TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 1069
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....accounts of the assessee-company, a share and stock broker, were found by the Assessing Officer (AO) to bear negative stock as at the year-end in some scrips traded in. The shares, listed at paragraph 5 (pages 2-3) of the assessment order, were found by him to fall in two categories. For the first category, the assessee explained them to be shares which came to be transferred to the company's dematerialised (D-Mat) account from that of its' Directors and their family members, and were sold from the assessee's said account. However, as a corresponding purchase was not recorded in the assessee's accounts (either in quantity or value), the same came to be reflected as negative stock. The acquisition by the assessee, which was sans any consideration, recorded or otherwise, being not explained, the same was considered unexplained as to its' nature and source. Accordingly, value/s thereof, as on the date/s of acquisition, i.e., on which the same came to be included in the assessee's D-mat account, aggregating to Rs. 24,28,500/-, was brought to tax. Detail of these scrips are as under: (pg. 2 of the assessment order/Table A) Sr. No. Company Name Qty. (Nos.) Amount (Rs.) 1 Bongaingao....
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....rust [2009] 308 ITR 161 (SC) and Union of India vs. Satish Panalal Shah [2001] 249 ITR 221 (SC). The ld DR. on the other hand, relied on the orders by the Revenue authorities. 5. We have heard the parties, and perused the material on record. The facts as emanating from the material on record give rise to a number of questions and, accordingly, issues, which would require being suitably addressed, so as to arrive at the sums, if any, that would stand to be assessed as income, including the question as to the correct head of income. 5.1 Our first observation in the matter is that the assessee has by reducing the value of its stock-in-trade as at the year-end, i.e., by placing a value (stated to be market value at the year-end) on some shares recorded at minus figures, has artificially decreased it's business profit for the year. The sale value of the relevant shares having been already credited to the Profit & Loss (P&L) Account, not doing so, given a nil purchase cost thereof, which is understandable in-as-much as no cost has been incurred toward their acquisition by the company, so that no further adjustment was arguably called for. And the only issue that could arise in that cas....
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....the opening stock is permissible, value of which is to be taken at the same sum (Rs. 2,91,08,820/-) as adopted qua closing stock for the immediately preceding year (PB pages 7, 40 - 47), we do not think the argument to be valid. This is as both the opening and closing stock are to be valued correctly and, two, on the same basis, i.e., to arrive at the correct income for the account period. It is the profit for each year, and each year alone, that could be brought to tax for that year; each year being an independent unit of assessment. Reference in this context is made to the decision in CIT (Dy.) vs. Daman Ganga Paper Ltd. [2014] 63 SOT 47 (Mum), based on decisions by the Hon'ble jurisdictional High Court and Supreme Court settling the law in the matter. We may refer to this addition as Addition 1. We may here also mention that though manifest in the form of (the value of) the closing stock, the addition is essentially on account of unexplained credit inasmuch as the source of the credit of the shares in the assessee's D-mat account is unexplained, which remains unaccounted in financial accounts as well. The sale implies existence of shares, at least in that number and, further, av....
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.... (+) 359 26,925 (2) (1) The impact of the negative year-end stock, which gets included in the negative figure at Col. 3 above, stands already neutralised in the addition of Rs. 2,27,392/- (Addition 1). (2) to be valued at lower of cost/fair market price (as at the relevant date/s) and FMV at the year-end. Needless to add, the A.O. shall, apart from verification and undertaking the exercise afore-said, effect the addition, where so, only after hearing the assessee and meeting its' objections, if any. 5.3 The third addition (Addition 3) is qua the peak shortfall during the year, which may be at a figure different from that obtaining as at the beginning or the close of the year. We may represent this scenario, along with the earlier two, as under, with reference to a particular scrip (say): Scenario Opg. Stk. Clg. Stk. Peak (-) Difference Remarks 1. (-) 100 (-) 500 - (-) 400 Addition 1 2. (-) 500 (-) 100 - (+) 400 Addition 2 3. (-) 500 (-) 100 (-) 600 (+) 600 Addition 3 In scenario 3, the addition would be for the value of 600 shares, as against for 400 shares in scenario 2. The reason is simple: the assessee having no opening stock (in ....
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....le C), the business income will however stand to be increased only by the carrying value of Rs. 84/-, i.e., Rs. 2,01,264/-, forming part of the closing inventory and, correspondingly, the opening inventory for the following year, and so on. The difference with reference to Addition 1 is that the corresponding shares stand already sold in that case and, therefore, to that extent shall not find reflection in the closing stock; and the profit/loss on sale gets subsumed in the P&L Account. And, apart from accounting for the peak shortfall (during the year) and concomitant adjustment, Addition 2 and Addition 3 are of the same species. Needless to add, the exercise for both these additions is to be carried out for all the shares, and not limited to those shares reporting negative quantity as at the beginning and/or at the end of the year, which may well be positive, even as shortfall (negative stock) subsists during a part of the year. Credit in the form of closing stock in every such case (i.e., with reference and toward decline from the peak shortfall during the year, as at the yearend), shall obtain. Also, if the business income is, as contended, assessed as speculative income, the de....
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....lowed it credit for the opening 'negative stock' (shortfall) in-as-much as the said stock could only be acquired, or credit there-against availed, whichever one way one may see it, during a preceding year. If anything, it shows the accounts being unreconciled, with differences between the quantitative records (D-mat accounts) and corresponding financial accounts. We have, accordingly, directed for such a reconciliation, so as to bring out all such discrepancies, discussing some, i.e., rather than confirming only that which subsist as at the year-end, also explaining the extent and manner of the ensuing additions for the current year. In other words, we have, while examining the assessee's plea of negative opening stock, and which therefore should also be given effect to, accepting it on the basis of the settled law, also observed other aspects in relation thereto, to find that these have a direct impact on the income for the year and, therefore, shall require adjudication by the assessing authority. This may, however, not be construed as placing any limitation on A.O.'s examination; the purport being the proper assessment - in framing which he shall have regard to our observations ....
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....ncome which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.' Accordingly, and even as observed by the ld. CIT(A), we find no basis for holding the income/loss from the said activity as speculative by the AO, nor was any pointed out to us during hearing. We, therefore, have no hesitation in confirming the impugned order on this score. As regards the reallocation of the administrative expenditure, we find that both the assessee as well as the AO to have allocated the same under different activities without any basis. However, the said allocation is itself rendered of no consequence as the entire business income is to be regarded as nonspeculative. We decide accordingly, and the Revenue fail on both these grounds. We m....