2019 (2) TMI 715 - AT - Income Tax

Addition on account of loss on valuation of securities - Held that - In the absence of any clarity on the computation of amount of loss arising due to change in the valuation of securities under the new method of cost or market price, whichever is less , we set-aside the impugned order and remit the matter to the file of AO for determining the amount of loss arising by the application of method cost of market price, whichever is less to the securities held by the assessee bank as stock in trade. It is only after determining such a loss on valuation of securities that the ultimate figure of loss will be determined. AO will give a reasonable opportunity of hearing to the assessee. Before parting with the matter, we would like to clarify on an issue concerned with the change in the method of valuation of securities. On a specific query, AR submitted that the assessee was earlier valuing such securities as per a method prescribed by the RBI, resulting into some loss to be amortized over certain number of coming years. Once we have held that the new method of valuation has to be followed, which would account for loss on decline in the market value of securities in the concerned year itself, there can be no rationale in continuing to allow losses in subsequent years under the old method of valuation of securities as per RBI, which admittedly resulted into amortization of loss in some subsequent years. The AO is directed to examine this aspect also, which is connected with the determination of loss on valuation of securities under the new method of Cost or market price, whichever is less. It should be ensured that the assessee does not get double deduction. Factual matrix for the A.Y. 2012-13 is mutatis mutandis similar to that of the preceding year except for the amount of disallowance of ₹ 5,35,47,228/- made by the AO and sustained in the first appeal. Following the view taken hereinabove, we set-aside the impugned order and direct the AO to determine the issue as ordered supra. Both the appeals are allowed for statistical purposes.

Summary

Issues:
1. Disallowance of loss on valuation of securities for assessment years 2011-12 and 2012-13.

Analysis:
A.Y. 2011-12:
The primary issue in this appeal was the disallowance of a loss on the valuation of securities claimed by the assessee. The Assessing Officer (AO) disallowed the deduction as the loss was not accounted for in the books of account. However, the Tribunal referred to the judgment in the case of Kedarnath Jute Manufacturing Company Vs. CIT and held that the absence of entries in the books of account cannot be decisive for disallowing a deduction if the assessee is entitled to it under the law. The Tribunal disagreed with the AO's view and allowed the deduction.

The next issue was whether the assessee was entitled to value its securities at "cost or market price, whichever is less." The Tribunal cited the principle established by the Supreme Court in Chainrup Sampatram Vs. CIT, which allows stock valuation under this method. The Tribunal held that the assessee was within its rights to switch to this valuation method and that the change cannot be rejected if consistently followed.

Regarding the quantum of the loss claimed, the Tribunal noted a lack of clarity on how the loss was computed under the new valuation method. As a result, the Tribunal set aside the order and remitted the matter to the AO for determining the exact amount of loss on valuation of securities. The AO was directed to provide a reasonable opportunity for the assessee to be heard.

Additionally, the Tribunal addressed the issue of double deduction due to a change in the valuation method. It directed the AO to ensure that the assessee does not receive double deductions by examining the impact of the change in valuation method on subsequent years.

A.Y. 2012-13:
The disallowance of a larger amount for the subsequent assessment year was also challenged by the assessee. Following the same reasoning as in the previous year, the Tribunal set aside the order and directed the AO to determine the issue in line with the decisions made for the earlier assessment year.

In conclusion, both appeals were allowed for statistical purposes, emphasizing the need for a proper determination of the loss on valuation of securities and prevention of double deductions.