authorities below. The assessee maintained that the valuation was done in accordance with AS-13, which mandates valuing current investments at the lower of cost and fair value. The Tribunal found that the valuation method adopted by the assessee was prudent and consistent with accounting standards, and there was no basis to classify the loss as speculation loss.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 2.25 crores, finding the change in the method of valuation bona fide, consistent with AS-13, and regularly followed thereafter. The appeal of the Revenue was dismissed.