2009 (7) TMI 880 - AT - Income Tax

Revaluation loss - assessee has claimed loss on account of revaluation of closing stock of debentures and shares - assessee did not carry out any business in share trading in the financial year relevant to the immediately preceding assessment year - AO accepting the claim of the assessee for deduction on account of fall in value of shares and securities as reflected in the balance sheet. In the circumstances the claim of the assessee clearly reflected in the balance sheet and return of income and accepted by the AO cannot be said to be erroneous or legally unsustainable. As held by the Supreme Court in the case of Malabar Industrial Co. Ltd.(2000 - TMI - 5786 - SUPREME Court) Revision - Held that - when two views were inherently possible and that ITO has taken one view then even if the CIT doesn t agree with the view taken by the AO, the assessment order cannot be treated as erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law. Unless an assessment order is both erroneous as well as prejudicial to the interest of the Revenue, the CIT doesn t have jurisdiction to revise the assessment order under section 263. order of the CIT under section 263 is not sustainable in law and accordingly set aside, appeal of the assessee is allowed.

Summary

Issues:
1. Revision of assessment order under section 263 based on disallowance of loss on revaluation of closing stock of shares and debentures.
2. Treatment of shares and securities as stock-in-trade by the assessee.

Issue 1: Revision of assessment order under section 263
The case involved two appeals filed by the assessee against the order of the CIT under section 263 for the assessment year 2001-02. The CIT disallowed the loss claimed by the assessee on account of revaluation of closing stock of debentures and shares, amounting to Rs. 39,90,279. The CIT's basis for disallowance was that the assessee did not carry out any business in share trading during the relevant financial year, and the main business was that of a financial consultant. The CIT concluded that the loss claimed was not allowable as it was only an investment in shares and securities, not a systematic trading activity. The CIT directed the AO to disallow the claimed loss, which was initially allowed by the AO after due consideration of the facts presented during the assessment proceedings.

Issue 2: Treatment of shares and securities as stock-in-trade
The assessee contended that from the assessment year 2001-02, they had been treating the purchase and sale of shares as a business, valuing the closing stock at cost or market value, whichever was less. The audited balance sheet for the relevant year reflected the purchase and valuation of shares and debentures, with the closing stock valued at Rs. 2,28,975. The profit for the year was calculated based on these values. The assessee argued that the AO had considered these details during the assessment under section 143(3) and had raised specific queries regarding the purchase of shares, which were satisfactorily answered. The assessee had consistently followed this valuation method for subsequent years, which was accepted by the AO.

The ITAT, after analyzing the facts and the entries in the books of account, concluded that the assessee had indeed treated shares and securities as stock-in-trade from the relevant year onwards. This treatment was consistent in subsequent years and had been accepted by the tax authorities. The ITAT cited the principle established by the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT, emphasizing that not every loss of revenue could be deemed prejudicial to the interests of the Revenue. The ITAT further referred to the decision in CIT v. Max India Ltd., highlighting that unless an assessment order was both erroneous and prejudicial to the interest of the Revenue, the CIT did not have jurisdiction to revise it under section 263. Consequently, the ITAT held that the order of the CIT disallowing the loss claimed by the assessee was not sustainable in law and set it aside, allowing the appeal of the assessee.

In another appeal by the assessee against the order of the AO giving effect to the CIT's order under section 263, the ITAT dismissed the appeal as infructuous, as the CIT's order under section 263 for the assessment year 2001-02 had been set aside in the earlier appeal.