Income Tax Appellate Tribunal - Ahmedabad
Acit And The Joint Commissioner Of ... vs Panchmahal Cement Co. Ltd. on 31 July, 2008
ORDER
R.P. Garg, Vice President
1. On a difference of opinion between the Judicial Member and Accountant Member, the President, Income Tax Appellate Tribunal, has referred the following question for my opinion as Third Member, which read as under:
Whether, on the facts and circumstances of the case, specially the fact that the assessee has never disputed the correctness of number of shares remaining in closing stock, date-wise lot out of which the shares in closing stock were available as well as the purchase price of respective lot, should the issue relating to the valuation of closing stock of such shares be referred back to the Assessing Officer with the directions as contained in paragraph No. 6.3.6 of the order authored by the learned Accountant Member or the valuation of closing stock arrived at by the Assessing Officer be confirmed?
2. The facts of the case are that, the assessee valued shares of Motorol (India) Ltd. at Rs. 3,45,60,315/- for which there seems to be no basis and the Assessing Officer observed that it may be, probably, average value. Stock position of these shares is shown by the assessee, as under:
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Date of Purchase No. of Shares Rate Per Share Total of Shares
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9.8.1994 50,000 Rs. 88/- Rs. 44,00,000/-
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21.5.1995 10,000 Rs. 266=25 Rs. 26,62,500/-
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28.3.1995 to 1,26,500 Rs. 274=65 Rs. 3,47,43,444/-
31.3.1995
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TOTAL:- Rs. 4,18,05,944/-
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3. As the scripts were clearly identified, the Assessing Officer held that the closing stock should be valued at cost at Rs. 4,18,05,944/-. He, accordingly, held that the assessee had undervalued the closing stock by Rs. 72,45,629/- [Rs. 4,18,05,944/- (-) Rs. 3,45,60,315/-] and added the same to the income of the assessee company.
4. On appeal, the CIT(A) considering the claim of the assessee, held that the assessee is a trader in shares; that valuation of closing stock is at average cost which is a recognized method, there is no finding by the Assessing Officer that the assessee has not followed this method regularly or that this method is misused; that the assessee's closing stock contained shares of ten companies out of which the Assessing Officer has accepted the valuation on the basis of average cost in respect of eight companies and rejected the valuation in respect of two companies i.e., Ind Tro Deco Ltd. and Motorol (India) Ltd., and that the Assessing Officer has not disturbed the valuation of shares shown by the assessee in respect of those companies in which cost comes to less than average cost; that the Assessing Officer has adopted pick and choose method for valuation of shares at cost and at average cost instead of following a uniform method and that, according to him, the Assessing Officer cannot change the method regularly followed by the assessee and if it is changed due to some reasons, he has to follow another method in respect of all the items of closing stock, which is not done by the Assessing Officer. He, therefore, deleted the addition of closing stock made.
5. When the matter came up before the Tribunal, both the Members agreed with regard to addition for the difference in the value of shares of Ind Tro Deco Ltd., which was also valued at actual cost only by the Assessing Officer. However, there was a difference of opinion with regard to valuation of shares of Motorol (India) Ltd. The Learned Judicial Member upheld the valuation made by the Assessing Officer, whereas, the Learned Accountant Member was of the opinion that the matter should be set aside for further verification.
6. The Learned Accountant Member held that though no sale dates have been referred to, it would be reasonable to presume the sales as having taken place, as otherwise if the entire purchase stand held as at the close of the year, following any cost method would result in the same value of the shares held; the entire purchase cost forming part thereof. According to him, full details including for those sole, being not stated by the Assessing Officer in his order, or on record, it is-not possible to say whether the Assessing Officer's valuation, which appears to be on FIFO basis, or that by the assessee, is correct. He further clarified that it is not the adoption of a particular method by the assessee, but that of its application by it, that has been held to be incorrect in the facts and circumstances of the case. He further observed that besides being necessarily required to be only from among the shares (capital assets) that could possibly be sold out as on the date of sale namely the interchangeable principle is subject to identification principle, even where not so mandated, the valuation models specifically proscribe following of cost formula whereby and enterprise could obtain predetermined effect on the net profit/loss by selecting a particular method of ascertaining items that remain in inventory. He, therefore, observed that the details of the cost of acquisition of the shares in Motorol (India) Ltd., sold out were called for to examine whether the same is in respect of the specific shares sold i.e., following the identification principle, or worked out by applying a cost formula, treating the shares under question as interchangeable, which they indeed are i.e., per .the interchangeable principle; the same being not clear from the assessment order. In spite o1 giving two opportunities neither the Department nor the assessee was in a position to furnish those details. He further held that the matter woulc require to be remitted back to the file of Assessing Officer for confirming the cost of acquisition of the shares of Motorol (India) Ltd. sold during the year, either on the specific shares sold basis or by applying the average cost method as delineated in the order for which the data as submitted by the assessee or on record may be called for from the assessee or otherwise verified by the Assessing Officer.
7. The Learned Judicial Member observed that neither before the Assessing Officer nor before the CIT(A), nor even before the Tribunal, the assessee disputed the fact relating to number of shares of Motorol (India) Ltd. remaining in the closing stock as stated in the assessment order. The assessee never objected the number of shares in the closing stock. The learned Counsel was specifically asked for the explanation whether the details of shares recorded in the assessment order for valuation was correct or not and he was further required to furnish date-wise details of sale and purchase of shares during the previous year relevant to assessment year 1996-97. The Learned Counsel for the assessee, subsequently and admittedly, submitted that neither such details were available nor he was disputing the details the correctness of the closing stock of shares recorded in the assessment order. In these circumstances, he held that the cost of purchase as recorded in the assessment order was correct and that if that was the case, then the value of shares remaining in the closing stock was rightly calculated at Rs. 4,18,05,944/- by the Assessing Officer and the Revenue authorities were justified in making the addition for the difference in the valuation.
3. Parties are heard and their rival submissions are considered. On reading of the two opinions of the learned members, I find that there is no difference between them on principal of valuation of shares. Both agree that valuation of the stock of shares had to be on cost and that when the stock of shares is identifiable and the cost of purchase thereof and the date of purchase is also known, the shares are to be valued at the actual cost and not the average cost. As otherwise also, as observed by the ld. Accountant Member where the entire purchase is held as at the close of the year, it would give the same value. That cost is as mentioned in the Table given in paragraph 2 above is Rs. 4,18,05,944. It is not disputed by the assessee as stated by the ld. Judicial Member and no details otherwise are furnished by the assessee in spite of opportunities given in the course of hearing before the Division Bench and even during the hearing before the Third Member. In these circumstances, to assume a situation, in this case, the sale of shares of Motorola and then set aside the matter on assumption of such sales as having taken place to verify that assumed situation would not be warranted. When the assessee is not furnishing the details of any sales alleged to have taken place and there are no details available on record either in assessment order or elsewhere, where would the question of verification arise particularly when the assessee does not, despite opportunities, dispute the cost or the date of acquisition of the stock of shares as appearing as at the end of the year. It is for the parties to bring the material on record that some sales have taken place. In absence thereof Assessing Officer was to be held justified to proceed on the basis of the material on record and value the stock as per the actual cost of acquisition. The cost at the average price otherwise than actual cost is to be proved by the assessee. No such details as stated above are there, nor furnished by the assessee despite opportunities given. In my opinion, therefore, the CIT(A) was not justified in directing to adopt the valuation by the assessee for which there is no basis given at any stage on the assumed average price when the shares and their cost of acquisition is identifiable and not even disputed by the assessee. The order of the CIT(A) is accordingly to be vacated and. that of the AO, as opined by the ld. Judicial Member, is to be restored.
9. In the result, the appeal of the revenue on this issue is to be partly allowed.
10. The matter shall now be placed before the Division Bench for passing the appropriate order.
Sanjay Arora, Accountant Member
1. The present set of appeals by the Revenue arise from the two separate Orders by the Commissioner of Income-tax (Appeals)-IV. Baroda ["CIT(A)" for short] dated 03-05-1999 and 01-02-2001, in respect of the same assessee for two consecutive years, i.e., Assessment Years (AYs) 1995-96 and 1996-97. respectively, with the assessee preferring Cross Objection (CO) for AY 1995-96. As these concern the same issues, these were heard together and are being disposed of vide a common Order.
2. The grounds raised by the parties are as under, which we shall iake up in seriatim:
By the Revenue (for AY 1995-96):
1. The ld. CIT(A) has erred in law and on facts in deleting the addition made on account of Trade Deposits of Rs. 33.90.500.
2. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 85,67,196/- on account of interest.
3. The ld. CIT(A) has erred in lew and on facts in deleting the disallowance of vehicle and telephone expenses amounting to Rs. 50,000/-.
4. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 87,48,350/- on account of difference in value of shares.
By the Assessee in Cross Objection for AY 1995-96:
1. The CIT(A) erred in upholding the disallowance of interest payment to the extent of Rs. 8,62.500/-.
2. The CIT(A) erred in disallowing vehicle and telephone expenses of Rs. 50,000/- on account of personal user though the assessee is a limited company.
By the Revenue for AY 1996-97:
1. On the facts and in the circumstances of the case and in Law, the learned CIT(A) erred in deleting the addition made on account of Trade Deposit of Rs. 34,58,378/-.
A.Y. 1995-96 3.1 The facts in relation to the first ground are that the Assessing Officer (AO) observed the assessee to have raised a sum of Rs. 33.90 lacs during the year by way of Trade Deposits, the aggregate amount of which figure outstood at Rs. 61.58 lacs as at the end of the relevant previous year, i.e., Financial Year (FY) 1994-95. On being questioned in its respect, it was submitted by the assessee that these were, in fact, not Trade Deposits, but only amounts received against the sales made. However, as no contra accounts or confirmation from the parties stood submitted by it in support, or were the details of the sales against which the same were claimed to have been received, the AO, treating the same as unconfirmed cash credits, added the same to the assessee's taxable income Under Section 68 of the Income-tax Act. 1961 ["the Act" hereinafter].
3.2 In appeal, the assessee reiterated its submissions as made earlier, further explaining that it had adopted this unusual practice, i.e., of not crediting the amounts received against the sales made to the accounts of the relevant customer-debtors, as its funding institutions wanted it to disclose a higher figure of Trade Deposits. Copies of the accounts of all the Trade Deposits, as well as of the concerned debtors, stood submitted to substantiate its claim. On examining the same, being essentially the ledger accounts of the Trade Depositors and of the relevant debtors, the l'd CIT(A) found no reason not to accept the assessee's claim; the AO having not disputed the transactions of the sales, and directed deletion of the entire addition as made. Aggrieved, the Revenue is in appeal.
3.3. Before us, it was submitted by the learned DR that the AO has invoked the provisions of Section 68 of the Act in the absence of the assessee furnishing adequate material before him to come to the inference of the assessee's claim as being validly pressed/supported, as stood claimedly done before the l'd CIT(A), who accepted the same without requiring its examination by the AO in the first place. Further, there was no reason for the assessee not to have furnished the requisite details before the AO, so that its claim could not be accepted at face value, having been decided without affording proper opportunity to the Revenue.
3.4 The learned AR submitted that there was no infirmity in the order of the l'd CIT(A), which stood passed on satisfaction as to the validity of the assessee's claim(s). And further, that the matter could be set-aside, if so considered, for the purpose of verification at the AO's end.
3.5 We have heard the parties, and perused the material on record. Admittedly, the assessee did not place all the relevant material before the AO, and the l'd CIT(A) proceeded to accept that submitted before him without recording either the reason(s) for doing so; the assessee having failed to do in the first place, or alter allowing a reasonable opportunity to the AO to examine the same, so that his order stands vitiated by non-observance of Rule 46A of the Income-tax Rules, 1962. Under the circumstances, we only consider it fit, in the interest of justice, to restore this matter back to the file of the AO to grant a reasonable opportunity to the assessee to establish its case before him and decide the same in accordance with law, per a speaking order. We decide accordingly.
4.1 Vide its second ground, the Revenue contests the deletion of the disallowance in the sum of Rs. 85,67,196/-, out of total interest disallowance as effected by the AO, i.e., at Rs. 94,29,696/-; the assessee being in appeal, vide its Cross Objection (Ground # 1), for the balance Rs. 8.62.500/- sustained by him. The facts of the case in brief arc that the assessee claimed a total interest expenditure at Rs. 180.57 lacs (after netting interest receipts amounting to Rs. 123.03 lacs) for the current year. Its financial Statements revealed huge advances amounting to Rs. 1507.04 lacs to various parties. Its including to the Associate Group Concerns; the assessee-company being a part of Rinki Group of Companies. On scrutiny, it was explained by the assessee that the advances stood for acquiring 'land' and 'shares', so that there was no question of any disallowance on that account. The advance to M/s Mascon Technical Services Ltd., was toward technical services, with the bill raised by it being settled in the subsequent year, so that being for business purpose, again, no interest disallowance is called for. Similarly, the advance to its sister concerns, M/s Manor Investment Co. Ltd. (MICPL) and Sai (sic) Developers (P) Ltd. (STDPL), were current account balances, which remained in debit only for a part of the year, and further, also represented, in part, the amounts receivable against the sale of shares, so that no inference of a non-business purpose, could be drawn. The same stood, however, unaccepted by the AO, who made a disallowance in respect of the assessee's claim for interest at Rs. 94.30 lacs., by calculating the same @ 18% p.a. for the period over which the relevant amounts outstood during the previous year, mentioning the details in the body of his order.
4.2 In appeal, on the basis of the assessee's submissions in respect of each of the 13 parties on advances to whom the interest disallowance stood worked out by the AO. the l'd CIT(A) found that except for two parties, i.e.. BCC Housing finance Company (Rs. 2,02,500) and MICPL (Rs. 6,60,000), to whom advance for Rs. 30 lacs and Rs. 146 lacs, respectively, stood made, all the other advances were for the purpose of the assessee's business, as established by the assessee on the basis of the material brought on record. He, therefore, allowed the same, save Rs. 8,62,500/-. i.e., in respect of these two parties, for which the disallowance stood confirmed. Aggrieved, both the parties arc in appeal [Assessee's CO Ground # 1].
4.3 Before us, the learned DR. pleaded for the set-aside of the impugned order, having been passed in violation of the express provision of Rule 46A of the Income-tax Rules, 1962, as would be evident from the fact that no material worth the name stood supplied by the assessee before the AO, while the ld CIT(A) adjudicated on the basis of the "sufficient material" brought on record by the assessee. The ld AR. on the other hand, supported the impugned order, stating that there has been no grievance as to the violation of Rule 46A in the Revenue's grounds of appeal.
4.4 We have heard the parties, and perused the material on record. Evidently, there has been a clear violation of Rule 46A by the l'd CJT(A) in deciding this ground of the asscssee's appeal before him. The Revenue's relevant ground, we find to be couched in words with wide amplitude so as to enable it to argue its case on the basis of violation of Rule 46A. Even otherwise, it is a legal ground, having a bearing on the matter, so that the Revenue's appeal can not be decided without admitting the same, i.e., by its rejection at the threshold. Further, we also observe that the advances to some of the parties arc either against the purchase of shares, or outstand against the amounts receivable on the sale of shares, so that, in either case, it amounts to financing of the assessee's investments in shares, or only toward its share transactions. The assessee has presumably returned the "profit-arising from its share transactions as its business income, i.e., assessable under Chapter IV-D, while the AO has assessed the same under the head "Capital Gains" (Chapter IV-E) on the transfer of short-term capital assets, after giving a definite finding that subscription to/investment in, and subsequent sale of, shares did not constitute the asscssee's business, which was one of manufacture and sale of cement. And which decision, we find, stands accepted by the assessee. Further, the said shares stand shown as investments in its balance-sheet, and which, as asserted by the learned DR. are primarily Group Companies, subscribed to also under the promoter's quota, so that they entailed a lock-in period of 3 to 5 years. In view of the same, it is difficult to see as to how the asscssee's interest cost, which signifies the holding cost, being relatablc to the financing of the underlying activity, and thus, neither a cost toward acquisition or improvement, could be allowed Under Section 36(1)(iii), as done by the l'd CIT(A), so that his order is even otherwise inconsistent with the facts on record. Under the circumstances, we only consider it fit, in the interest of justice, to remit this matter back to the file of the AC for a proper adjudication in consideration of any material that the assessee may wish to rely upon in the establishment of its case before him, in accordance with law, per a speak frig order. We decide accordingly.
5.1 Vide its third ground, the Revenue contests the deletion of the disallowance in the sum of Rs. 50,000/- out of the total disallowance of Rs. 1 lac effected by the AO out of the assessee's claim for vehicle and telephone expenses on account of personal user of the relevant assets/facilities by the Directors. The AO observed, w.r.t. the lax audit report, that the expenditure in respect of telephones installed at the Director's rcsidcnce(s), as well as toward the personal use of the company's vehicles by them, stand stated by the fax Auditor as un-aseertainable. Further, as the details of the managerial remuneration were not available on record, it could not be ascertained whether the personal user of the said facilities stood provided by the assessce-company in pursuance to an understanding with the Directors, as also if the perquisite element in its respect stood offered to tax by them in their personal returns. He. therefore, made a disallowance at an estimated amount of Rs. 1 lac out of the total expenditure claimed in respect of the telephones (Rs. 2.3 lacs) and vehicles (Rs. 7.12 lacs), being not in satisfaction of the mandate of Section 37(1) of the Act. In appeal, the same stood confirmed on the same basis even as the l'd CIT(A) restricted the disallowance, finding the same to be on a higher side, to Rs. 50,000/-. Aggrieved, both the parties are in appeal [Assessee's ground # 2].
5.2 Before us, like contentions were raised by either party, with the learned DR placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case Sayaji Iron & Engg. Co. Ltd. 253 ITR 749 (Guj). to which the learned DR replied that the ratio of the said decision would have no application in the facts of the present case; the asscssee-company failing to adduce any evidence before the Revenue authorities of having provided the said facilities to its Directors in pursuance to an understanding or contractual arrangement with them, even as expressed by the Tax Auditor in his report, or of having declared the perquisite element in its respect by the Directors in their personal returns.
5.3 We have heard the parties, and perused the material on record.
5.4 We find that the Revenue's case, as pleaded by the learned DR, to be on course. This is as, if the assessee-company had allowed the user of its assets/facilities to its Directors for their private purposes in pursuance to an arrangement in this respect, the lax Auditor would not have qualified his report in the matter, making a disclaimer, and which would only be in the absence of the relevant evidence/explanations. Further the assessee-company has also not furnished any evidence of any perquisite element having been offered by the Directors to tax in their personal hands, in support of its claim, and which only furthers the Revenue's case. However, as we have decided to restore this case back to the file of the AO in respect of ground # 1, we only consider it appropriate, in the interest of justice, to restore this issue back to the file of the AO to grant an apportunity to the assessee to present its case in light of the argument(s) raised before us. I The AO shall decide the same in accordance with law, per a speaking order. We decide accordingly.
6.1 The fourth and the last ground of the Revenue's appeal relates to the deletion of the addition in the sum of Rs. 87,48,350/- effected by the AO in the computation of the assessee's income under the head "Capital Gains". The assessee disclosed a surplus of Rs. 557.13 lacs on the sale of shares, in which heavy investments stood made by it. And which, being not the assessee's business, stood assessed under the said head pf income by the AO, as against its being returned as its business income bt the assessee, reporting the said surplus as "other income" in its final accounts. Further, the AO observed a difference in the valuation of the closing stock of two shares, being in Indo Fra Decco Ltd. (128700 shares, at Rs. 15,02,721/-) and Motorol (India) Ltd. (186500 shares, at Rs. 72,45,629/-), so that there had been an under-valuation to that extent, i.e., Rs. 87,48,350/- (1502721 + 7245629). In appeal, the assessee pleaded that it has valued its closing stock of shares at 'average cost' and which represents a recognized method of valuation as per the guidelines in its respect issued by The Institute of Chartered Accountants of India (ICAI). There is no finding by the AO that the assessee has not been following this method regularly or that it 'misused' the same. Rather, the assessee has valued the 'stock' of shares in all the ten (10) companies which stood held by it as at the year-end on the average cost basis, of which the AO has disturbed/rejected the valuation of only two shares afore-referred, so that the average cost method stood accepted by him for the balance eight (8) shares. It was not open for the AO to follow a 'pick and choose" policy, and the assessee's method being (one of) a recognized and accepted method(s) for valuation of closing stock, the same ought to have been accepted. The assessee's contentions found favour with the l'd CIT(A), finding it reasonable, and deleted the entire addition as made Aggrieved, the Revenue is in appeal.
6.2 Before us, it was contended by the learned DR that the average price method would be inappropriate under the circumstances; the shares in question being clearly identifiable, i.e., w.r.t. their purchase time and cost. The learned AR, on the other hand, relied upon the order of the l'd CIT(A), submitting that the AO could not reprobate and approbate, accepting the average cost valuation for some items of the closing stock and not for others.
6.3 We have heard the parties, and perused the material on record.
6.3.1 Firstly, we observe that the valuation of the assessee's stock of shares as at the year-end has been made for the purpose of computation of income under the head (of Income) "Capital Gains". The assessee having not challenged the said finding by the AC), the only question, therefore, that requires consideration is the correct valuation of the shares (i.e., capital assets) which stand transferred by the assessee, and which stand valued by it at average cost, i.e., implicitly, by valuing the outstanding shares, disclosed by it under the head "Investments" in its balance-sheet, following the average cost method, i.e., ostensibly, as we find that there is no definite finding by the AO with regard to it, or of any reference in his order to the assessee's declaration in its respect in the Notes to the Accounts, and which is mandatory for it to do in its audited accounts in terms of Accounting Standard (AS)-1, i.e., 'Disclosure of Accounting Policies' issued by the ICAI.
6.3.2 Further on, even though this should not, ordinarily, be of any consequence, as the two. i.e., valuing the goods sold or those in stock, following any cost method, should result in the same amount of profit/loss; the purport of any valuation being the determination of true and fair profit/loss, in the context of the present case, it would not be so. And for the simple reason that the relevant goods, i.e., the shares, being a capital asset, it is only the cost of the assets sold, determined following any (historical cost) method (as FIFO, LIFO, Average cost, etc.); the same being interchangeable (for otherwise, it is only the actual cost of the particular asset(s) sold, as urged by the l'd. DR. that could be reckoned for the purpose), that could be taken into account. So that the cost of the asset(s) purchased subsequent to the sale (under recknoning), would have no impact in the determination of the cost of those sold (earlier). This is, as would he apparent, as it is only the cost of acquisition of the relevant capital asset(s) which (along with the cost of improvement, if any) that can be reduced from the amount accruing on transfer, in the computation of income chargeable to tax Under Section 45. As such, the cost of asset(s) acquired subsequent to the transfer, under the circumstances, would have no bearing in the determination of cost, and thus, income, arising from those transferred, and which the assessee's avowed method clearly envisages and bears. It is this essential difference that attends, and/or is involved in. the valuation of stock-in-trade in contradistinction to capital asset(s) (for determination of income chargeable to tax Under Section 45). And, as such, also in the present case, and not, as made out, i.e., of the AO disturbing/rejecting, and selectively at that, the valuation of shares (investments) by the assessee that outstand with it at the year-end, and consequently of those sold, following an accepted and recognized method of valuation, i.e., at average cost. As an example, if in the present case, 1,60,000 shares in Indo Tra Decco Ltd. stood purchased not on 11-08-1994 at a single late of Rs. 25/- each, but on different dates prior to the sale date of 15-11-1994, at varying rates, the average cost method would require: shares being a fungible asset, the averaging of the said cost (over 1,60,000 shares), to determine the profit on the sale of 50,000 shares in the said company on 15-11-1994.
6.3.3 Here it may also be pertinent to state that AS-2. "Valuation of Inventories", issued by the ICAI. in its different versions (being revised from time to lime), reference to which stands made by the assessee in its submissions before the l'd CIT(A), when it refers to following a recognized and accepted cost method of valuation, would be inapplicable to the present case, being specifically excluded in respect of the shares, debentures or other financial instruments, where held as stock-in-trade. Further, where held as an investment, either on a long-term or short-term basis, the reporting and valuation aspects thereof are covered by the AS-13, i.e., 'Accounting for Investments'. A perusal of the same reveals that it, following the fundamental accounting principles of conservatism, requires the investments to be stated at the lower of acquisition cost and fair market value (FMV). In the present case, the assessee has valued its investments at cost, being lower than their FMV, which is even otherwise apparent from the fact that it has realized profits on their sale, as also the fact that the rate(s) of the subsequent purchases/acquisition, and which are proximate in time to the valuation date (31-3-1995), is higher [than the earlier purchase rate(s)]. However, this marks the second point of departure between the two valuation models, i.e., the "Accounts" and the "Tax" one. arising primarily on account of their different purposes. The 'Accounts' one, concerned with the statement of the true state-of-affairs, thus, postulates the write down of investments, by providing for the diminution in the value thereof, other than temporary, to their FMV. The 'Tax' one, on the other hand, restricts itself only to the gain/loss arising on account of transfer, so that the FMV of the un-transferred capital assets, there being no 'transfer' upon which only the gain or loss can accrue or arise, is rendered of no moment.
6.3.4 The l'd CIT(A) has observed of there being no finding by the AO of the assessee as having not followed this method (average cost) regularly or of having misused the same. We find this as not germane in view of the fact that the AO has observed that the assessee has carried out the share transactions for the first time during the current year. Further, there is no question of misusing of any method; the sole purpose of valuation of the closing stock being to ascertain the correct profits on the sales (transfers) made during the year (period) under consideration (by adopting a reasonable method consistently). As also pointed out earlier, the 'cost of acquisition', in terms of Section 48, can only be w.r.t. the acquisition cost of the shares sold, so that the same would only be un-influenced by the cost of the shares purchased later, and thus, admittedly not sold (transferred), and forming part of the shareholding as at the year-end. Of course, these could form part of a subsequent sale transaction. However, in such a case, again, the average cost method, if applied, will be only w.r.t. to the average purchase cost of all the shares, being fungible, that are available for, and thus possibly could be, sold out by that date. As such, in the facts of..the present case, even assuming non-identification (and which only would necessarily entail adoption of any particular method), following any method would result in the same valuation in respect of shares in Indo Tra Decco Ltd. at we shall presently (sic).
6.3.5 Coming to the facts of the present case, as afore-referred, the cost of acquisition, is of the capital assets (shares) transferred during the year. In respect of the first company, it is clear that 50,000 shares (in Indo Tra Decco Ltd.) sold on 15-11-1994 are only out of the shares (1,60,000) purchased on 11-08-1994, so that the stock of 128700 shares as on 31-3-1995 could only be out of the balance 1.10.000 shares remaining out of the purchase of 11-08-1994, and 18700 shares purchased on 31-3-1995. As such, we find no infirmity in their valuation at Rs. 85,81,221/- as made by the AO (as against at Rs. 70,78,500/- by the assessee), yielding a difference of Rs. 15,02,721/-, and addition in respect of which is, therefore, confirmed. We decide accordingly.
6.3.6 As regards the shares in Motorol (India) Ltd., though no sale dates have been referred to, it would be reasonable to presume the sales as having taken place, as otherwise, i.e., if the entire purchases stand held as at the close of the year, following any cost method would result in the same value of the shares held; the entire (aggregate) purchase (acquisition) cost forming part thereof. The full details thereof, including for those sold, being not stated by the AO in his order, or on record, we are not in a position to state if the AO's valuation, which appears to be on FIFO basis, or that by the assessee, is correct. We would wish again to clarify here that it is not the adoption of a particular method (the average cost in the present case) by the assessee, but that of its application by it, that has been held by us as incorrect in the facts and circumstances of the case. Besides being necessarily required to be only from among the shares (capital assets) that could possibly be sold out as on the date of sale, i.e., the interchangeable principle is subject to identification principle, even where not so mandated, the valuation models specifically proscribe following of cost formulas whereby an Enterprise could obtain predetermined effect on the net profit/loss by selecting a particular method of ascertaining items that remain in Inventory [ Ref. AS-2], The details of the cost of acquisition of the shares in Motorol (India) Ltd. sold out were called for by the Bench, to examine whether the same is in respect of the specific shares sold (identifying them on the basis of distinctive numbers or share certificate numbers), i.e., following the identification principle, or worked out by applying a cost formula, treating the shares under question as interchangeable, which they indeed are, i.e., per the interchangeable principle: the same being not clear from the assessment order. The l'd DR, despite grant of two opportunities, could not produce the assessment record, and neither was the same forthcoming from the assessee who was also asked for it; the relevant details having only been furnished by it. In view of the foregoing, therefore, the matter would be required to be remitted back to the AO's file for confirming the cost of acquisition of the shares in Motorol (India) ltd. sold during the year, either on the specific shares sold basis (if so considered in the first instance), or by applying the average cost method as delineated in this order (Ref. Para 6.3.2 & 6.3.4]. and for which, the data as submitted by the assessee, or on record, if found insufficient, may be called for from the assessee, or otherwise verified by the AO. The Revenue having not disturbed the assessee's valuation for the balance scrips sold during the year, again, ostensibly, following the average cost method, and which is not a subject mailer of dispute, we arc disinclined to pass any direction in their respect. We decide accordingly.
ITA No. 1306/Ahd/200T - AY 1996-97 - By the Revenue:7.1 At the time of hearing of this appeal, it was the common contention of both the parties that the decision of the Tribunal in its appeal ITA No. 1781/Ahd/99 for AY 1995-96 (which stood heard prior to this appeal), on this ground, being in relation to the same issue, be made applicable to this ground as well, there being no change in the facts and circumstances of the case.
7.2. In view of the foregoing, we, finding the facts and circumstances of the case to be identical as obtaining in the assessee's case for the preceding year, i.e., AY-1995-96, decide this issue likewise, i.e., as with regard to Ground # 1 in the Revenue's appeal [ITA No. 1781/Ahd/1999]. Refer (para 3.5) of this order.
Result 8.1 In the result, the assessee's cross objection [170/Ahd/2002] and Revenue's appeal [ITA 1306/Ahd/2001] are allowed for statistical purposes.
Order pronounced in the open court today on 15-02-2007.
8.2 In the result, the Revenue's appeal [ITA 1781/Ahd/1999] is partly allowed.
Order pronounced in the open court today on -02-2007 ITA No. 1781/Ahd/1999 for Asst. Year 1995-96 I.S. Verma, Judicial Member
1. Having gone through the proposed order drafted by ld. Accountant Member in Revenue's appeal, i.e. ITA No. 1781/Ahd/1999 and so far as issue relating to valuation of Closing Stock of shares of M/s. Motorol (India) Ltd. is concerned, I have not been able to persuade myself to agree with various observation/comments/findings as are contained in paragraph No. 6.3.1 to 6.3.4 and 6.3.6 as a result of which the ld. Accountant Member has proposed to refer the issue relating to valuation of Closing Stock of shares of M/s. Motorol (India) Ltd. back to the file of Assessing Officer with the directions contained therein and, therefore, proceed to write my separate order.
2. The brief facts relating to the issue involved in hand and as have been revealed from the records are that the assessee had furnished its return of income for Asst. Year 1995-96 declaring NIL income on 30/1/1995. Since the assessee had carried on sale purchase transactions in shares during the previous year relevant to Assessment Year 1995-96, the Assessing Officer proceeded to verify some of them and on scrutiny of the accounts including Profit & Loss account, balance-sheet, etc. came to know that the assessee was having closing stock of shares of about 10 (ten) companies and had claimed to have valued the closing stock of all those companies on average cost method basis, but when the Assessing Officer examined the individual transactions he came to know that so far as closing stock of shares of M/s. Indo Tra Decco Ltd. and M/s. Motorol (India) Ltd. was concerned, the closing balances of shares as per purchase (lot-wise) was available.
2.1 It was, in view of these facts that, he rejected the assessee's claim of valuation of stock of shares two companies [M/s. Indo Tra Decco Ltd and M/s. Motorol (India) Ltd.] on average cost method and proceeded to value the closing stock on the basis of actual lot-wise/purchase price-wise which resulted in an addition of Rs. 15,02,721/- on account of suppressed of stock of shares of M/s. Indo Tra Decco Ltd. and another addition of Rs. 72,45,629/- on account of suppressed valuation of closing stock of shares of M/s. Motorol (India) Ltd. The relevant part of the order of the Assessing Officer as contained in paragraph No. 12, reads as under:
12. On scrutiny of Profit and Loss Account and Balance sheet of the assessee company it is seen that assessee company has carried out share transaction activities first time in the year under consideration and further it is seen that maximum share trading have been taken place with Rinki Group companies like Motorol India Ltd. Rinki Hydro Cartons Ltd. and Rinki Petro Chemicals and Industries Ltd. On the basis of details field by the assessee, the following facts are revealed:
(i) The shares of M/s. Indo Tra Decco-Ltd. were purchased and sold out by the assessee during the year and the stock position of the shares in respect of above company is shown by the company as under:
(a) Purchases of Shares on 11.8.94 : 1,60,000 shares @ Rs. 25
(b) Sale of Shares on 15.11.94 : 50,000 shares @ Rs. 40
(c) Purchases of shares on 31.3.95 : 18,7000 shares @ Rs. 311.83
In view of the above the stock value comes to :
Closing stock shares 110,000 @ 25% = 27,50,000
Shares 18,700 @ 311.83 = 58,31,221
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Total shares 1,28,700
Actual stock value comes to Rs. = 85,81,221
Whereas the assessee company has valued the stock of above shares for Rs. 70,78,500/- (probably average value). However, the scripts of above shares clearly identifying that the closing value of shares should be Rs. 85,81,221/- instead of Rs. 70,78,500/-. Thus the assessee has undervalued the closing stock of the shares by Rs. 15,02,721/- (Actual closing value of Rs. 85,81,221 - Rs.70,78,500/- = Rs. 15,02,721). The same is added in the total income of the assessee treating that assessee has undervalued the stock of above shares with sole view to reduce the profit of the company.
(ii) On further scrutiny of details of sales transactions it is seen that the shares of M/s. Motorol India Ltd. were purchased and sold out during the year and the stock position of the shares in respect of above company is shown by the assessee company as under:
Purchases on 9.8.94 - 50,000 shares @ Rs. 88 per share 44,00,000 Purchases on 25.1.95 - 10,000 shares @ 266.25: 26,62,500 Purchases on 28.3.95 to 31.3.95 - 126,500 shares @ 274.65: 347,43,444
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186,500
Actual stock 4,18,05,944
Whereas the assessee company has valued the stock of above shares for Rs. 3,45,60,315/- (probably average value). However, the scripts of above shares clearly, identifying that, the closing value of shares should be Rs. 4,18,05,944/- instead of Rs. 3,45,60,315/-. Thus the assessee has undervalued the closing stock of the shares by Rs. 72,45,629/- (Actual purchasing value of Rs. 418,05,944 - 3,45,60,315 = Rs. 72,45,629). The same is added in the total income of the assessee treating that assessee has undervalued the stock of above shares with sole view to reduce the profit of the company.
3. On appeal by the assessee, the CIT(Appeals) deleted the addition as per findings contained in paragraph No. 7.3 of his order which reads as under:
7.3. The contentions of the appellant, Assessing Officer and the facts on record are considered carefully. The appellant is trading in shares which is not disputed by the Assessing Officer. The valuation of closing stock at 'Average cost' is a recognized method as per guidelines issued by the Institute of Chartered Accountants. There is no finding by the Assessing Officer that assessee has not been following this method regularly or this method is misused. The appellant closing stock contains shares of 10 companies out of which the Assessing Officer has accepted valuation on the basis of 'average cost' in respect of 8 companies and rejected valuation on this basis in respect of 2 companies i.e. Indo Tro Deco Ltd., and Motorol (India) Limited. The Assessing Officer has not disturbed the valuation of the shares shown by the appellant in respect of those companies in which cost comes to less than average cost. Thus the Assessing Officer has adopted pick and choose method for valuation of shares at cost and at 'average cost' instead of following a uniform method. In my view the Assessing Officer cannot change the method regularly followed by the assessee and if it is changed due to some reasons, he has to follow another method in respect of all the items of closing stock, which is not done by the Assessing Officer. I therefore hold that the Assessing Officer is not justified in .making addition of Rs. 87,48,350/- on account of undervaluation of shares which is deleted.
4. Parties were heard.
5. So far as submissions made by both the parties and as have been recorded by the ld. Accountant Member, there is no dispute, but I would like to high-light one aspect of this case, which in my opinion has vital bearing on the outcome of the decision on this point and that fact is that this case was first heard by us on 05/10/1996 when the assessee had not challenged or objected to the correctness of lot-wise/balance stock of shares of M/s. Indo Tra Decco Ltd. as well as of M/s. Motorol (India) Ltd.; meaning thereby that the assessee had not directly or indirectly or in arguments had challenged that the number of balance shares as well as date of purchase rates mentioned by the Assessing Officer in paragraph No. 12 at all.
5.1. In other words, the assessee did not challenge the facts stated in the Assessment order, - to the effect that in the closing stock of shares of M/s. Motorol (India) Ltd., 5000 shares were out of lot purchased on 09/08/94 and @ 25/- per share, 10000 shares were out of lot purchased on 25/01/1995 and @ 266.25 per share and 126500 shares were out of lot purchased on 28/03/95 to 31/03/95 and @ 274.65 per share.
5.2. However, when ld. Accountant Member proceeded to draft the decision he expressed an apprehension that the Assessing Officer having not given the details of sales of shares of M/s. Motorol (India) Ltd., it is not clear as to out of which lot of shares of M/s. Motorol (India) Ltd. the balance stock was available, which otherwise means that the ld. Accountant Member suo moto raised a doubt with respect to correctness of number of balance shares left in the closing stock, purchase rate as well as lot and it was in view of this apprehension that the appeal was re-fixed for specific purpose to get clarification from the assessee.
5.3. The appeal was finally heard on 19th February-2007 when ld. Counsel for the assessee was specifically asked by the Bench to furnish the date-wise details of sales of shares of M/s. Motorol (India) Ltd., so that the correctness of figures/other details, such as, date of purchase and rate of purchase mentioned in the Assessment order could be verified - though, of course, the assessee had not objected to the correctness of the same either before the Assessing Officer or before the CIT(Appeals) or before us at the time of original hearing on 05/10/2006.
5.4. Answering the aforesaid query, the Id Counsel for the Assessee simply stated that the required details were not available and did not dispute, at this stage also, the correctness of the closing stock of shares of these two companies [M/s. Motorol (India Ltd. & M/s. Indo Tra Deccdo Ltd.], date of purchase, the lot out of which balance was shown and the purchase rate recorded in the assessment order.
6. In view of above facts and circumstances of the case, first of all, I am of the opinion that so far as number of balance shares, purchase rate and lot out of which the relevant shares remained in the closing stock are concerned, the same cannot be disputed by the Tribunal of its own at this stage and, therefore, there is no question of casting any onus on to the Assessing Officer - to prove the correctness of the same.
7. So far as issue as to whether alleged average method adopted by the assessee should be upheld or the method adopted by the Assessing Officer upheld is concerned, there is no dispute among us because both of us are in agreement that so far as shares of these two companies (supra) are concerned, the method adopted by the Assessing Officer, i.e. adopting the lot-wise/cost-wise is to be upheld.
8. So far as valuation of closing stock of M/s. Indo Tra Decco Ltd. is concerned, again, there is no dispute among us because the ld. Accountant Member has upheld the figures, rate, lot and method of valuation adopted by the Assessing Officer and has, consequently, confirmed the addition.
8.1. The dispute, therefore, remains only with respect to closing stock of shares of M/s. Motorol (India) Ltd.
9. Having considered the totality of the facts and circumstances of the case and law with respect to setting aside back to the file of CIT (Appeals) or Assessing Officer, as the case may be, first of all, I am of the opinion that simple question to be decided now remains is with respect to the valuation of closing stock of shares of M/s. Motorol (India) Ltd.
10. So far as aforesaid issue i.e. valuation of closing stock of shares of M/s. Motorol (India) Ltd., is concerned, the assessee has simply disputed the action of the Assessing Officer as well as of the CIT(Appeals) on the basis of sole ground that they were not justified in rejecting the assessee's system of valuation based on average cost method and specially when Assessing Officer has accepted such method with respect to closing stock of shares of 8 other companies.
11. Before deciding this issue, I would like to record an admitted position of facts with respect to this issue - so far as objection of the assessee is concerned and that fact is that the assessee has never at any stage of the proceedings - either before the Assessing Officer or before the CIT (Appeals) or before the Tribunal during the course of hearing of this appeal on 05/10/2006; disputed the facts relating to number of shares of M/s. Motorol (India) Ltd. remaining in the closing stock, as stated in the assessment order, i.e. the assessee never objected to the correctness of the number of shares in the closing stock, lot out of which the shares were found to be balance in stock, date of purchase and cost price.
11.1. Another factual position which in my opinion is also most important and must be recorded here, even at the cost of repetition, is that this appeal was originally heard on 05/10/2006, but later on, the ld. Accountant Member having raised some doubt relating to correctness of details relating to number of shares in closing stock of shares of M/s. Motorol (India) Ltd., the lot out of which the shares had remained balance and cost of purchase thereof, the appeal was re-fixed specially for the purpose of giving an opportunity to the assessee to explain as to whether the details recorded in the assessment order with respect to quantity of closing stock of the shares, the date of purchase of lot out of which the shares had remained balance and the purchase price thereof was correct or not and the appeal was, therefore, re-heard on 19/01/2007. On 19/01/2007, the ld. counsel for the assessee, Sr. Advocate, Shri J.P. Shah, was specifically asked by the Bench to explain as to whether the details of shares of M/s. Motorol (India) Ltd. recorded in the assessment order for valuation purpose was correct or not and was further required to furnish the details of date-wise sales of shares of M/s. Motorol (India) Ltd. during the previous year relevant to Assessment Year 1996-97 and the ld. Counsel, specifically and admittedly, submitted that neither such details were available nor he was not disputing the details recorded in the assessment order.
12. In view of above facts and circumstances of the case, I am of the opinion that the details regarding number of shares, date of purchase and cost of acquisition of M/s. Motorol (India) Ltd., remaining balance in the closing stock as on 31/03/1995 and cost of purchase thereof as recorded in paragraph No. 12(ii) of the assessment order at page No. 7, correctness of which has not been objected to by the assessee at any stage of proceedings, have to be taken to be correct; meaning thereby that-
(i) 50,000 shares of M/s. Motorol (India) Ltd. remaining balance in the closing stock were out of shares purchased on 09/08/1994 and the rate of purchase was Rs. 88/- per share.
(ii) 10,000 shares of Motorol (India) Ltd. remaining balance in the closing stock were out of shares purchased on 25/01/1995 @ Rs. 266 = 25 per share.
(iii) 126,500 shares of Motorol (Inda) Ltd. remaining balance in the closing stock were out of shares purchased during the period 28/03/95 to 31/3/95 @ Rs. 274 = 65 per share;
were correct and if that was the case, then the value of aforesaid shares remaining in closing stock was rightly arrived at Rs. 4,18,05,944/- (by the Assessing Officer). I am, further, of the opinion that since the assessee had valued the aforesaid shares only at Rs. 3,45,60,315/-, there was clear cut under valuation of closing stock of these shares by an amount of Rs. 72,45,629/- and Revenue Authorities were quite justified in making addition to that extent. The order of the CIT (Appeals) on this point is, therefore, confirmed. Revenue's this ground is allowed.
13. In the result, the appeal of the Revenue, i.e. ITA No. 1781/Ahd/1999 for Asst. Year 1995-96 is allowed.
ORDER Under Section 255(4) of the IT Act As there is a difference of opinion with respect to the issue relating to the valuation of closing stock of shares of M/s. Moforol (India) Ltd., the same is, therefore, referred to the Hon'ble President of ITAT with a request that following question may be referred to a Third Member or pass such order as the Hon'ble President may think fit.
Whether, on the facts and circumstances of the case, specially the fact that the assessee has never disputed the correctness of number of shares remaining in closing stock, date-wise lot out of which the shares in closing stock were available as well as the purchase price of respective lot, should the issue relating to the valuation of closing stock of such shares be referred back to the Assessing Officer with the directions as contained in paragraph No. 6.3.6 of the order authored by the learned Accountant Member or the valuation of the closing stock arrived at by the Assessing Officer be Confirmed?
ORDER
1. Consequent upon difference of opinion between the Members constituting Bench 'C', which had heard, in this appeal, the Hon'ble President referred the following question for the opinion of the Third Member and for that purpose appointed the Hon'ble Vice President Shri R.P. Garg:
Whether, on the facts and circumstances of the case, specially the fact that the assessee has never disputed the correctness of number of shares remaining in closing stock, date-wise lot out of which the shares in closing stock were available as well as the purchase price of respective lot, should the issue relating to the valuation of closing stock of such shares be referred back to the Assessing Officer with the directions as contained in paragraph No. 6.3.6 of the order authored by the learned Accountant Member or the valuation of closing stock arrived at by the Assessing Officer be confirmed?
2. The Hon'ble Vice President (3rd Member) has now decided, as per order dated 29/2/2008, the issue referred to in the question in favour of the revenue and against the assessee after concurring with the order of the Judicial Member. The relevant portion of the order of the Hon'ble Vice President (Third Member), as contained in para 8 and 9 of the order read as under:
8. Parties are heard and their rival- submissions are considered. On reading of the two opinions of the learned members, I find that there is no difference between them on principle of valuation of shares. Both agree that valuation of the stock of shares had to be on cost and that when the stock of shares is identifiable and the cost of purchase thereof and the date of purchase is also known, the shares are to be valued at the actual cost and not the average cost. As otherwise also, as observed by the ld. Accountant Member where the entire purchase is held as at the close of the year, it would give the same value. That cost is as mentioned in the Table given in paragraph 2 above is Rs. 4,18,05,944. It is not disputed by the assessee as stated by the ld. Judicial Member and no details otherwise are furnished by the assessee in spite of opportunities given in the course of hearing before Bench and even during the hearing before the Third Member. In (sic) circumstances, to assume a situation, in this case, the sale of shares of Motorola and then set aside the matter on assumption of such sales as having taken place to verify that assumed situation would not be warranted, when the assessee is not furnishing the details of any sales alleged to have (sic) place and there are no details available on record either in assessment order or elsewhere, where would the question of verification arise particularly when the assessee does not, despite opportunities, dispute the cost or the date of acquisition of the stock of shares as appearing as at the end of the year. It is for the parties to bring the material on record that some sales have taken place. In absence thereof Assessing Officer was to be held justified to proceed on the basis of the material on record and value the stock as per the actual cost of acquisition. The cost at the average price otherwise than actual cost is to be proved by the assessee. No such details as stated above are there, nor furnished by the assessee despite opportunities given. In my opinion, therefore, the CIT(A) was not justified in directing to adopt the valuation by the assessee for which there is no basis given at any stage on the assumed average price when the shares and their cost of acquisition is identifiable and not even disputed by the assessee. The order of the CIT(A) is accordingly to be vacated and that of the AO, as opined by the ld. Judicial Member, is to be restored.
9. In the result, the appeal of the revenue on this issue is to be partly allowed.
3. In view of above facts and circumstances of the case, Ground No. 4 of revenue's appeal stands allowed.
In the result, revenue's appeal is partly allowed.
Pronounced in the open court on 31/7/2008