TaxTMI 
TaxTMI 
2007 (2) TMI 345
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....ere had been no 'conversion' of investment into stock-in-trade, nor any change in the method of accounting, but rather, rectification or reclassification of accounts by the new auditor of the stock of shares earlier wrongly shown as 'investments' in the previous year. 3. The learned CIT(A) thereby erred in upholding the reduction of loss claimed by the appellant by the sum of Rs. 56,65,082. 4. The learned CIT(A) erred in dismissing the additional ground of appeal, namely that, in case it was held that a 'transfer' did take place to the reclassification of investments as 'stock-in-trade', the appellant should have been granted the benefit of long-term or capital loss, as the case may be." 2. The assessee in the present case is a company which is engaged in the business of dealing in shares and securities. A return of income for the year under consideration was filed by it on 30-11-1996 declaring a loss of Rs. 81,32,680. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee-company has converted its investment made in the shares into stock-in-trade and has claimed loss of Rs. 56,65,082 due to difference in cost price and market pric....
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....were not found acceptable by the Assessing Officer. Relying on the treatment given by the assessee-company itself to the relevant shares as investment in the books of account for the immediately preceding year, he held that there was a conversion of the said investment into stock-in-trade by the assessee-company as on 1-4-1995 within the meaning given in section 2(47)(iv ) and the loss as a result of such conversion was a capital loss and not the business loss as claimed by the assessee. Taking note of the fact that the sale of shares effected by the assessee-company during the year under consideration was only to the extent of Rs. 7,68,436 and keeping in view the treatment clearly given to the relevant shares as investment in the books of account for the immediately preceding year, it was held by the Assessing Officer that the explanation offered by the assessee-company on the basis of mistake of classification of shares in earlier years as investment was clearly an after thought in order to claim the loss resulted by reduction in the market values of shares during the year under consideration as business loss. He observed that the said shares were earlier held by the assessee-com....
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....ts by an assessee.' Any change in an accounting policy which has a material effect shall be disclosed. The impact of and the adjustments resulting from such change, if material, shall be shown in the financial statements of the period in which such change is made to reflect the effect of such change. Where the effect of such change is not ascertainable, wholly or in part, the fact shall be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the previous year but which is reasonably expected to have a material effect in years subsequent to the previous years, the fact of such change shall be appropriately disclosed in the previous year in which the change is adopted. (iv) In the appellant's case there is no disclosure of the change in Accounting policy or of the fact that there has been a 'rectification or reclassification' in the Auditor's report and even in the annexure to the Auditor's report. (v) The appellant's contention that the Assessing Officer has wrongly held that the assessee has valued the closing stock by taking average cost of the shares as on 1-4-1995 and not the market price is not substantiated. ....
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....rely on the basis of misclassification of the said shares as investment done in the accounts for the immediately preceding year. He contended that the reduction in value of the said shares was mainly attributable to the year under consideration and since the said shares lying in the closing stock at the end of the year were valued at cost or market price, whichever is lower, the resultant loss was rightly claimed by the assessee-company in the year under consideration as per the Accounting Standard No. 13 issued by the ICAI. He also contended that the assessee-company has been suffering losses continuously in its business of dealing in shares and securities and there being no tax benefit as such accrued to it as a result of claim of the loss in question, there was no justification for the authorities below to hold the said loss was claimed as an after-thought on the basis of mistake in misclassification of shares. He contended that all the subsequent events are relevant and material to appreciate the claim of the assessee for the said loss and having regard to the said events as well as the nature of the assessee's business, the loss due to reduction in the values of the shares des....
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....n of the purchaser. He also pointed out that the Accounting Standard-2 regarding the valuation of inventories is not applicable to shares, debentures and other securities held as stock-in-trade and the reliance of the assessee-company thereon is clearly misplaced. He submitted that there was a change in the method of valuation of stock of shares by the assessee-company inasmuch as opening stock of shares was valued at cost whereas closing stock was valued at cost or market price, whichever is lower. He contended that no justification, however, was given by the assessee for this change either before the Assessing Officer or before the learned CIT(A). He contended that the shares in question thus were held by the assessee as investment in the earlier years and there being conversion of the said investment into stock-in-trade during the year under consideration, the loss on such conversion was a capital loss as rightly held by the authorities below and not a business loss as claimed by the assessee-company. He, therefore, strongly supported the orders of the authorities below on this issue and urged that the same may be upheld. 6. We have heard the arguments of both the sides and als....
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....ion. In this regard, it is pertinent to note that the assessee is a limited company incorporated under the Companies Act, 1956 and it was, therefore, not only required to maintain the books of account in the manner prescribed under the said Act, but also to get the same audited from the auditors. Before forwarding the books of account to the auditors for the purposes of audit, it was also required to prepare a profit & loss account and balance sheet and forward the same to the auditors after the approval of Board of Directors. The Board of Directors was supposed to consider and discuss the said financial statements and also to comment upon the results reflected therein in its report to be tabled before the Annual General Meeting of the shareholders. Keeping in view all these statutory requirements or process through which the financial statements of the assessee-company were required to be undergone, we find it difficult to agree with the contention of the learned counsel for the assessee that shares acquired for an amount of about Rs. 3 crores for sale representing its stock-in-trade were shown as investment in the books of account of the assessee-company by mistake in the immedia....