TaxTMI 
TaxTMI 
2008 (2) TMI 510
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 law 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 assessment year 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 assessment year 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 lakhs during the year by way of Trade Deposits, the aggregate amount of which figure outstood at Rs. 61.58 lakhs ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Assessing Officer'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 Assessing Officer, and the ld. 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 after allowing a reasonable opportunity to the Assessing Officer 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 Assessing Officer 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 Assessing Officer, 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le 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 Assessing Officer 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 ld. CIT(A) in deciding this ground of the assessee'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 cannot 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 are either against the purchase of shares, or outstand against the amounts receivable on the sale of shares, so that, in either case, it amou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ood provided by the assessee-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 lakh out of the total expenditure claimed in respect of the telephones (Rs. 2.3 lakhs) and vehicles (Rs. 7.12 lakhs), 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 ld. 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 Co.'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 of Sayaji Iron & Engg. Co. Ltd. v. CIT [2002] 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 assessee-company failing to adduce any evidence before the revenue authorities of having provided the said facilities to its Directors in pursuance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ued 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 Assessing Officer 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 Assessing Officer 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 Assessing Officer to follow a 'pick and choose' policy, and the assessee's method being (one of) a recognized and accepted methods) for valuation of closing stock, the same ought to have been accepted. The assessee's contentions found favour with the ld. 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 cost price method would be inappropriate under the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Assessing Officer 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 11-8-1994 at a single rate o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gularly or of having misused the same. We find this as not germane in view of the fact that the Assessing Officer 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 (a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 ld. 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 Assessing Officer's tile 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, and for which, the data as submitted by the assessee, or on record, if found insufficie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' 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 Tra Decco 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 "losing 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fore the CIT(Appeals) or before us at the time of original hearing on 5-10-2006. 5.4 Answering the aforesaid query, the ld. 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 Decco 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 ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 19-1-2007. On 19-1-2007, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aluation 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?" THIRD MEMBER ORDER Per R.P. Garg, Vice President, As a Third Member.-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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ia) 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 Indo Tra Decco 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rved 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 diff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vacated and that of the Assessing Officer, 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. ORDER Per Bench 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?" ....