TaxTMI 
TaxTMI 
2017 (1) TMI 614
X X X X Extracts X X X X
X X X X Extracts X X X X
....he order of the CIT (A) deleting or confirming the addition made by the AO on account of claim of reduction in value of investment as business loss which was stock-in-trade. This common issue is in both the appeals and the facts and circumstances are identical and hence, for the sake of convenience and brevity, we will discuss the facts of revenue's appeal and decide the issue. For this, the Revenue has raised the following 5 grounds:- "1. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in deleting the addition of Rs. 62,00,000/- and treating the reduction in value of investment as business loss when the entire investment could not be treated as stock-in-trade. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A)(A) erred in failing to appreciate that the assessee company is a NBFC which is regulated by the RBI and is bound to follow the guidelines prescribed by the RBI and has to maintain its books of accounts as per guidelines of RBI. 3. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in accepting the treatment given to the investment by the assessee company and treating the entire investment in securi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ggrieved, the assessee preferred appeal before the CIT(A), who allowed the claim of the assessee by observing in Para 4.4 and 4.5 of his order as under:- "4.4 I have carefully considered the order of the AO and the submission of the appellant. A reading of the assessment order shows that the A O has accepted the fact that the appellant is engaged in the business of non-banking financial services for which it has obtained registration from the RBI. That the stock in trade of the appellant consists of government equity shares etc. has also not been disputed. The business income offered from such a stock I trade has been accepted by the AO. Their valuation as done by the appellant and disclosed in the closing stock has also not been held as incorrect by the AO. The only issue disputed as the claim of the appellant as made in the P & L A/c. regarding provision for depreciation on investment. This has been done as the appellant values current investment at cost or market value whichever is lower and either credit or debited the gain or loss. The loss is debited under the nomenclature provision, but it is actual valuation loss. The AO has rejected this claim of the appellant for the rea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n stated that the said investments are actually stock in hand. It is also evidenced that the appellant is not dealing in shares. The order of the AO, it is seen, is silent on the fact as to why he has considered that the claim has not actually crystallizing and that it is only provisions made that stands debited. The action of the AO in rejecting a claim made by the appellant on the basis of a suspicion without specifically establishing the fact as to why the same was not acceptable cannot be upheld. This especially so if the appellant has been able to establish that it has followed the provisions of Income Tax Act totally. 4.5 Rejection of the depreciation / loss claimed by the appellant would mean rejection of the regular books of accounts maintained by the appellant. It is open to the AO to reject the assessee‟s books of accounts but for doing so proper analysis of the books of accounts and the defects noticed should be detailed. The rejection cannot be based simple on the nomenclatures used by the appellant to describe a claim. This enquiry / examination has not been done by the AO. It is seen that the appellant has maintained details of stock in trade and has made avai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this assessment year 2008-09, the assessee obtained Auditors' Report as required u/s 227 of the Companies Act, 1956 and Non-Banking Financial Companies Auditors Report pursuant to the directions of the Reserve Bank of India dated 02-01-1998. The assessee prepared financial statements on accrual basis of accounting in accordance with the provisions of the Companies Act and the RBI guidelines. During the year under consideration, the assessee was having current investments (quoted) comprising of Government Securities, certificate of deposits and commercial papers and Corporate Bonds. The assessee valued these investments at cost or market value whichever is lower and the same is provided depreciation amounting to Rs. 62 lacs on account of fall in market value of the investments. This valuation is done in accordance with the prudential norms prescribed under the RBI Act. The assessee before us submitted the details of securities held by them and constituted stock-in-trade. The learned Counsel for the assessee referred to Schedule 7 of the final accounts and the following quoted securities were held as current investments as on 31-03-2008:- Securities Quantity Book Value (Rs. in tho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervened by order dated March 9, 1987, under Section 263 of the Income-tax Act. By the said order, the Commissioner set aside the order of assessment holding that the assessee-bank had no right to calculate profit or loss arising out of the investment trading account as the said account did not form part of the final account of the assessee-bank. That, since the investment trading account was not incorporated in the final account, the assessee-bank had no right to calculate profit or loss arising out of the investment trading account. In that matter, the assessee-bank was following the mercantile system of accounting and the loss claimed by the assessee was not debited in the profit and loss account. Against the order of the Commissioner under Section 263 of the Act, the assessee- bank preferred an appeal to the Tribunal which took the view that the assessee had claimed the loss by following the same method which it was following for the last 30 years. Consequently, the order passed by the Commissioner under Section 263 was set aside. Against the said order of the Tribunal, two questions were referred for opinion to the High Court. Answering the said questions, the High Court observ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the market price of the shares and securities was not provided for in the audited accounts. On the other hand, it was argued on behalf of the assessee-bank that even though in the balance-sheet the market price of the shares and securities was not mentioned yet, for determining the real income of the assessee, the said price was required to be taken into account. That, for the last 30 years, the assessee-bank was submitting income-tax returns after taking into account the market price of such shares and securities which was accepted by the Department. It was submitted that not making proper entries in the balance-sheet could hardly be a ground for not assessing the real income. The Supreme Court came to the conclusion on the above arguments that where the market value of shares and securities had fallen below the cost before the date of valuation and where on the date of valuation, the market value is less than the actual cost then the assessee was entitled to value the articles at market price and the assessee was entitled to claim the loss which the assessee would probably incur at the time of the sale of shares and securities. That, whichever method the assessee adopts, it sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O did not verify whether the assessee has compiled with the Guidelines issued by RBI or not. The issue is not whether violation of Guidelines was observed by the undersigned or not but the basic fact remains that A.O. did not call for any details as to what are the Guidelines issue by RBI which are applicable to the NBFC and failed to verify whether all the conditions stipulated therein have been made. The A.O. has not done the assessment in a proper manner and that was the short point which was being emphasized in the show cause notice. I accept the argument of the assessee that interest has been shown on accrual basis even after the due date of coupon period till 31.03.2008. The order is neither erroneous nor prejudicial to the interest of revenue on this point. I also accept the argument of the assessee that it was granted license/regulator of NBFC without any permission to invite public deposits. The assessee company was therefore not required to maintain certain securities in the form of SLR and has therefore correctly considered all the investments as "current investment "and treated them as stock in trade. The assessee‟s contention in this regard has also been found co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessments order prejudice to the revenue has been caused on account of this issue. In view of the above discussions and facts in the present case, we confirm the order of the CIT (A) deleting the addition made by the AO and dismiss the appeal of the Revenue. Consequently, the appeal of assessee on this issue for A.Y. 2009-10 in ITA No. 1276/Mum/2015 is allowed. 7. Since, the assessee's cross objection is supportive of the order of the CIT (A) on this issue for A.Y. 2008-09 and we have dismissed the Revenue's appeal by confirming the order of the CIT (A), the same has become infructuous and the same is dismissed as such. 8. Now, coming to the assessee's appeal in ITA No.1276/Mum/2015 for the assessment year 2009-10, the second issue in this appeal of assessee is as regards to the order of CIT (A) confirming the action of the AO in making disallowance of expenses relatable to exempt income by invoking the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter 'the rules'). 9. At the outset, Ld. Counsel for the assessee stated the fact that there is no exempted income in the hands of the assessee. For this he referred to the computatio....