2018 (2) TMI 508 - AT - Income Tax

Disallowance of diminution in value of closing stock - method of valuation of closing stock of quoted shares - Held that - We find that the assessee had placed reliance on the said CA s certificate and had accordingly valued its closing stock by adopting the breakup value per share as on 31.03.2004, as it was lower than cost of the unquoted shares. We also find from the accounting policy of the assessee company which are part of the audited financial statements and from point 1C enclosed in page 32 of the paper book on the accounting policy followed for stock-in-trade . We also find that the assessee has been consistently following this method of valuation of closing stock of unquoted shares without any deviation thereon as has been categorically mentioned by the Ld. CIT(A) in his order, which remained uncontroverted by the Revenue before us. No justifiable reason to interfere in the order of the Ld. CIT(A) in this regard and hence, we do not find any infirmity in the order of the CIT(A) with regard to the issue. Accordingly, grounds raised by the Revenue are dismissed. Disallowance of interest paid on loan taken for purchase of shares of Ganpati Sugar Industries Ltd., which was part and parcel of the stock-in-trade - Held that - The assessee is engaged in the business of dealing in shares. It is not in dispute that the assessee is already holding 11,30,000 shares of M/s Ganpati Sugar Industries Limited and which is part and parcel of its stock-in-trade of the trading business. Hence, it could be safely concluded that the additional investment which was made by the assessee out of borrowed funds were also made only for the purpose of business. AO had observed in the assessment order that the assessee has been allotted by M/s Ganpati Sugar Industries Limited by converting the share application money into share capital in assessment year 2005-06. In any case, once the borrowing has been accepted as being used for business purposes in the year of borrowing, then any interest paid thereon in subsequent years cannot be the subject matter of disallowance as the closing balance of borrowings at the end of earlier year would become the opening balance of borrowings at the beginning of this year. Department cannot take different stand during the year under appeal when they had accepted the borrowing being used for business purposes in the earlier year. This ratio has been laid down in the case of CIT vs. Sridev Enterprices (1991 (1) TMI 52 - KARNATAKA High Court). - Decided against revenue.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in deleting the disallowance of diminution in value of closing stock of ?30,76,750/-.
2. Whether the CIT(A) was justified in upholding the disallowance of interest of ?5,31,000/- paid on loan taken for the purchase of shares of Ganpati Sugar Industries Ltd.

Detailed Analysis:

Issue 1: Deletion of Disallowance of Diminution in Value of Closing Stock

The Revenue appealed against the CIT(A)'s decision to delete the disallowance of diminution in value of closing stock amounting to ?30,76,750/-. The assessee, a non-banking finance company, valued its closing stock of unquoted shares at the lower of cost or breakup value, as mandated by the Reserve Bank of India (RBI) prudential norms. The Assessing Officer (AO) allowed the valuation of quoted shares at the lower of cost or market value but disallowed the valuation of unquoted shares at the lower of cost or breakup value, leading to the disallowance of ?30,76,750/-.

The assessee argued that its method of inventory valuation was consistent and in line with Section 145A of the Income Tax Act, which requires the consistent application of the accounting method. The CIT(A) agreed with the assessee, noting that there was no basis for the AO to differentiate between quoted and unquoted shares for valuation purposes. The CIT(A) emphasized that the assessee had consistently followed the same method of valuation over the years, which was also certified by a Chartered Accountant.

Upon review, the Tribunal found that the AO had accepted the valuation method for quoted shares but not for unquoted shares, despite the RBI's clear mandate. The Tribunal upheld the CIT(A)'s decision, stating that the assessee had followed the RBI's notification and consistently applied its valuation method. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order.

Issue 2: Disallowance of Interest on Loan for Purchase of Shares

The assessee cross-appealed against the CIT(A)'s decision to uphold the disallowance of ?5,31,000/- in interest paid on a loan used to purchase shares of Ganpati Sugar Industries Ltd. The assessee, a dealer in shares, had borrowed money in earlier years and used it partly towards an advance for share application money in Ganpati Sugar Industries Ltd. The AO disallowed the interest, arguing that the borrowed funds were not used for business purposes.

The assessee contended that the borrowed funds were used for its trading business and that the investment in share application money was part of its stock-in-trade. The CIT(A) did not accept this argument and upheld the AO's disallowance. However, the Tribunal noted that the borrowed funds were used for business purposes in earlier years, and the shares were part of the assessee's stock-in-trade. The Tribunal referred to the Karnataka High Court's decision in CIT vs. Sridev Enterprises, which held that interest on borrowings used for business purposes in earlier years cannot be disallowed in subsequent years.

The Tribunal directed the AO to delete the disallowance of ?5,31,000/-, allowing the assessee's cross-objection.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding the deletion of the disallowance of diminution in value of closing stock and allowed the assessee's cross-objection concerning the disallowance of interest on the loan used for the purchase of shares.