2015 (10) TMI 24 - HC - Income Tax

Nature of investment - in the nature of trade or not - Assessee had changed the treatment of the shares by treating them as investment instead of stock in trade - AO concluded that, the only motive for this undue change in this year (AY 2005-06) appeared to be lowering the tax incidence and taking undue benefit of the exemption from tax on long term capital gains under Section 10(38) of the Act and concessional rate of tax @ 10% on short term capital gains under Section 111A - Held that - It is not clear whether after the signing of the audited balance sheet as on 31st March 2004 by Directors and CA any resolution was passed by the Board of Directors of the Assessee deciding to treat as investment the shares shown therein as stock in trade. This is an important aspect which does not appear to have merited attention by the CIT (A) or even the ITAT. The Court would like to observe at this stage that it is inconceivable that after an audited balance sheet of a company for a financial year is signed by its Directors and statutory Auditors, and submitted to the statutory authorities, including the Registrar of Companies (RoC) and the income tax authorities, the figures in such balance sheet for the closing stock of shares can simply be altered subsequently by adopting the device of regrouping by the Assessee, even by a Board resolution. That is a process unknown to the law. Even from the point of view of principles governing statutory accounts, such change cannot be simply given effect to in the balance sheet and P&L account for a subsequent year. For instance, such a change, as was sought to be made by the Assessee in the instant case, to the value of the closing stock of shares by treating it as investment instead of stock-in-trade, would affect (and perforce necessitate changes) in the balance sheet and P&L accounts for at least two financial years. It is doubtful if this can at all be done particularly if the statutory authorities including the RoC and the income tax authorities have already been provided with (and perhaps acted upon or accepted) such signed audited accounts for a particular financial year. The authorities concerned, and in particular the income tax authorities, ought to strictly scrutinise such claims as to regrouping of figures appearing in the audited and signed accounts by an Assessee subsequent to such signing. In other words, the decision regarding such change in the figures, like for e.g., the regrouping of shares in the present case, if at all permissible, has to be preceded by a legally acceptable procedure adopted by the Assessee, and in any event prior to the finalization and signing of the audited balance sheet for a particular financial year. Considering that above aspects having not been examined by the ITAT, the Court sets aside the impugned order on the above issue and remands the said appeal to the ITAT for a fresh consideration keeping in view the above aspects. The ITAT is urged to call for the complete details of the records both from the AO as well as the CIT (A) and any further relevant particulars to arrive at a correct decision.

Summary

Issues Involved:
1. Appeal by Revenue against ITAT order for AY 2005-06.
2. Appeal concerning treatment of capital loss as business loss for AY 2006-07.

Analysis:
1. For the appeal related to AY 2005-06, the Assessee, a private limited company, filed its return declaring total income comprising business loss, short term capital gain, and long term capital gain. The AO noticed a change in accounting method affecting profitability due to treating shares as investment instead of stock in trade. The AO concluded the change aimed at tax benefits, thus treated shares as stock in trade for taxation. The CIT (A) directed the AO to consider the transactions as investment, which the ITAT upheld. However, the High Court observed discrepancies in the regrouping of shares and remanded the case to ITAT for a fresh decision, emphasizing the importance of legally acceptable procedures in such changes.

2. Regarding the appeal for AY 2006-07, dependent on the AY 2005-06 decision, the ITAT's order was set aside, and the case was remanded for reconsideration. The High Court highlighted the interdependence of the issues in both appeals and directed a fresh decision in accordance with the law. The judgments emphasized the need for thorough scrutiny and adherence to legal procedures in financial reporting and tax treatment decisions to ensure accuracy and compliance with statutory requirements.