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TMI Blog2006 (9) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 3. Both the lower authorities have erred in law and on facts in not considering and grossly ignoring various explanations, submission and evidences placed on record by the appellant in its proper perspective and further erred in not appreciating the view point of the appellant. This action of both the lower authorities is in clear breach of principles of natural justice and therefore deserves to be quashed. 4. Levy of interest under section 234A/B/C of the Act is not justified. 5. Initiation of penalty proceedings under section 271(1)(c) of the Act is not justified. 6. Initiation of penalty proceedings under section 271E of the Act is not justified." The main issue involved in this appeal relates to the disallowance of the claim of the assessee amounting to Rs. 16,88,76,463 on account of change in the method of valuation of the closing stock. The brief facts relating to this issue are that the Assessing Officer on verification of the final accounts noted in Schedule 14 that the chartered accountant that has given the following note : "……8. The company has changed its accounting policy for valuation of quoted shares, held as stock-in-trade from cost to cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the assessee was considered but the Assessing Officer did not accept the contention of the assessee that the change in the method of valuation is allowed in respect of the shares held as stock-in-trade and accordingly the Assessing Officer disallowed the loss on account of revaluation claimed. The Assessing Officer was also of the view that the shares were held by the assessee as capital asset. The assessee went in appeal before the Commissioner of Income-tax (Appeals) where it was submitted that adoption of the cost or market value whichever is less for stock-in-trade is one of the recognised method of accounting and assessee has accordingly adopted the same. In this regard reliance was placed on the following judgments : (i) Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) ; (ii) CIT v. Bharat Commerce and Industries Ltd. [1999] 240 ITR 256 (Delhi) ; (iii) CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559 (Cal) ; (iv) CIT v. Corporation Bank Ltd. [1988] 174 ITR 616 (Karn) ; (v) CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) ; and (vi) CIT v. Mopeds India Limited [1988] 173 ITR 347 (AP). The Commissioner of Income-tax (Appeals) confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be viewed in the context of the facts which have been brought on record by the Assessing Officer. In particular, as discussed above, the Assessing Officer has observed that the major share holding of the assessee-company comprising of 4792930 shares valued at Rs. 19,38,82,249 as on April 1, 2000, shown as stock-in-trade and 37000 shares of Core Health Care Limited valued at Rs.12,95,000 as on April 1, 2000, shown as investment and there has been no purchase or sales transactions in this share holding. As a matter of fact, the Assessing Officer has pointed out and given a finding that there was no justification for treating 4792930 shares of Core Health Care Limited as stock-in-trade while treating the balance 37,000 shares as investment when there was no intention to make any commercial or business transactions. This is evident from the fact that the assessee company is a sister concern of Core Health Care Limited and has pledged shares of Rs. 47,92,930 to banks/institutions for the purpose of loan being taken by Core Health Care Limited and not by the assessee-company. This itself is sufficient to hold that the transaction is not in the nature of business transactions and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the assessee in view of the facts in the present case. It is clear from the facts reproduced above and also discussed by the Assessing Officer that the investments particularly in Core Health Care Limited are not for business purposes and at best can be treated as capital assets and the assessee is entitled to claim gain/loss as and when the said assets are transferred. The notional loss claimed on account of treating them as stock-in-trade and thereafter changing the method of valuation has been rightly held by the Assessing Officer as not bona fide and not for business considerations. The Assessing Officer is vested with this power under section 145(1) of the Income-tax Act, 1961, as approved by the Calcutta High Court in CIT v. UCO Bank [1993] 200 ITR 68." The learned authorised representative, before us, pointed out that the assessee started the business of dealing in shares and other investment and accordingly it converted its fully paid up quoted shares held as investment on April 1, 1995, into stock-in-trade after passing the necessary resolution and since then these shares continued to be held as stock-in-trade. The stock-in-trade was valued at cost, however, during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds page 19 of the paper book, which consists of note No. 16 relating to the notes on accounts under Schedule-14 relating to the audited accounts and on this basis it was pointed out that the assessee was dealing in the shares. The assessee has purchased and sold the shares in the earlier years also. The detailed trading history was filed before us alongwith the pledge agreement and it was pointed out that the assessee as per the pledge agreement was entitled to change the shares from time to time. The assessee has reduced its shares under pledge from Rs. 72,00,300 to Rs. 38,73,330, which has duly been accepted by the ICICI Bank. Our attention was also drawn for this towards the share pledge agreement entered into by the assessee with the bank. Thus it was contended that the addition made by the Assessing Officer be deleted as the case of the assessee is duly covered by the decision of the hon'ble Gujarat High Court in the case of CIT v. Atul Products Ltd. [2002] 255 ITR 85. The learned Departmental representative on the other hand relying on the order of the Commissioner of Income-tax (Appeals) as well as that of the Assessing Officer pointed out that the change in the method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-trade up to the assessment year 2000-01. The assessee has pledged 72,00,300 shares with ICICI as guarantee vide share pledge agreement dated September 30, 1998. Subsequently the assessee has reduced the numbers of shares which were pledged with the permission of ICICI Bank from 72,00,300 to 38,78,330 which shows that the assessee can take back the shares with the permission of ICICI Bank whenever the same are required for trading. During the financial years 1998-99 and 1999-2000, the assessee has purchased and sold the shares. The Central Board of Direct Taxes has notified two accounting standards vide notification dated January 25, 1996, on the basis of the power entrusted under section 145(2) of the Income-tax Act. The Accounting Standard No. 1 and Accounting Standard No. 2. These Accounting Standards are mandatory to be followed in view of section 145(3). Due to this change, the value of the shares has gone down by Rs. 16,88,76,463 and this fact has been stated by the assessee in note No. 8 in Schedule-14 of its audited final accounts. We noted that clause 4 on Accounting Standard No. 1 lays down as under : "4. Accounting policies adopted by an assessee should be such so as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... howing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919. 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased, which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure ….. From this rigid doctrine, one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question' (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o revaluation of the raw materials on the basis of specific instances of fall in value of the goods when such goods could not be sold even at cost price, there was nothing wrong in valuing the goods at an estimated realisable value. The Institute of Chartered Accountants in their Accounting Standard No. 2 has recognised under paragraph 24 cost or market value whichever is less to be the method for valuing the closing stock. Accounting Standard 13 although not relevant to the issue in dispute, which deals with the accounting for investment also requires that current investment should be carried in the financial statement at lower of cost and fair value. It also requires under paragraph 33 and a reduction in carrying amount and any reversion of such reduction should be charged or credited to the profit and loss account statement. Thus we are of the opinion that the loss incurred by the assessee due to change in the method of accounting valuing the closing stock of the shares and securities lower of the cost or market value is a loss accrued during the year. The hon'ble Supreme Court again also recognized the method of valuation of closing stock at cost or market value whichever is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission of the learned authorised representative that during the year there was a lot of fluctuations in the share market and therefore, the assessee did not like to involve itself in such a risky market has force. The volume of the business being nil during the year cannot be a consideration for deciding the bona fide of the appellant for change in the method of its valuation of closing stock. Our aforesaid view is duly supported by the following case laws : -CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad) ; -CIT v. Corporation Bank Ltd. [1988] 174 ITR 616 (Karn) ; -Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad) ; -Bank of Cochin Ltd. v. CIT [1974] 94 ITR 93 (Ker) ; -Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329 (Ker) ; -CIT v. Chari and Ram [1949] 17 ITR 1 (Mad) ; -CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd. [1993] 201 ITR 56 (Karn) ; -CIT v. Delta Plantation Ltd. [1993] 71 Taxman 329 (Cal) ; -Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom) ; -Triveni Engineering Works Ltd. v. CIT [1987] 167 ITR 742 (All) ; -CIT v. Dalmia Cement (Bharat) Ltd. [1995] 215 ITR 441 (Delhi) ; -CIT v. Smithkline Beecham Consumer Brands Ltd. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is not permitted to value the stock differently for tax purposes then the method as he adopted in the books, in the case before us, there is no dispute that the assessee has not valued the stock by adopting a different method what he has adopting in his accounting books. The decision of the hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. as reported in [1991] 188 ITR 44 will also not help the Revenue. We find in this decision the hon'ble Supreme Court has accepted valuation of stock-in-trade at cost or market value whichever is lower to be a matter entirely within the discretion of the assessee. It was further held that whichever method the assessee adopts should disclosed a true picture of its profit and loss accounts. If he adopts a system which does not disclose true state of affairs for determination of the tax even if it is ideally suited for other purposes of his business such as the accretion of the reserve, declaration of dividend, planning and the like, it is the duty of the Assessing Officer to adopt such method of computation as he deems appropriate for proper determination of the true income of the assessee. In the case before us, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H). In the cases before us, the assessee has duly explained the bona fide of the change in the method. The assessee held the shares since April 1, 1995, as stock-in-trade as an investment. In our view, the Assessing Officer cannot convert the stock-in-trade into an investment when the shares as stock-in-trade has been duly accepted by the Revenue in the earlier years and in the subsequent years also. It is not the case of the Revenue that the assessee has not adopted the method of the valuation so changed in the subsequent years. Under these facts and circumstances of the case, we set aside the order of the Commissioner of Income-tax (Appeals) and delete the addition of Rs. 16,88,76,463 made by the Assessing Officer in the income of the assessee.
The next issue relates to the charging, of interest under sections 234A, 234B and 234C of the Income-tax Act.
Both the parties agreed that this issue is consequential. We, accordingly direct the Assessing Officer to recompute the interest in accordance with law on the income as may be finally assessed after giving effect to this order.
In the result, the appeal is allowed.
Pronounced in the open court on September 22, 2006. X X X X Extracts X X X X X X X X Extracts X X X X
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