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The Revenue appealed against the CIT(A)'s decision to delete the disallowance of diminution in value of closing stock amounting to Rs. 30,76,750/-. The assessee, a non-banking finance company, valued its closing stock of unquoted shares at the lower of cost or breakup value, as mandated by the Reserve Bank of India (RBI) prudential norms. The Assessing Officer (AO) allowed the valuation of quoted shares at the lower of cost or market value but disallowed the valuation of unquoted shares at the lower of cost or breakup value, leading to the disallowance of Rs. 30,76,750/-.
The assessee argued that its method of inventory valuation was consistent and in line with Section 145A of the Income Tax Act, which requires the consistent application of the accounting method. The CIT(A) agreed with the assessee, noting that there was no basis for the AO to differentiate between quoted and unquoted shares for valuation purposes. The CIT(A) emphasized that the assessee had consistently followed the same method of valuation over the years, which was also certified by a Chartered Accountant.
Upon review, the Tribunal found that the AO had accepted the valuation method for quoted shares but not for unquoted shares, despite the RBI's clear mandate. The Tribunal upheld the CIT(A)'s decision, stating that the assessee had followed the RBI's notification and consistently applied its valuation method. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order.
Issue 2: Disallowance of Interest on Loan for Purchase of SharesThe assessee cross-appealed against the CIT(A)'s decision to uphold the disallowance of Rs. 5,31,000/- in interest paid on a loan used to purchase shares of Ganpati Sugar Industries Ltd. The assessee, a dealer in shares, had borrowed money in earlier years and used it partly towards an advance for share application money in Ganpati Sugar Industries Ltd. The AO disallowed the interest, arguing that the borrowed funds were not used for business purposes.
The assessee contended that the borrowed funds were used for its trading business and that the investment in share application money was part of its stock-in-trade. The CIT(A) did not accept this argument and upheld the AO's disallowance. However, the Tribunal noted that the borrowed funds were used for business purposes in earlier years, and the shares were part of the assessee's stock-in-trade. The Tribunal referred to the Karnataka High Court's decision in CIT vs. Sridev Enterprises, which held that interest on borrowings used for business purposes in earlier years cannot be disallowed in subsequent years.
The Tribunal directed the AO to delete the disallowance of Rs. 5,31,000/-, allowing the assessee's cross-objection.
Conclusion:The Tribunal dismissed the Revenue's appeal regarding the deletion of the disallowance of diminution in value of closing stock and allowed the assessee's cross-objection concerning the disallowance of interest on the loan used for the purchase of shares.
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