TaxTMI 
TaxTMI 
2013 (7) TMI 11
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....es, inter alia, included 28,43,800 shares of Yield Investments ltd. and 45,00,000 shares of Off-Shore India Ltd., whose carrying cost as on 31.03.2003 was Rs.1,53,56,520/- and Rs.2,47,05,000/- respectively. During the previous year, relevant to assessment year 2004-05, the assessee company resolved to convert equity shares held in these two companies from investment to stock-in-trade in its books of accounts for the year ended 31.03.2004. The assessee passed accounting entries transferring the carrying cost of these two shares from investment to trading account. Accordingly, in its Profit & Loss a/c. for the year ended 31.03.2004, the assessee debited sum of Rs.4,00,61,520/- on account of transfer of investments to stock in trade. In respect of shares held on trading account, the assessee regularly followed principle of the lower of the cost or the market value in valuation of inventory whereas investments were valued at cost. For the purpose of arriving at the value of the inventory, the assessee followed Accounting Standard-13 as also RBI's Prudential guidelines, according to which shares of unlisted companies were valued either at cost or break-up value whichever is lower. In th....
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....hare. According to CIT(DR), the documents, which the assessee placed before the AO, clearly established that the shares were transferred from investments to stock-in-trade did not have any intrinsic value or market value and therefore in its books of accounts, such transfer had to be recorded with reference to the intrinsic value of the shares, which could at best be taken at Re.1/-. By adopting the carrying cost as the basis for passing of the accounting entries. The assessee had taken undue benefit of such carrying cost which was not permissible as per the legal provisions, though such accounting methods have been made in conformity with the accounting standards. The ld. CIT,DR further argued that provisions of section 45(2) of the Income-tax Act, 1961 specifically deals with the situation concerning of conversion of investments into stock-in-trade and it requires that in such a case, the income has to be computed with reference to fair market value as the capital asset on the date of conversion. Such provisions of section 45(2) were specifically incorporated in the Statute and which were contrary to the Accounting Standard-13 of the ICAI, the income had to be computed with refer....
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....e Revenue in the assessment for the assessment year 2003-04. As per AS-13, the transfer of long term investment to current investment as on 01.04.2003 had to be necessarily done at such carrying cost and not with reference to the market value or break-up value of shares. The ld. A.R. submitted that it has been held by the Hon'ble Supreme Court in the case of CIT- vs- U.P. State Industrial Development Corporation reported in 225 ITR 703 (SC) that where the statutory provisions are not in conflict with the accounting standards or accepted commercial principles of accounting, then in such case, the income has to be computed on the basis of accounting standards or accepted commercial principles of accounting. The ld. A.R. argued in the present case that section 45(2) of the Act was not applicable because the shares of Off-Shore India Ltd. were not transferred or sold during the year. He submitted that section 45(2) of the I.T. Act, 1961 comes into force not in the year in which conversion takes place but it comes into play in the year in which the converted capital asset is actually sold or transferred. The ld. A.R. further submitted that in the assessee's case, entire shareholding of ....
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....o hold 3,43,800 shares of Yield Investments Pvt. Ltd. out of 28,43,800 shares transferred out of investments. As against the carrying cost of Rs.5.40 per share as on 01.04.2003, the remaining 3,43,800 shares were valued at break-up value method as on 31.03.2004 at the rate of Rs.4.94 per share. As a result, the valuation loss of Rs.1,58,148/- in respect of stock in trade of Yield Investments Pvt. Ltd. was allowed by the AO. The ld. A.R. further submitted that the assessee followed the same method of valuation of stock in the case of Off- Shore India Ltd. also. However, since in the latter case, the break-up value of each share was (-) Rs.1.89; for identification purposes, the value of stock in trade of shares of Off-Shore India Ltd. was taken at Re.1/-. It was further submitted that in the case of shares of both the companies, the assessee had followed the identical basis of accounting for recording transfer from investment to stock in trade and also the basis of adopting for valuation in both the cases was identical. In the case of Yield Investments Pvt. Ltd., the AO did not find any infirmity in the accounting methods adopted by the assessee but the same method of accounting foll....
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....d Investment (P) Ltd. were transferred @Rs.5.40 per share. From the impugned order it appeared that the transfer of shares of Yield Investment Pvt. Ltd. from "Investment" to "Stock in trade", carried out at the carrying cost was accepted by the A.O. This fact indicates that the method of accounting followed by the appellant in relation to the said transfer of shares was accepted by the A.O. The appellant followed the same accounting method and principles in relation to transfer of shares of Off- Shore India Ltd. which only was disputed by the A.O. in the impugned order. It is also found from the impugned order that part of the shares of Yield Investment Pvt. Ltd. transferred to stock in trade on 1.4.2003 were sold during the year and the loss arising there from was assessed partly under the head "capital gains" as required u/s 45(2) and partly as "business loss". The remaining shares of Yield Investment P. Ltd. remained in stock as on 31.3.2004. As at the end of the financial year 2003-04, all the shares of Off-Shore India Ltd., which were transferred to stock in trade, remained in stock. Since both the investee companies were closely held and their shares were not quoted on any re....
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.... to shares of Off-Shore India Ltd. I further find that appellant's method of inventory valuation was same in respect of all shares of unlisted/unquoted companies & the shares of unquoted companies were always valued on the principle of "lower of the cost or break up value". For this purpose break up value was calculated on the basis of Balance Sheet of the investee companies for the preceding year. Wherever the break up value of the unquoted shares was negative, the appellant valued shares of such companies at token amount of Re.1/-. These accounting methods and principle of inventory valuation was uniformly followed and barring shares of Off-Shore India Ltd. the A.O. did not dispute or disbelieve the said method of accounting or method of valuation in any other case & rather he accepted appellant's all other transactions. The A.O. has justified the disallowance on the ground that the appellant followed different basis and method for accounting for recording transfer of shares from "investment" to "stock" and valuation of shares of Yield Investments (P) Ltd and Off-Shore India Ltd. I however, find that in both the cases the appellant have followed identical method of accounting and....