2016 (6) TMI 1477 - AT - Income Tax

Valuation of unquoted shares - deduction towards depreciation in the value of shares claimed - deduction for decline in the value of shares which it perceived to be stock-in-trade rather than investment - assessee submitted before the AO that the company had surplus funds which were used for purchasing 1,80,000 shares at par and company was about to come out with public issue, but, eventually, did not due to market conditions - Since the assessee invested all surplus funds as per the assessee s own version, the AO treated the purchase of shares as 'Investment and, resultantly, disallowed the amount of loss on their valuation HELD THAT - It is evident from the assessee s reply tendered before the AO that the company invested its surplus funds in purchase of unquoted shares. It can be seen that the assessee had never dealt with or traded in shares either in the past or in the future. Under these circumstances, it is difficult to accept the assessee s contention of having held these shares as stock-in-trade . Once it is held that the shares were purchased as investment, there cannot be any deduction on account of decline in the value of investment as at the year end . Therefore, approve the view taken by the authorities below. Penalty u/s 271(1)(c) in respect of disallowance deduction towards depreciation in the value of shares - Facts narrated above evidently prove that the assessee claimed deduction for decline in the value of shares which it perceived to be stock-in-trade rather than investment. But, for that, all the necessary details were duly filed. Simply because the assessee s contention of the shares having been purchased and held as stock-in-trade has not been accepted, it cannot be equated with concealment of income or furnishing of inaccurate particulars of income so as to attract the penalty. It is a case in which the assessee s bona fide belief of these shares having been held as investment has not been accepted, which can be a good ground for making of disallowance, but, cannot lead to imposition of penalty. Therefore, order for the deletion of the penalty.

Summary

Issues:
1. Quantum appeal regarding the treatment of unquoted shares as investment or stock-in-trade.
2. Penalty appeal under section 271(1)(c) for disallowance of deduction on the decline in the value of shares.

Quantum Appeal Analysis:
The case involved the purchase of unquoted shares by the assessee, valuing them at year-end and claiming a deduction for the decline in their value. The Assessing Officer (AO) treated the shares as an investment instead of stock-in-trade, disallowing the deduction. The Commissioner of Income Tax (Appeals) upheld this decision. The Tribunal supported the authorities' view, emphasizing that the assessee had never traded in shares previously, making it hard to accept the shares as stock-in-trade. Consequently, the deduction for the decline in the value of shares was disallowed. The quantum appeal was dismissed based on these findings.

Penalty Appeal Analysis:
Regarding the penalty appeal under section 271(1)(c), the AO imposed a penalty for the disallowed deduction. However, the Tribunal noted that the assessee's belief in treating the shares as stock-in-trade, rather than investment, was genuine, supported by the filing of all necessary details. The Tribunal found that the disagreement on the nature of the shares did not amount to concealment of income or furnishing inaccurate particulars to attract a penalty. The Tribunal ordered the deletion of the penalty, stating that the genuine belief of the assessee could lead to a disallowance but not a penalty imposition. Consequently, the penalty appeal was allowed, resulting in the penalty's deletion.

This judgment clarified the distinction between shares held as investment and stock-in-trade, emphasizing the importance of genuine belief in tax matters to determine penalty implications. The Tribunal's decision highlighted the necessity of proper documentation and rationale behind the assessee's actions to avoid penalty under section 271(1)(c) of the Income Tax Act.