2015 (6) TMI 943 - AT - Income Tax

Treatment to the losses on sale of share as capital loss - Held that - From the perusal of the Balance sheet as on 31st March, 2007, it is seen that the shares of RPG Life Sciences Ltd of ₹ 2.37 crores are reflected under the head of investment and are valued at cost which is also in line with the accounting policies (as reflected in the annual accounts and placed at page 29 of the paper book,). On the other hand, if the Assessee had treated the shares of RPG Life Sciences Ltd. as part of stock in trade, as is the submission before us, then it should have valued the shares at closing market rate or cost whichever is lower which is the policy adopted by Assessee for value stock in trade. The submission of the Assessee that at the expiry of the lock in period i.e. on 02.04.2007, the shares of RPG Life Science Ltd. were transferred to stock in trade is not supported by any evidence more so when the Assessee is a limited Company and is required to follow certain guidelines, procedures prescribed under the Accounting Standards when there is transfer from investment to stock in trade. Further, it is also seen that under clause 12A of the Tax Audit Report for A.Y. 2008-09 which is placed at page 84, against the column with respect to particulars of capital asset converted into stock in trade, the auditor has mentioned as Nil meaning thereby that auditor has also certified that there is no conversion of capital asset to stock in trade. The submission of the Assessee that for the practical purposes it had treated the shares as stock in trade cannot be accepted in view of the fact that the Accounting Standard 13 on Accounting of Investments, issued by the Institute of Chartered Accountants of India which is being followed by the Assessee, states that shares, debentures and other securities held as stock in trade are to be accounted for and disclosed similar to the current investment and with respect to current investment in the Accounting Standard, it is stated that it has to be valued at lower of cost and fair value whereas on the other hand, the Assessee has in its books treated the shares as investment and accordingly valued the shares at cost and therefore its contention of holding the shares at stock in trade is also not supported by the method of accounting and its valuation. Before us, ld. A.R. has also not placed any material on record in support of its contention that for the sake of identification, the shares were placed in investment account. - Decided against assessee.

Summary

Issues:
1. Treatment of loss on sale of shares as capital loss instead of trading loss.

Analysis:
The appeal was filed by the Assessee against the order of CIT(A)-XIV, Ahmedabad for A.Y. 2008-09. The Assessee, a company engaged in trading shares, declared a total loss in its income tax return. The Assessing Officer (A.O.) determined the total income, disagreeing with the treatment of the loss on the sale of shares as a business transaction. The A.O. concluded that the loss was a long-term capital loss, not a business transaction loss, disallowing its adjustment against business income under Sections 71(3) and 74(1) of the Act. The CIT(A) upheld the A.O.'s decision, emphasizing that the shares were intended as investments, not for trading, based on the accounting treatment and circumstances. The Assessee argued that the shares were part of the stock in trade, citing a conversion from investment to stock in trade after a lock-in period. However, the Tribunal found no evidence supporting this conversion and rejected the Assessee's argument. The Tribunal also noted the adherence to Accounting Standard 13, valuing the shares as investments, not stock in trade. The Assessee's reliance on a Calcutta High Court decision was deemed inapplicable to the case. Consequently, the Tribunal dismissed the appeal, affirming the treatment of the loss as a capital loss.

The primary issue revolved around the treatment of the loss on the sale of shares by the Assessee as a capital loss instead of a trading loss. The A.O. and CIT(A) determined that the shares were intended as investments based on accounting policies and the circumstances surrounding the acquisition and valuation of the shares. The Assessee's argument of converting the shares from investment to stock in trade after a lock-in period was not substantiated with evidence, leading the Tribunal to reject this claim. The Tribunal emphasized the adherence to Accounting Standard 13, which guided the valuation of shares as investments, not stock in trade. The Assessee's reliance on a previous court decision was deemed irrelevant to the current case, further supporting the dismissal of the appeal.

In conclusion, the Tribunal upheld the decisions of the A.O. and CIT(A) regarding the treatment of the loss on the sale of shares as a capital loss, not a trading loss. The Tribunal found no merit in the Assessee's argument of converting the shares to stock in trade after a lock-in period, as it lacked supporting evidence. Adherence to accounting standards and the specific circumstances of the case led to the dismissal of the Assessee's appeal, affirming the classification of the loss as a capital loss.