2020 (2) TMI 1018 - HC - Income Tax

Shares converted into stock-in-trade - Valuation adopted for conversion of investments to stock-in-trade, opening stock and closing stock - value of the closing stock at the end of the year was required to be valued at the cost to the business at the time of conversion (i.e. the market value at the time of conversion) or cost of acquisition or net realizable value whichever is less? - HELD THAT -The GROZ-BECKERT SABOO LIMITED 1978 (11) TMI 2 - SUPREME COURT has held that where an assessee converts his capital assets into stock-in-trade and starts dealing with them, the taxable profit on the sale must be determined by deducting on sale proceeds and the market value at the time of their conversion into stock-in-trade. The aforesaid principle has neither been taken into account by the AO as well as by the CIT (Appeals) and the Tribunal. It is not in dispute before us that the CIT (Appeals) and the Tribunal has not examined the aforesaid aspect of the matter. In view of preceding analysis, the substantial question of law No.1 framed by this Court is answered in favour of the assessee and against the revenue. In the result, the order passed by the Assessing Officer as well as CIT (Appeals) and the Tribunal are hereby set aide and the matter is remitted to the Assessing Officer to decide the matter afresh .

Summary

Issues:
1. Compliance with Appellate Tribunal's direction in assessment.
2. Valuation of closing stock of shares converted into stock-in-trade.
3. Application of "original cost or market value whichever is less" principle for valuation.

Issue 1: Compliance with Appellate Tribunal's direction in assessment.
The appellant converted shares into stock-in-trade and valued them at fair market value as per Section 45(2) of the Income Tax Act, 1961. The Assessing Officer disallowed this treatment, resulting in an income determination of &8377; 2,75,48,980/-. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Income Tax Appellate Tribunal remitted the matter to the Assessing Officer to re-compute profits based on the net realizable value of shares or the conversion cost, whichever is lower. The Assessing Officer valued the closing stock accordingly and levied interest under relevant sections of the Act. Subsequent appeals by the appellant were dismissed, leading to the current appeal.

Issue 2: Valuation of closing stock of shares converted into stock-in-trade.
The appellant claimed closing stock value based on the cost at acquisition or market value at that time, whichever was lower. The authorities under the Act did not appreciate this claim. The Tribunal's order directed the Assessing Officer to value the closing stock at the net realizable value of shares as on a specific date or at the value of the opening stock, i.e., the conversion cost, whichever is lower. The Supreme Court precedent emphasizes deducting the market value at the time of conversion into stock-in-trade from the sale proceeds to determine taxable profit, a principle overlooked by the lower authorities. The Tribunal and other authorities failed to consider this crucial aspect.

Issue 3: Application of "original cost or market value whichever is less" principle for valuation.
The Tribunal's direction to re-compute profits based on net realizable value or conversion cost, following the method used for valuing opening stock, aligns with the Supreme Court's precedent. Consequently, the substantial question of law framed in favor of the assessee and against the revenue. The orders of the Assessing Officer, CIT (Appeals), and the Tribunal were set aside, and the matter was remitted to the Assessing Officer for fresh consideration in line with the Tribunal's directions and the Supreme Court's decision. As a result, it was deemed unnecessary to address the 2nd and 3rd substantial questions of law, and the appeal was disposed of accordingly.