2012 (6) TMI 444 - HC - Income Tax

Valuation of Shares Revenue contented against the ITAT Order the shares held by the assessee at the end of the year should be valued as per market rate and the consequential loss should be allowed as a business loss Held that - The assessee carrying on the business in sale of shares held to be stock-in-trade and not by way of investment as the value of stock-in-trade is reduced because of market conditions as the said shares were held as stock-in-trade, the assessee suffered a loss in the business and therefore the assessee was entitled to claim business loss - The valuation of stock is cost or market value whichever is lower is settled position of law in favour of assessee. Accounting of interest received on loans and advances to be on receipt basis or accrual basis as per the regular mercantile system of accounting maintained by the assessee Held that - The interest on which the tax is levied is an income shown to be due from non-performing asset and once a particular asset is shown to be a non-performing asset then the assumption is that it does not yield any revenue - If it is not yielding any revenue, the question of showing that Revenue and paying tax would not arise - unless that amount is received no tax is payable - in favour of the assessee

Summary

Issues:
1. Treatment of loss from share transactions as speculation loss.
2. Tax treatment of interest income on non-performing assets.

Issue 1: Treatment of loss from share transactions as speculation loss:

The assessee, primarily engaged in share transactions, filed a return declaring a loss for the assessment year. The assessing authority deemed the loss as speculation loss under section 73. However, the Commissioner of Income-tax (Appeals) directed the authority to treat the loss as a business loss, disagreeing with the speculation loss treatment. The Appellate Tribunal upheld this decision, emphasizing that the shares were held as stock-in-trade, justifying the business loss claim. The Tribunal's decision was supported by the fact that the assessee was carrying on the business of sale of shares, not mere investment. The valuation of stock-in-trade based on market value supported the allowance of business loss. The High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue.

Issue 2: Tax treatment of interest income on non-performing assets:

Regarding the taxability of interest income accrued but not received from non-performing assets, the Revenue contended that the assessee should be taxed on the accrued interest income based on the mercantile accounting system. However, the Circular issued by the Board emphasized that accounting policies should reflect a true and fair view of the financial statements. The High Court referred to a previous case where it was held that income shown as accrued in the accounts must be brought to tax, unless proven unrecoverable. In the case of non-performing assets, where interest remains unpaid, it is considered not yielding revenue, hence not taxable until received. The Court found that the interest due from non-performing assets, not actually received, was not taxable based on the principles of the mercantile system and the non-performing nature of the assets. Therefore, the High Court ruled in favor of the assessee, concluding that no tax was payable on the interest due from non-performing assets until received.

In conclusion, the High Court upheld the decisions of the Appellate Authorities regarding the treatment of loss from share transactions and the tax treatment of interest income on non-performing assets. The judgments favored the assessee in both issues, emphasizing the business nature of share transactions and the non-taxability of interest income until received from non-performing assets.