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TMI Blog2009 (12) TMI 729X X X X Extracts X X X X X X X X Extracts X X X X ..... e Explanation to section 73 of the Income-tax Act, 1961. As per the learned authorised representative, the Assessing Officer in the course of the assessment proceedings treated the loss of Rs. 90,69,917 arising as a result of the valuation of the closing stock of shares as speculation loss within the meaning of the Explanation to section 73. The Commissioner of Income-tax (Appeals) on further appeal, however, held that the loss in question was to be treated as a business loss and not a loss which was speculative in nature. The relevant observations recorded in paragraph 2.4 of the order of the Commissioner of Income-tax (Appeals) were relied on which read as under : "2.2 I have considered the facts of the case as discussed by the Assessing Officer and as submitted by the learned authorised representative of the appellant at the time of hearing of this appeal along with the decisions relied upon by them. Having considered the same, I am of the considered view that the learned Assessing Officer has not appreciated the facts of the case of the appellant properly and without appreciating the correct nature of the facts, he has given his findings treating the valuation loss as specula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue. This did not give rise to any right to receive income as any such right will accrue or arise only at the point at which such assets are sold. Admittedly, it was pointed out, no transaction had taken place during the year of account in those assets. He referred to the decision of the Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481 and, in particular, to the observations at pages 485/486 relating to the valuation of closing stock, wherein the Supreme Court has observed that the true purpose of valuing and crediting the closing stock is to balance the cost of the goods, entered on the other side of the accounts at the time of the purchases, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales, in the course of the year, showing the profit or loss actually realised on the year's trading. Relying on these observations, Shri Sharma argued that neither in law nor in commercial practice, could any profit be said to accrue or arise by a mere revaluation of stocks in the books of account. It is a common ground that, during the year of account, apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old stock at cost on the other side of the accounts thus cancelling out the entries relating to the same unsold stock earlier in the accounts ; and then that is carried forward as the opening balance in the next year's account. This cancelling out of the unsold stock from both sides of the accounts leaves only the transactions on which there have been actual sales and gives the true and actual profit or loss on this year's dealings.' In paragraph 16 on page 445 in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) has been taken note of as follows (page 485) : `It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the Act as is held in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC). Thirdly, it is a settled principle of income-tax law that it is the real income, which is taxable under the Act. This proposition was enunciated in CIT v. Birla Gwalior Pvt. Ltd [1973] 89 ITR 266 (SC) which was pronounced in CIT v. Shoorji Vallabhdas and Co [1962] 46 ITR 144 (SC). Under section 145 of the Act chargeable income has to be deducted from the accounts regularly employed by the assessee, if in the opinion of the Assessing Officer the accounts are correct and complete. The Assessing Officer can apply a different method of accounts to deduce the income chargeable if in his opinion in the method employed by the assessee the chargeable income cannot properly be deducted. The recognised and settled accounting practice of accounting with the closing stock in the accounts has to be valued on the cost basis or at the market value basis if the market value of the stock is less than the cost value. In the present case, the assessee has not adopted the established and settled practice. The market value of the stock has been taken into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another. (2) A contract of sale may be absolute or conditional. (3) Whereunder a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. (5) Contract of sale how made.-(1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by installments, or that the delivery or payment or both shall be postponed. (2) Subject to the provisions of any law for the time being in force, a contract of sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss takes place. It is settled law that for income-tax purposes, each year is a self contained accounting period and the tax authorities can only take into consideration income, profits and gains made in that year and they are not concerned with potential profits which may be made in another year. In the case of the respondent, its opening stock for the subsequent year would be less by Rs. 90,69,917 and sales effected out of such opening stock would result in more profits/lower losses and vis-a-vis the facts pertaining in such previous year the applicability of the Explanation to section 73 can be considered on the merits. To apply a deeming provision like the Explanation to section 73 to the said loss would be patently erroneous in law and in clear violation of the settled legal principles espoused in the judgments of the apex court." We have heard the learned Departmental representative and the learned authorised representative and have gone through the orders of the authorities below and found from the record that during the year under consideration, the assessee-company was engaged in the business of purchase and sale of securities. In the computation of total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t total loss of Rs. 90.69 lakhs comprises loss due to trading in shares amounting to Rs. 66.66 lakhs and the loss due to diminution in the value of stock to the extent of Rs. 23.94 lakhs. Accordingly, he pleaded that even the entire loss was not attributable to the valuation of stock and that substantial loss was arising out of transaction of purchase and sale of shares. We have considered the rival contentions, carefully gone through the orders of the authorities below and found that the assessee has claimed loss of Rs. 90.69 lakhs in the return filed on October 30, 2001 along with the audit report. As per the statement of facts filed by the assessee before the Commissioner of Income-tax (Appeals), this loss comprises Rs. 66.66 lakhs due to trading in shares, whereas loss due to diminution in the value of stock was to the extent of Rs. 23.94 lakhs. Since the assessee-company was engaged in purchase and sale of shares of other companies, which resulted in loss, the Explanation to section 73 was attracted. There are two exceptions as provided in the Explanation to section 73, where this Explanation is not attracted. The first is where the gross total income of the company includes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kolkata Bench, in the case of Paharpur Cooling Towers Ltd. v. Deputy CIT [2003] 85 ITD 745. The following was the observation of the Bench : "On the assessee's alternate contention that the loss in share dealings was only on account of fall in value of shares held as closing stock and, therefore, the loss so suffered could not be said to be loss on account of `purchase and sale of shares' within the meaning of section 73, there was nothing on record to substantiate the factual elements embedded in that proposition and that plea, being taken for the first time at that stage, was a new twist to the assessee's case. On the contrary, there was a categorical and uncontroverted finding by the Assessing Officer that the assessee had sold some shares which were held by it as `stock-in-trade' and that the assessee incurred said loss on such transactions. The assessee's contention was contrary to the admitted facts on record. The assessee had also not brought on record any material to substantiate the factual elements embedded in the proposition canvassed by him. Even if the loss was only on account of fall in value of stock, it was still in the nature of loss incurred from that busines ..... X X X X Extracts X X X X X X X X Extracts X X X X
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