TaxTMI 
TaxTMI 
2026 (7) TMI 1970
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....g is at Rs. 7,47,08,374/- The assessee was given a number of opportunities to explain that how this loses were made good as share market losses are settled at the end of the settlement cycle. Further the assessee was specifically asked how he had been compensating the huge losses shown in his ITRs since A.Y. 2015-16 as his income from profession and other sources is not sufficient in comparison the losses reported. 2. The appellant craves leave to add or amend the grounds of appeal as and when need of doing so arises." 2. The facts of the case are that the Assessing Officer, noticed from the balance-sheet of the assessee that the proprietor's capital reported in ITR for the A.Y. 2018-19 was disproportionately large in comparison to the income reported during the last three years and had seen a huge jump from previous years. He, therefore, asked the assessee to furnish the source of funds for the capital introduced with documentary evidence and to justify the huge business losses that were shown. In response, the assessee submitted that this was the first year of audit. The substantial increase in capital was because it included earlier year's losses, which had already b....
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....d the opening capital at Rs. 10,41,73,520/-. He noted that he had asked the assessee to file supporting evidence to demonstrate that his earlier counsel had furnished wrong financial statements but the assessee had reiterated his submissions without furnishing any documentary evidence. He observed that the net debit balance in future and options trading were Rs. 7,47,08,374/- and observed that as share market losses were settled at the end of the settlement cycle and the broker/sub-broker does not permit to carry forward losses to this next settlement cycle, the assessee was required to explain the same but could not offer any explanation in this regard. Therefore, he set out to re-construct the capital account of the assessee. Taking the opening balance at the amount shown by the assessee, he deducted the closing balance of capital account as on 31.03.2017, the dividend income, long term capital gain, the short term capital gain, amount received on sale or shares, amount received by bank transfer from his wife and F&O closing stock of Rs. 7,18,58,724/- but noticed that there still was a difference of Rs. 2,82,44,223/-, which was unexplained. He therefore, treated the same as inves....
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....ng stock. This contention of the assessee had been accepted by the Assessing Officer in the assessment order dated 27.08.2021. b. To match the balance-sheet, opening balance of capital as on 1.04.2017, opening capital had been placed at a resulting figure of Rs. 10,41,73,520.85/- based on this incorrect premise of closing stock as well as accounting for past losses of earlier assessment years of Rs. 2,33,15,090/-. This was against the practice of carrying forward the closing balance of capital as on 31.03.2017 to the next year i.e. 1.04.2017. Since the closing balance of capital was only Rs. 27,084/- and not Rs. 10,41,73,521/-, it was corrected in the revised return by the auditors. c. The trading loss had been computed at Rs. 90,48,341.64/- for the assessment years 2018-19 but the actual trading loss as per revised audit report was only 3,29,460/-. It was submitted that during the course of scrutiny proceedings, the assessee had filed an affidavit on 25.03.2021 affirming and reiterating those facts. The assessee further submitted that the very basis of drawing the financial statements dated 20.09.2018 was incorrect, because financial statements were drawn for ....
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....e real income which could be subjected to tax and the Assessing Officer had failed to consider this. He further pointed out that there was no case for the Department to add back losses determined of past years in the current assessment year and then bring them to tax under section 115BBE of the Income Tax Act. The assessee submitted that all the past years' cases had been done under scrutiny and no additions had been made in those cases. 4. The ld. CIT(A) gave due consideration to the submissions made by the assessee and held that the assessee had explained that the increase of opening capital of Rs. 10,41,73,520/- as against the closing balance in capital of Rs. 27,084/- for the A.Y. 2017-18 dated 31.03.2017, was on account of erroneous accounting of F&O transactions. He observed that in the original audited balance-sheet uploaded, the closing stock of F&O had been shown at Rs. 7,18,58,523/- but the same was actually the market value of, "sauda" carried forward by brokers Fairwealth Securities Ltd, that was wrongly considered as closing stock. Subsequently, the assessee had uploaded revised audit report and filed a rectified return of income for the relevant assessment year cor....
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....ect income and statement of affairs of the assessee for the assessment year 2018-19. 5. The Department is aggrieved at this decision of the ld. CIT(A) and has accordingly come before us. Sh. Amit Kumar, Sr. DR (hereinafter referred to as the ld. DR) appearing on behalf of the Department invited our attention to a report prepared by the DCIT, Circle-1, Luckow in which it was stated that the assessee had filed an ITR for the A.Y. 2018-19 on 17.10.2018 where he had shown proprietors capital of Rs. 10,46,97,834/-. During the course of assessment proceedings, the assessee had submitted that this figure had been wrongly taken by his professionals and therefore, he filed a revised audited profit and loss account and balance-sheet on 25.03.2021, showing therein the proprietor's capital at Rs. 4,75,878/-. However, in the very next year's balance-sheet i.e. as on 31.03.2019, the assessee had shown the same figure i.e. Rs. 10,46,97,883.49/- as opening capital. It was pointed out that the assessee had not furnished any documentary evidence in support of his claim that the first audit report was incorrect. Despite being asked to furnish information relevant to the source of income for A.Y. 2....
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....reme Court in the case of Radhasoami Satsang vs. CIT had categorically held that the principle of res judicata does not strictly apply to income tax proceedings and consistency could be claimed only where fundamental facts permeating through different assessment years remain identical. In the present case, not only had the assessee's own financial disclosures undergone drastic and unexplained changes, but the very foundation of capital accretion remains unsubstantiated. Therefore, in the absence of reliable evidence, the assessee could not seek shelter under past acceptance or alleged consistency. Mere filing of revised profit and loss accounts and balance-sheets during scrutiny without supporting material and contrary to originally audited records did not cure the inherent defects or discharge the burden cast upon the assessee under the Income Tax Act. Consequently, the findings recorded by the Assessing Officer were fully justified. It was submitted that the statement of the assessee that he had never taken any loans from any banks or otherwise in para 16 of the statement of facts filed with the memo of appeal before the ld. CIT(A), was contradicted by the fact that he had admitt....
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....of the cumulative losses of previous three years amounting to Rs. 2,33,15,090/. As such the capital account filed by him was inherently flawed. Similar action had been taken by the same auditor in the next assessment year. The assessee was unaware of these mistakes until the time the case was taken up for scrutiny. When he found that notices from the Income Tax Department were not being complied with or being complied with delay, he approached another consultant and was informed of the mistake in the preparation of the capital account. Thereafter, based upon the guidance note under section 44AB of the Income Tax Act, 1961 (2014 revised addition) and guidance notes on accounting for future and options and its impact on balance-sheet as published by ICAI, the assessee had revised his audit report and rectified the income tax return that was filed by him on the basis of such revised audit report. He had also sworn an affidavit on 25.03.2021 pointing all these out. The ld. AR submitted that the mistakes in the capital account were self-evident from the fact that the sauda value of derivatives could never be considered in closing stock and even if it was presumed for a moment that the p....
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....n the report brought on record by the ld. Sr. DR, it was submitted that the ITR for the A.Y. 2019-20 had been filed in October, 2019 itself. The assessee only came to know about the mistake in the filing of the audited financials when the case was taken up scrutiny in the Financial Year 2020-21 and 2021-22. Thus it could not be a ground to show that the audit report filed by the assessee initially was correct because it had been repeated in the financials of the next year. Regarding why no complaint was filed against the auditor, it was submitted that the tax auditor C.A. Himanshu Agarwal, was suffering from throat cancer for about three years and died sometime in 2024. Furthermore, the concerned C.A. having realized his mistake had undertaken to rectify the mistake. The ICAI mandates the C.A. to obtain a unique documentation identification number (UDIN) for carrying out attestation functions. It was pertinent to state that the C.A. obtained UDIN on rectified audit report dated 23.03.2021 which was contained on page 69 of the paper book of the respondent. In the circumstances, it was not deemed appropriate to file a complaint against him for the mistaken audit report. With regard t....
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....e and time. Subsequently, however, the ld. CIT(A) had granted a VC to the assessee and the assessee had submitted all the issues before him. On consideration of these, the ld. CIT(A) had passed the order in favour of the assessee and it was prayed that the order may kindly be confirmed. 7. We have duly considered the facts and circumstances of the case and the arguments of both parties. It is fairly apparent that the initial capital account filed with the audited accounts was defective on account of the fact that the sauda value (contract or notional value) of a derivative cannot be considered a closing stock for account and taxation purposes. The sauda value is the total exposure of the contract calculated as the quantity of the underlying asset multiplied by the current price of the underlying asset. A derivative does not confer direct ownership of the underlying asset and carries no physical inventory that one can physically possess, store or sell as traditional stock. Closing stock is defined as value of unsold tangible goods or raw materials held in inventory at the end of an accounting period whereas derivatives are mere contractual agreements to buy or sell underlying ass....