2017 (12) TMI 357 - AT - Income Tax

Short term capital gain on sale of shares - non materialization of transaction - hypothetical income - Held that - The facts as emerged before us are that the proposed transaction of sale of shares did not materialize at all. No agreement or MOU or any sale bill etc. with respect to sale of these shares has been brought on record. It is contended that no such document was entered into and therefore there was no question of bringing on record any such document. Further, even sale consideration of the impugned share has not been determined. Only an advance of ₹ 25 Lakhs is stated to have been received which has been deducted by the assessee from the cost of Investment in the Balance Sheet. No further amount is reported to have been received by the assessee. Thus, under these circumstances it is not justified at all to presume that sale of shares has taken place. No income has accrued in the favor of assessee. Apparently, the proposed transaction of sale fell through and did not materialize. Under these circumstances, it cannot be held at all that any capital gain was earned by the assessee on sale of impugned shares. Thus, addition made by the AO is illegal and factually incorrect and the same is here by directed to be deleted. Addition for deviation u/s 145A - assessee did not include amount of Excise duty and VAT while making valuation of the closing stock - Held that - Hon ble Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd., 2007 (11) TMI 41 - HIGH COURT OF DELHI it was held that if there is change in closing stock to give effect to Section 145A, there must necessarily be a corresponding adjustment in the opening stock of the year. Similar view has been expressed by the ICAI in the Guidance Note explaining the provisions of Section 145A. Further, on the basis of sense of justice and equity also same inference can be drawn that if Trading and P & L Account is to be converted from Exclusive method to Inclusive method, then corresponding adjustment will be required to be made in all relevant heads of Income and Expenditure including the opening stock. The adjustment on account of Payment of Excise duty and VAT out of Cash/Bank but not debited in P & L Account would also be required to be given. It is noted that assessee has submitted detailed submissions and evidences to demonstrate the fact of payment of Excise duty as well as amount of Excise duty and VAT embedded in the value of opening stock. No dispute on facts has been raised by the Ld. DR before us. Further, assessee has also submitted before the lower authorities both sets of Trading and P & L Account prepared on both inclusive and exclusive method showing that amount of net loss in both the situation remains the same at ₹ 48,716,531/- . Thus, viewed from any angle no case is made out by the revenue before us for sustaining the addition. Under these circumstances, we find that the CIT (A) has rightly deleted the addition

Issues Involved:
1. Addition of ?2,60,00,000 as short-term capital gain on sale of shares.
2. Non-allowance of carry forward of losses amounting to ?1,63,84,566.
3. Addition for deviation under Section 145A amounting to ?1,29,39,052.

Issue-wise Detailed Analysis:

1. Addition of ?2,60,00,000 as Short-Term Capital Gain on Sale of Shares:
The assessee challenged the addition of ?2.60 Crores as short-term capital gain on the sale of shares of M/s Dudheshwar Steel and Alloys Ltd. The AO noted that the assessee received ?25 Lakhs as an advance for the sale of shares but did not show any capital gain in the income tax return. The AO computed the sale consideration and capital gain, adding ?2.60 Crores based on the assumption that 17% of the sale consideration of ?30 Crores was attributable to the assessee. The AO invoked Section 2(47) of the Income Tax Act, 1961, and Section 53A of the Transfer of Property Act, deeming the transaction as a transfer.

The Tribunal found that the AO did not fully consider the facts and documents, including the FIR filed by the director of the company, indicating that the sale transaction did not materialize due to disputes. The Tribunal referred to the Supreme Court judgment in CIT vs. Balbir Singh Maini, which held that income tax cannot be levied on hypothetical income. The Tribunal concluded that there was no de facto transfer of shares, and thus, no capital gain accrued to the assessee. The addition was deemed illegal and factually incorrect, and it was directed to be deleted.

2. Non-Allowance of Carry Forward of Losses Amounting to ?1,63,84,566:
The assessee was aggrieved by the non-allowance of carry forward of losses and depreciation totaling ?1,63,84,566. The AO did not mention why the benefit of carry forward was not granted. The Tribunal noted this omission and remitted the issue back to the AO to consider the claim properly and pass a speaking order. The AO was directed to give the assessee adequate opportunity for a hearing before making a fresh order. This ground was allowed for statistical purposes.

3. Addition for Deviation Under Section 145A Amounting to ?1,29,39,052:
The AO added ?1,29,39,052 for deviation under Section 145A, noting that the assessee did not include Excise duty and VAT in the valuation of the closing stock. The assessee argued that following the exclusive method of accounting per AS-2, no adjustment was needed even if accounts were recast on an inclusive basis. The CIT(A) accepted the assessee's detailed working, showing that no adjustment was required, and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had demonstrated that no further adjustment was needed even if accounts were converted to an inclusive method. The Tribunal referred to the Delhi High Court judgment in CIT vs. Mahavir Aluminium Ltd., which supported that corresponding adjustments must be made in the opening stock if changes are made in the closing stock to comply with Section 145A. The Tribunal confirmed that the CIT(A) rightly deleted the addition, and the revenue's appeal was dismissed.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal directed the deletion of the addition of ?2.60 Crores as short-term capital gain and remitted the issue of carry forward of losses back to the AO. The addition under Section 145A was also deleted, confirming the CIT(A)'s order.

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