2016 (11) TMI 1069 - AT - Income Tax

Addition on account of negative stock-in-trade as at the year-end - correct head of income - Held that - Valuation of the relevant scrips as at the year-end may be lower than the cost as recorded in books, as where there is a decline in the market price since. The difference, or the said decline, is only a business loss, which gets absorbed in the valuation of the closing stock. No separate addition/adjustment is required to be made/effected, i.e., apart from that in respect of shortfall w.r.t. the cost stated. The exercise for both these additions is to be carried out for all the shares, and not limited to those shares reporting negative quantity as at the beginning and/or at the end of the year, which may well be positive, even as shortfall (negative stock) subsists during a part of the year. Credit in the form of closing stock in every such case (i.e., with reference and toward decline from the peak shortfall during the year, as at the yearend), shall obtain. Also, if the business income is, as contended, assessed as speculative income, the decline therein (on account of the valuation of closing stock) would again stand to be assessed under the same head/category. However, as we shall presently see, i.e., while discussing the Revenue s appeal, the categorization of the same as speculative is without basis. Addition by way of such adjustment shall again be carried out by allowing the assessee proper opportunity of hearing, meeting its case, if any. Income from share trading - speculative business - Held that - Share trading, as apparent from the assessee s final accounts, i.e., income (operating) statement and balance-sheet (as at the year-end) respectively, constitutes a principal business of the assessee-company. Accordingly, and even as observed by the ld. CIT(A), we find no basis for holding the income/loss from the said activity as speculative by the AO, nor was any pointed out to us during hearing. We, therefore, have no hesitation in confirming the impugned order on this score. As regards the reallocation of the administrative expenditure, we find that both the assessee as well as the AO to have allocated the same under different activities without any basis. However, the said allocation is itself rendered of no consequence as the entire business income is to be regarded as nonspeculative. Denying the claim for reduction in the closing stock - Held that - The entire details were examined in the remand proceedings, to find that the revision is on account of revision in the rates of valuation of the closing stock as at the year-end. The revised statement is, in fact, in agreement with the balance-sheet as at the year-end (filed along with the original return); the assessee explaining the stock statement given earlier being as on 04.4.2011, furnished inadvertently. We, in fact, see no issue, i.e., either in principle or on facts. The assessee s revised return (PB pg. 1) bears no claim for any reduction in stock; it adopting the same figure of profit, i.e., as obtains per the profit and loss account. We have noted that the stock-in-trade at the year-end (Rs.2,74,36,842/PB pgs. 48-57) is in agreement with the figure as per the balance-sheet (PB pg. 7). No error in the impugned revision was also pointed out to us during hearing.

Issues Involved:
1. Maintainability of the addition of ?54,63,795/- on account of negative stock-in-trade.
2. Classification of income from share trading as speculative income.
3. Allocation of administrative expenditure.
4. Revision of closing stock valuation and its impact on profit.

Detailed Analysis:

1. Maintainability of the Addition of ?54,63,795/- on Account of Negative Stock-in-Trade:
The assessee, a share and stock broker, was found to have negative stock in some scrips at the year-end. The Assessing Officer (AO) categorized these into two groups: shares transferred from the directors' dematerialized (D-Mat) accounts without corresponding purchase entries and shares for which no explanation was provided. The AO added the value of these shares, totaling ?54,63,795/-, to the income. The assessee argued that these shares were used as margin money and sold when needed, but this explanation was not substantiated by evidence. The Tribunal confirmed the addition of ?2,27,392/- after verifying the opening and closing stock values, recognizing the need to exclude negative stock values, which are a physical impossibility. The Tribunal also noted that the addition should be made under sections 68 or 69A for unexplained credits or investments.

2. Classification of Income from Share Trading as Speculative Income:
The AO classified the income from share trading as speculative and allocated administrative expenses accordingly. However, the Commissioner of Income Tax (Appeals) [CIT(A)] reversed this, noting that the AO did not invoke the Explanation to section 73, which defines when a company's share trading is deemed speculative. The Tribunal upheld the CIT(A)'s decision, confirming that the assessee's principal business was share trading, making the speculative classification inapplicable.

3. Allocation of Administrative Expenditure:
The AO allocated administrative expenses to the speculative income category, increasing the taxable income. The CIT(A) found no basis for this allocation. The Tribunal agreed, noting that both the assessee and AO had allocated expenses without a clear rationale. Since the entire business income was deemed non-speculative, the allocation of administrative expenses became irrelevant.

4. Revision of Closing Stock Valuation and Its Impact on Profit:
The AO denied the assessee's claim for reducing the closing stock value by ?12,13,444/- due to lack of details. However, during remand proceedings, it was found that the revision was due to changes in stock valuation rates. The revised figures matched the balance sheet submitted with the original return. The Tribunal confirmed the CIT(A)'s decision, noting no errors in the revised stock valuation and profit figures.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. The addition of ?2,27,392/- was confirmed for incorrect stock valuation, while the classification of income as speculative and the allocation of administrative expenses were reversed. The revision of closing stock valuation was upheld, confirming the CIT(A)'s findings.

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