2019 (7) TMI 388 - HC - Income Tax

Disallowing of loss on shares - method of valuation of shares at cost or market price - whether the stocks which were shown in the investment account as investment only could be taken into consideration for claiming a deduction? - Single and isolated transaction - HELD THAT - It is seen that the assessee had shown the shares as investment in the books of account and there was no trading activities. Consequently, the Assessing Officer held that it cannot be allowed as deduction for the purpose of computing the profit of the assessee. In the case of Kerala Small Industries Development Corporation Ltd. 2004 (6) TMI 35 - KERALA HIGH COURT the Court had elaborately considered more or less an identical issue wherein the assessee, made investment in co-operative societies and the question was whether it can be treated as stock-in-trade or a trading asset. After examining the memorandum and articles of association of the assessee-company, the Court took into consideration as to what the word business connotes and held that it connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. Single and isolated transaction can be held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. Considering the facts of the said case, it was pointed out that the investment of the assessee in the cooperative societies cannot be treated as a trading activity, there was no purchase or sale involved, no such transaction and that the transaction made by the assessee in the form of shares in co-operative societies are only in the nature of capital investments in furtherance of the objects of the company and not as trading capital or circulating capital of the assessee company. The decision in Kerala Small Industries Development Corporation Ltd. (supra) is a clear answer to the assessee's case to hold that the assessee has not made out any ground to interfere with the order passed by the Tribunal. - Decided against assessee.

Summary

Issues:
1. Valuation of shares for deduction
2. Determination of investment as stock-in-trade
3. Treatment of shares as deduction for profit computation

Issue 1: Valuation of shares for deduction
The appeal under Section 260A of the Income-tax Act, 1961 questioned the rejection of the consistent method of valuing shares at cost or market price for deduction purposes. The Assessing Officer disallowed the deduction, stating that the shares shown as investment could not be considered as closing stock. The appellant argued that the shares were held as investments with no trading activities. The Commissioner of Income-tax (Appeals) upheld this view, and the Tribunal affirmed it, concluding that the shares were not stock-in-trade but investments, thus disallowing the deduction.

Issue 2: Determination of investment as stock-in-trade
The key issue was whether the shares held by the appellant were to be considered stock-in-trade or investments. The appellant failed to provide evidence to show that the shares were stock-in-trade. The Tribunal emphasized that previous orders in the appellant's favor for different assessment years were not applicable to the current case. The absence of documentation to support the claim that the shares were held for trading activities led to the dismissal of the appeal.

Issue 3: Treatment of shares as deduction for profit computation
The Tribunal's decision was based on the factual finding that the appellant did not substantiate the claim that the shares were stock-in-trade through any documents. Comparisons to relevant case law, such as Karnataka Bank Ltd. and Kerala Small Industries Development Corporation Ltd., were made. The Court held that the appellant's case did not align with the precedents cited, as there was a lack of evidence supporting the shares' classification as stock-in-trade. Consequently, the appeal was dismissed, and the substantial questions of law were answered against the appellant.

In conclusion, the judgment upheld the decision to disallow the deduction claimed by the appellant for the valuation of shares, emphasizing the importance of providing substantial evidence to support the classification of shares as stock-in-trade for profit computation purposes. The Court's analysis relied on the factual findings and legal principles established in relevant case law to determine the appropriate treatment of the appellant's shares.