2011 (3) TMI 1626 - AT - Income Tax

Summary

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

Summary:

Issue 1: Deletion of Addition of Rs. 2.25 Cr. by CIT(A)
The department contested the deletion of Rs. 2.25 Cr. by CIT(A), arguing that there was no change in the method of accounting or valuation of stock. The assessee-company had acquired shares of M/s. Inalsa Appliances Ltd. at Rs. 10/- each, which were later valued at Rs. 1/- per share due to the company's liquidation. The A.O. rejected this valuation, asserting it was inconsistent with Sec. 145A of the Act. However, CIT(A) found the change in valuation method bona fide and consistent with accepted accounting principles, directing the A.O. to delete the addition.

Issue 2: Consistency in the Method of Accounting and Valuation of Stock
The A.O. argued that the assessee adopted different valuation methods for opening and closing stock, which was not permissible u/s 145A. CIT(A) noted that the assessee's accounts were audited and accepted, and the change in valuation method was bona fide, following the principle of cost or market price, whichever is lower. The CIT(A) emphasized that the method was consistently followed in subsequent years and accepted by the A.O., thus upholding the change in valuation method.

Issue 3: Admissibility of Loss on Valuation of Closing Stock of Shares as Speculation Loss
The department claimed that the loss on valuation of shares should be treated as speculation loss. However, the assessee argued that the valuation was done as per Accounting Standard-13, valuing the shares at market value or cost price, whichever is lower. The CIT(A) and ITAT found the valuation method bona fide and consistent with accounting standards, rejecting the department's claim.

Conclusion:
The ITAT upheld the CIT(A)'s decision, confirming that the change in valuation method was bona fide and consistent with accepted accounting principles. The appeal of the Revenue was dismissed, and the addition of Rs. 2.25 Cr. was deleted.