ITAT Mumbai rules on FIFO vs. LIFO method for capital gains computation

The ITAT Mumbai ruled in favor of the assessee in a case concerning the calculation of short term capital gain using the FIFO method and the exclusion of bonus shares in the computation. The ITAT directed the AO to recompute the capital gain using the FIFO method consistently followed by the assessee, overturning the use of the LIFO method by the AO. The decision emphasized rectifying errors in the income computation by granting a fair hearing opportunity to the assessee.

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Issues:
1. Calculation of short term capital gain using FIFO method.
2. Consideration of bonus shares in computing short term capital gain.
3. Error in computation of income by AO.
4. Appeal against CIT(A)'s order upholding AO's addition of short term capital gain.

Issue 1: Calculation of short term capital gain using FIFO method
The assessee contended that the short term capital gain should be computed using the First In First Out (FIFO) method, considering the shares held prior to a specific date for the calculation. The ICICI Bank statement erroneously showed the sale of shares from bonus shares at nil cost. The assessee provided correct statements, but the CIT(A) dismissed the appeal, citing the accountant's oversight. The ITAT found that the capital gain should be computed using the FIFO method consistently followed by the assessee, not the Last In First Out (LIFO) method used by the AO. The ITAT directed the AO to recompute the short term capital gain using the FIFO method after granting a reasonable opportunity of hearing to the assessee.

Issue 2: Consideration of bonus shares in computing short term capital gain
The assessee argued that the cost of acquisition for computing short term capital gain should exclude the bonus shares received after a specific date and should be based on the FIFO method. The ICICI Bank statement inaccurately reflected the sale of shares from bonus shares at nil cost. Despite the correct statement presented to the CIT(A), the appeal was dismissed due to the accountant's oversight. The ITAT held that the capital gain should be calculated based on the FIFO method, excluding the bonus shares issued, contrary to the LIFO method used by the AO.

Issue 3: Error in computation of income by AO
During the assessment proceedings, the AO added an amount to the income of the assessee for speculation income and short term capital gain on shares, alleging non-disclosure. The AO contended that the addition was necessary due to the accountant's mistake, as acknowledged by the assessee. The CIT(A) upheld the addition, emphasizing the accountant's oversight. However, the ITAT found that the capital gain computation should adhere to the FIFO method consistently followed by the assessee, overturning the AO's decision.

Issue 4: Appeal against CIT(A)'s order upholding AO's addition of short term capital gain
The assessee challenged the addition of short term capital gain upheld by the CIT(A) based on the LIFO method used by the AO. The CIT(A dismissed the appeal, attributing the discrepancy to the accountant's error. The ITAT, after considering the submissions and evidence, directed the AO to recompute the short term capital gain using the FIFO method, emphasizing the exclusion of bonus shares in the calculation.

This judgment by the ITAT Mumbai addressed the dispute regarding the calculation of short term capital gain using the FIFO method, exclusion of bonus shares in the computation, error in the AO's income assessment, and the appeal against the CIT(A)'s decision. The ITAT ruled in favor of the assessee, directing the AO to reevaluate the short term capital gain based on the FIFO method and granting a fair hearing opportunity.

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