2010 (5) TMI 66 - HC - Income Tax

Capital gains cost of shares - The actual cost of the shares sold was Rs 1,10,57,400/- and this figure was used for the purposes of computing capital gains under Section 48 of the Income Tax Act, 1961 (hereinafter referred to as the said Act ). However, in the books of accounts, the assessee company followed Accounting Standard-13 and took the average cost of Rs 40,78,693/- as the cost price of these shares. The Assessing Officer issued a notice under Section 154 proposing to rectify the purported mistake in the intimation issued under Section 143(1)(a) of the said Act. - According to the Assessing Officer, the value of the shares was overstated in the balance sheet by Rs 69,78,707/- and the Assessing Officer required the assessee to indicate as to why the said amount should not be added to the returned income. Thereafter, in the order passed under Section 154/143(1)(a) of the said Act, the Assessing Officer made the aforesaid addition which was confirmed by the Commissioner of Income Tax (Appeals). ITAT deleted the additions. Held that We agree with the conclusions arrived at by the Tribunal that this was a matter which could not have been adjusted under Section 143(1)(a) and certainly not a matter which could have been rectified under Section 154 of the said Act. We also note that the Assessing Officer as well as the Commissioner of Income Tax (Appeals) were confused by the two systems which were in operation. One was the manner in which the assessee was keeping his books in accordance with Accounting Standard-13 and other was the manner of computation of capital gains under the income tax regime. - What the assessee has done is to identify the 75,600 shares sold in the year in question and has taken the actual cost of these shares as Rs 1,10,57,400/- and indexed it and thereafter reduced the indexed cost from the actual sale price of the shares to arrive at the capital gains of Rs 3,40,11,091/-. This has been correctly computed in terms of the said Act and, therefore, there can be no grievance on the part of the revenue inasmuch as the capital gains has been correctly computed and tax thereon has been paid. decided in favor of assessee

Summary

Issues:
1. Rectification of intimation under Section 143(1)(a) of the Income Tax Act, 1961 regarding the computation of capital gains.
2. Interpretation of Accounting Standard-13 in relation to the cost of shares sold by the assessee.
3. Confusion between the two systems of bookkeeping and computation of capital gains.

Analysis:

1. The main issue in this case was the rectification of the intimation under Section 143(1)(a) of the Income Tax Act, 1961, concerning the computation of capital gains. The Assessing Officer proposed to rectify a supposed mistake in the intimation issued under Section 143(1)(a) by adjusting the value of shares shown in the balance sheet, which was different from the cost price used for computing capital gains. The Tribunal held that such adjustments were not suitable for prima facie adjustments under Section 143(1)(a) and should have been handled through a proper notice and due deliberations. The Tribunal concluded that the rectification made by the Assessing Officer was not appropriate under Section 154 of the Act.

2. Another significant issue was the interpretation of Accounting Standard-13 by the assessee in determining the cost of shares sold. The assessee followed Accounting Standard-13 and used the average cost of shares for computation, while the actual cost was different. The Tribunal noted that the assessee correctly computed capital gains under the Income Tax Act, and there was no deficiency in following Accounting Standard-13. The Tribunal emphasized that the confusion arose due to the different systems of bookkeeping and computation of capital gains, which led to the misunderstanding by the Assessing Officer and the Commissioner of Income Tax (Appeals).

3. The confusion between the two systems of bookkeeping and computation of capital gains was highlighted in the judgment. The Tribunal observed that the assessee's adherence to Accounting Standard-13 was appropriate, and the computation of capital gains under the Income Tax Act was correctly done. The Tribunal affirmed that the capital gains were accurately calculated and the taxes were duly paid. Ultimately, the Tribunal dismissed the appeal, upholding the order passed by the Income Tax Appellate Tribunal in deleting the addition made by the Assessing Officer and the Commissioner of Income Tax (Appeals).

In conclusion, the judgment clarified the proper procedures for rectification under the Income Tax Act, emphasized the importance of following accounting standards, and addressed the confusion arising from different systems of bookkeeping and computation of capital gains.