Notional capital gains and section 145A stock valuation adjustments fail absent real transfer and corresponding opening stock effect.

A proposed share sale that never crystallised could not give rise to short-term capital gains where the record showed only an advance, no completed transfer, and no de jure or de facto passage of shares; the notional addition was therefore deleted. An adjustment under section 145A for closing stock valuation could not stand in isolation, because the inclusive method must be applied consistently to opening stock, purchases, sales, and duties already paid to reflect true profit; the deletion was upheld. The remaining issue was remanded for fresh consideration, leaving the assessee partly successful and the Revenue's challenge unsuccessful on the principal additions.

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Issues: (i) Whether the addition as short-term capital gain on sale of shares was sustainable when the proposed transaction had not materialised and no de jure or de facto transfer of shares was shown. (ii) Whether the adjustment under section 145A on valuation of closing stock could be sustained without giving corresponding effect to opening stock and duties already paid.

Issue (i): Whether the addition as short-term capital gain on sale of shares was sustainable when the proposed transaction had not materialised and no de jure or de facto transfer of shares was shown.

Analysis: The record showed only receipt of an advance and a disputed proposed sale. No agreement, memorandum, sale bill, or other material established completion of transfer or ascertainment of final consideration. The notes to accounts and the FIR indicated that the transaction had broken down and possession disputes had arisen. In the absence of actual transfer, no capital gain could be brought to tax, and income tax cannot be levied on hypothetical income.

Conclusion: The addition as short-term capital gain was unsustainable and was deleted in favour of the assessee.

Issue (ii): Whether the adjustment under section 145A on valuation of closing stock could be sustained without giving corresponding effect to opening stock and duties already paid.

Analysis: The assessee demonstrated through working that the inclusive method required by section 145A produced no net effect on profit when opening stock, sales, purchases, and excise duty and VAT already paid were all correspondingly adjusted. The reasoning was supported by the legal principle that a change in closing stock to give effect to section 145A must be matched by a corresponding adjustment in opening stock and related items to arrive at true profit.

Conclusion: The deletion of the section 145A adjustment was upheld in favour of the assessee and the Revenue's challenge failed.

Final Conclusion: The addition on alleged capital gains was deleted, the section 145A adjustment was rejected, and the remaining issue was remanded for fresh consideration, resulting in a partly allowed appeal for the assessee and dismissal of the Revenue's appeal.

Ratio Decidendi: A notional capital gain cannot be taxed unless a real transfer giving rise to accrued income is established, and for section 145A the valuation adjustment must be made on a corresponding basis across opening stock, closing stock, sales, purchases, and duties to compute true profit.

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