2013 (7) TMI 11 - AT - Income Tax

Valuation of converted share of Off-shore India Ltd. - assessee has taken two contradictory methods for valuation of the same share for the same assessment year - CIT(A) deleted the addition - case of the assessee is that it values unquoted shares on the basis of fair market value, which is in case of unquoted shares determined on the basis of break-up value of the last available balance- sheet - Held that - In the instant case, shares of two companies were converted as on 01.04.2003 from investment to stock in trade. Both these shares were valued at fair market value being less than cost as on 31.03.2003 and the same was duly accepted by the department. On the very same value, the said shares were converted into stock in trade on the immediately next date i.e. 01.04.2003. Thus, the shares were converted into stock in trade on the fair market value as on the date of conversion. Out of the shares of two companies which were converted on the same system, the department has accepted the system as correct in the case of Yield Investments Pvt. Ltd. and has disputed only in the case of Off-Shore India Ltd. As on 01.04.2003, the fair market value of Off-Shore India Ltd. was determined on the basis of break-up value of last available balance-sheet as on that date, which was also accepted by the Revenue as the market value as on 31.03.2003, there was no reason to dispute that the same was not the market value as on 01.04.2003 on the basis of data available on that date. Thus, no specific error in the order of the CIT(A) could be pointed out by the Revenue by bringing any relevant material on record - ground of Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of the addition on valuation of converted shares of Off-shore India Ltd. by the CIT(A).

Detailed Analysis:

Issue 1: Deletion of the addition on valuation of converted shares of Off-shore India Ltd. by the CIT(A)

The primary issue in this appeal is whether the CIT(A) was justified in deleting the addition made by the AO concerning the valuation of converted shares of Off-shore India Ltd. The AO had disallowed Rs. 2,47,05,000/- claimed by the assessee as the cost of shares of Off-shore India Ltd. when converted from investments to stock-in-trade, arguing that the market value of these shares was Re.1/- per share, not the carrying cost.

Findings of the AO:
The AO noted that the assessee held shares in various companies, including 45,00,000 shares of Off-shore India Ltd. at a carrying cost of Rs. 2,47,05,000/-. The assessee converted these shares from investments to stock-in-trade and valued them at the carrying cost. The AO argued that the market value of these shares was Re.1/- per share as the break-up value certified by a Chartered Accountant was (-) Rs.1.89 per share. Consequently, the AO disallowed the cost of Rs. 2,47,05,000/-.

Arguments by the Revenue:
The Revenue contended that the CIT(A) erred in allowing the relief to the assessee without properly appreciating the facts. The CIT(DR) argued that the assessee's method of accounting, although conforming to the accounting standards, was not permissible under the statutory provisions of the Income-tax Act, 1961, specifically section 45(2). The Revenue emphasized that the fair market value should be considered, which was Re.1/- per share, and not the carrying cost.

Arguments by the Assessee:
The assessee argued that the accounts were maintained in conformity with Accounting Standard-13 and RBI's Prudential Norms. The assessee pointed out that the carrying cost of shares as on 31.03.2003 was accepted by the Revenue in the previous assessment year. The assessee contended that section 45(2) was not applicable as the shares were not sold during the year, and the conversion was recorded at the carrying cost as per the accounting standards.

Findings of the CIT(A):
The CIT(A) observed that the assessee consistently followed the same accounting method and principles for transferring shares from investments to stock-in-trade. The CIT(A) noted that the AO accepted the method for shares of Yield Investments Pvt. Ltd. but disputed it for Off-shore India Ltd. The CIT(A) held that the AO was not justified in adopting different standards for identical transactions and that the assessee's method of accounting and valuation was consistent and in conformity with the accounting standards.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, noting that the assessee valued unquoted shares based on fair market value determined by the break-up value of the last available balance-sheet. The Tribunal found no specific error in the CIT(A)'s order and confirmed that the shares were converted into stock-in-trade at fair market value as on the date of conversion. The Tribunal dismissed the Revenue's appeal, affirming that the AO could not selectively approve the method for one share and reject it for another.

Conclusion:
The appeal filed by the Revenue was dismissed, and the CIT(A)'s order deleting the addition on valuation of converted shares of Off-shore India Ltd. was upheld. The Tribunal found that the assessee's method of accounting and valuation was consistent and in accordance with the accounting standards, and there was no justification for the AO to dispute it selectively.