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TMI Blog2017 (12) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain was earned by the assessee on sale of impugned shares. Thus, addition made by the AO is illegal and factually incorrect and the same is here by directed to be deleted. Addition for deviation u/s 145A - assessee did not include amount of Excise duty and VAT while making valuation of the closing stock - Held that:- Hon’ble Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd.,[2007 (11) TMI 41 - HIGH COURT OF DELHI] it was held that if there is change in closing stock to give effect to Section 145A, there must necessarily be a corresponding adjustment in the opening stock of the year. Similar view has been expressed by the ICAI in the Guidance Note explaining the provisions of Section 145A. Further, on the basis of sense of justice and equity also same inference can be drawn that if Trading and P & L Account is to be converted from ‘Exclusive’ method to ‘Inclusive’ method, then corresponding adjustment will be required to be made in all relevant heads of Income and Expenditure including the opening stock. The adjustment on account of Payment of Excise duty and VAT out of Cash/Bank but not debited in P & L Account would also be required to be given. It is noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hearing, detailed arguments were made by both the sides and after hearing both the parties and perusing the orders passed by the lower authorities and having gone through the material placed before us, we proceed to decide the appeal ground wise hereunder. Ground Nos.1 2: 4. In these grounds, the assessee has challenged the action of lower authorities in making addition of ₹ 2.60 Crores as short term capital gain on sale of shares of M/s Dudheshwar Steel and Alloys Ltd. The brief background of the impugned addition is that during the course of assessment proceedings, it was noted by the Assessing Officer (in short referred to as AO ) that assessee has received advance of ₹ 25 Lakhs against the sale of shares of aforesaid company, however no capital gain has been shown in the income tax return on sale of these shares. Therefore, the AO computed the value of sale consideration by making his own calculations and also computed the amount of capital gain in the similar fashion and made the addition of ₹ 2.60 Crores by making following observations in the assessment order: In point No. 8 of the notes on accounts in the Tax Audit Report, it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter, the AO computed the taxable amount of capital gain in the assessment order as under:- INCOME FROM CAPITAL GAINS: Short term capital gains: Deemed sale consideration being 17% of ₹ 30 Crores 5,10,00,000 Less: Cost of acquisition as per books 2,50,00,000 2,60,00,000 6. Being aggrieved, assessee carried the matter before the CIT (A). However, no relief was given by him and findings of the AO were confirmed without making any further discussion on the issue. Still being aggrieved, assessee brought the matter before the Tribunal. 7. During the course of hearing before us, it was argued by the Ld. Counsel of the assessee that the addition made by the AO and confirmed by the CIT (A) is totally baseless. The AO has made the addition in a hypothetical manner. The amount of advance was received in contemplation of sale, but the transaction did not materialize and even sale consideration was not fixed. The AO did not completely go through the Point No.8 of Notes to Accounts and j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year these shares were sold ₹ 2500000/- received against it but as per explanation information provided by the management the sale consideration amount is under dispute case is pending in court. Pending said decision/dispute, the investments have been shown at book value after deducting ₹ 2500000/-in the financial statements. The consequential effect on the profit/ (loss) of the company has neither been ascertained nor disclosed in the financial statement of the company . 8. The perusal of the above shows that the assessee had received as advance a sum of ₹ 25 Lakhs. However disputes took place and transaction of sale did not take place. Under these circumstances, there was no basis at all to draw inference from this note that the impugned transaction of sale has been completed by the assessee. In addition to the above, our attention was drawn upon the FIR filed by Shri Ashish Tapadia who happens to be director of M/s Dudheshwar Steel and Alloys Ltd. with Kavi Nagar Police Station, Ghaziabad. The perusal of this FIR reveals complete facts. From the perusal of this FIR, it transpires that the said company namely Dudheshwar Steels and Alloys Ltd. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held as follows: (ITR p. 148) ... Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income', which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. 12. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word accrue and held that income can be said to accrue when it becomes due. It was then obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of this case, nothing has been brought before us to show that there was in substance of transfer of shares. In the case before us, there is neither de jure nor de facto transfer of impugned shares. No income has accrued in the favor of assessee. Apparently, the proposed transaction of sale fell through and did not materialize. Under these circumstances, it cannot be held at all that any capital gain was earned by the assessee on sale of impugned shares. Thus, addition made by the AO is illegal and factually incorrect and the same is here by directed to be deleted. As a result, Ground No. 1 2 are allowed. Ground No. 3 18. In this ground, the assessee is aggrieved with the action of lower authorities in not allowing benefit of carry forward of losses and depreciation aggregating to ₹ 1, 63, 84,566/-. During the course of hearing, both the parties fairly agreed that this ground may go back to the file of AO with appropriate directions. With the assistance of parties, it was noted by us that the assessee made in the return filed claim about business loss and unabsorbed depreciation for ₹ 7,80,76,253/- and ₹ 46,19,425/- respectively. However in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter before CIT (A) and submitted detailed working that NIL adjustment is required to be made. The CIT (A) was satisfied with the submissions of the assessee and therefore, he deleted the addition. Still Being aggrieved, Revenue carried the matter before the Tribunal. 23. During the course of hearing before us, detailed arguments were made by both the sides. It was submitted by Ld. DR that compliance of provisions of Section 145A is mandatory. Therefore, AO has rightly made the addition and therefore, he heavily relied upon the order of the AO. 24. Per Contra, Ld. Counsel of the assessee vehemently relied upon the order of the Ld. CIT (A) and it was submitted by him that there is no denial to the fact that provisions of Section 145A are mandatory. However, the fact is that assessee has demonstrated before both the lower authorities that no adjustment would be needed even if the accounts are converted into inclusive method. Thus, compliance of Section 145A has been in effect made by the assessee. Our attention was also drawn on the guidance note of ICAI explaining provisions of Section 145A wherein it was clarified that whenever adjustment is made in valuation of inventories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 145A. In this regard, your goodself will appreciate that in present, assessee is a limited company. The financial statements are therefore required to be prepared as per provisions of Companies Act and accordingly valuation of inventories for Balance Sheet purposes are required to be made as per AS-2 (Accounting Standard-2) issued by the ICAI. Further, as per AS-2, the valuation of inventory should be made at lower of cost and net realizable value the method of valuation should be consistently applied from year to year. Your goodself will appreciate that inclusive method (i.e. valuation of inventory as per provisions of section 145A) is not permitted by AS-2 and therefore assessee is bound to follow the Exclusive method in the financial statements and the fact is accordingly disclosed by the Tax-auditor at point no. 12(b) of form no. 3CD that assessee has deviated from the provisions of section 145A with the fact that there is no impact on net profit due to this deviation. The detailed working chart in support was submitted to the Ld. AO during the course of assessment proceedings and your goodself will appreciate that the Ld. AO has not found any ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Increase/Decrease in profit (A-B) NIL Thus, according to the calculation made by the assessee, there is no effect in the profit due to deviation from the provisions of section 145A. 27. However, the AO disregarded the working and made the addition by giving his own working. It is noted by us that the difference in working of the assessee and working made by the AO is mainly due to the reason that AO has not given the benefit of corresponding adjustment in the value of opening stock by the amount of Excise duty and VAT and also did not give the adjustment on account of Excise duty and VAT paid out of cash/ Bank but not debited to the P L Account. It is noted that Hon ble Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd., supra, it was held that if there is change in closing stock to give effect to Section 145A, there must necessarily be a corresponding adjustment in the opening stock of the year. Similar view has been expressed by the ICAI in the Guidance Note explaining the provisions of Section 145A. Further, on the basis of sense of justice and equity also same inference can be drawn that if Trading and P L A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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