TMI Blog2008 (2) TMI 510X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Rs. 85,67,196 on account of interest. 3. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of vehicle and telephone expenses amounting to Rs. 50,000. 4. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 87,48,350 on account of difference in value of shares. By the assessee in Cross Objection for assessment year 1995-96: 1. The CIT(A) erred in upholding the disallowance of interest payment to the extent of Rs. 8,62,500. 2. The CIT(A) erred in disallowing vehicle and telephone expenses of Rs. 50,000 on account of personal user though the assessee is a limited company. By the revenue for assessment year 1996-97: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition made on account of Trade Deposit of Rs. 34,58,378. A.Y. 1995-96 3.1 The facts in relation to the first ground are that the Assessing Officer (AO) observed the assessee to have raised a sum of Rs. 33.90 lakhs during the year by way of Trade Deposits, the aggregate amount of which figure outstood at Rs. 61.58 lakhs as at the end of the relevant previous year, i.e., Financial Year (FY) 1994-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record. Admittedly, the assessee did not place all the relevant material before the Assessing Officer, and the ld. CIT(A) proceeded to accept that submitted before him without recording either the reason(s) for doing so; the assessee having failed to do in the first place, or after allowing a reasonable opportunity to the Assessing Officer to examine the same, so that his order stands vitiated by non-observance of Rule 46A of the Income-tax Rules, 1962. Under the circumstances, we only consider it fit, in the interest of justice, to restore this matter back to the file of the Assessing Officer to grant a reasonable opportunity to the assessee to establish its case before him and decide the same in accordance with law, per a speaking order. We decide accordingly. 4.1 Vide its second ground, the revenue contests the deletion of the disallowance in the sum of Rs. 85,67,196, out of total interest disallowance as effected by the Assessing Officer, i.e., at Rs. 94,29,696, the assessee being in appeal, vide its Cross Objection (Ground # 1), for the balance Rs. 8,62,500 sustained by him. The facts of the case in brief are that the assessee claimed a total interest expenditure at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial worth the name stood supplied by the assessee before the Assessing Officer while the ld. CIT(A) adjudicated on the basis of the "sufficient material" brought on record by the assessee. The ld. AR, on the other hand, supported the impugned order, stating that there has been no grievance as to the violation of Rule 46A in the revenue's grounds of appeal. 4.4 We have heard the parties, and perused the material on record. Evidently, there has been a clear violation of Rule 46A by the ld. CIT(A) in deciding this ground of the assessee's appeal before him. The revenue's relevant ground, we find to be couched in words with wide amplitude so as to enable it to argue its case on the basis of violation of Rule 46A. Even otherwise, it is a legal ground, having a bearing on the matter, so that the revenue's appeal cannot be decided without admitting the same, i.e., by its rejection at the threshold. Further, we also observe that the advances to some of the parties are either against the purchase of shares, or outstand against the amounts receivable on the sale of shares, so that, in either case, it amounts to financing of the assessee's investments in shares, or only toward its share tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, as also if the perquisite element in its respect stood offered to tax by them in their personal returns. He, therefore, made a disallowance at an estimated amount of Rs. 1 lakh out of the total expenditure claimed in respect of the telephones (Rs. 2.3 lakhs) and vehicles (Rs. 7.12 lakhs), being not in satisfaction of the mandate of section 37(1) of the Act. In appeal, the same stood confirmed on the same basis, even as the ld. CIT(A) restricted the disallowance, finding the same to be on a higher side, to Rs. 50,000. Aggrieved, both the parties are in appeal [Assessee Co.'s ground # 2]. 5.2 Before us, like contentions were raised by either party, with the learned DR placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Sayaji Iron Engg. Co. Ltd. v. CIT [2002] 253 ITR 749 (Guj.), to which the learned DR replied that the ratio of the said decision would have no application in the facts of the present case; the assessee-company failing to adduce any evidence before the revenue authorities of having provided the said facilities to its Directors in pursuance to an understanding or contractual arrangement with them, even as expressed by the Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of valuation as per the guidelines in its respect issued by the Institute of Chartered Accountants of India (ICAI). There is no finding by the Assessing Officer that the assessee has not been following this method regularly or that it 'misused' the same. Rather, the assessee has valued the 'stock' of shares in all the ten (10) companies which stood held by it as at the year-end on the average cost basis, of which the Assessing Officer has disturbed/rejected the valuation of only two shares afore-referred, so that the average cost method stood accepted by him for the balance eight (8) shares. It was not open for the Assessing Officer to follow a 'pick and choose' policy, and the assessee's method being (one of) a recognized and accepted methods) for valuation of closing stock, the same ought to have been accepted. The assessee's contentions found favour with the ld. CIT(A), finding it reasonable, and deleted the entire addition as made. Aggrieved, the revenue is in appeal. 6.2 Before us, it was contended by the learned DR that the average cost price method would be inappropriate under the circumstances; the shares in question being clearly identifiable, i.e., w.r.t. their purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the cost of improvement, if any) that can be reduced from the amount accruing on transfer, in the computation of income chargeable to tax under section 45. As such, the cost of asset(s) acquired subsequent to the transfer, under the circumstances, would have no bearing in the determination of cost, and thus, income, arising from those transferred, and which the assessee's avowed method clearly envisages and bears. It is this essential difference that attends, and/or is involved in the valuation of stock-in-trade in contradistinction to capital asset(s) (for determination of income chargeable to tax under section 45). And, as such, also in the present case, and not, as made out, i.e., of the Assessing Officer disturbing/rejecting, and selectively at that, the valuation of shares (investments) by the assessee that outstand with it at the year-end, and consequently of those sold, following an accepted and recognized method of valuation, i.e., at average cost. As an example, if in the present case, 1,60,000 shares in Indo Tra Decco Ltd. stood purchased not on 11-8-1994 at a single rate of Rs. 25 each, but on different dates prior to the sale date of 15-11-1994, at varying rates, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has observed that the assessee has carried out the share transactions for the first time during the current year. Further, there is no question of misusing of any method; the sole purpose of valuation of the closing stock being to ascertain the correct profits on the sales (transfers) made during the year (period) under consideration (by adopting a reasonable method consistently). As also pointed out earlier, the 'cost of acquisition', in terms of section 48, can only be w.r.t. the acquisition cost of the shares sold, so that the same would only be un-influenced by the cost of the shares purchased later, and thus, admittedly not sold (transferred), and forming part of the shareholding as at the year-end. Of course, these could form part of a subsequent sale transaction. However, in such a case, again, the average cost method, if applied, will be only w.r.t. to the average purchase cost of all the shares, being fungible, that are available for, and thus possibly could be sold out by that date. As such, in the facts of the present case, even assuming non-identification (and which only would necessarily entail adoption of any particular method), following any method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench, to examine whether the same is in respect of the specific shares sold (identifying them on the basis of distinctive numbers or share certificate numbers), i.e., following the identification principle, or worked out by applying a cost formula, treating the shares under question as interchangeable, which they indeed are, i.e., per the interchangeable principle; the same being not clear from the assessment order. The ld. DR, despite grant of two opportunities, could not produce the assessment record, and neither was the same forthcoming from the assessee who was also asked for it; the relevant details having only been furnished by it. In view of the foregoing, therefore, the matter would be required to be remitted back to the Assessing Officer's tile for confirming the cost of acquisition of the shares in Motorol (India) Ltd., sold during the year, either on the specific shares sold basis (if so considered in the first instance), or by applying the average cost method as delineated in this order, and for which, the data as submitted by the assessee, or on record, if found insufficient, may be called for from the assessee, or otherwise verified by the Assessing Officer. The reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1995-96, the Assessing Officer proceeded to verify some of them and on scrutiny of the accounts including Profit Loss account, balance-sheet, etc. came to know that the assessee was having closing stock of shares of about 10 (ten) companies and had claimed to have valued the closing stock of all those companies on average cost method basis, but when the Assessing Officer examined the individual transactions he came to know that so far as closing stock of shares of M/s. Indo Tra Decco Ltd. and M/s. Motorol (India) Ltd. was concerned, the closing balances of shares as per purchase (lot-wise) was available. 2.1 It was, in view of these facts that, he rejected the assessee's claim of valuation of stock of shares two companies [M/s. Indo Tra Decco Ltd. and M/s. Motorol (India) Ltd.] on average cost method and proceeded to value the closing stock on the basis of actual lot-wise/purchase price-wise which resulted in an addition of Rs. 15,02,721 on account of suppressed of stock of shares of M/s. Indo Tra Decco Ltd. and another addition of Rs. 72,45,629 on account of suppressed valuation of closing stock of shares of M/s. Motorol (India) Ltd. The relevant part of the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share Purchases on 25-1-1995-10,000 shares @ 266.25: 26,62,500 Purchases on 28-3-1995 to 31-3-95-126,500 shares @ 274.65: 347,43,444 --------- ----------- 186,500 Actual stock 4,18,05,944 Whereas the assessee-company has valued the stock of above shares for Rs. 3,45,60,315 (probably average value). However, the scripts of above shares clearly identifying that the closing value of shares should be Rs. 4,18,05,944 instead of Rs. 3,45,60,315. Thus the assessee has undervalued the closing stock of the shares by Rs. 72,45,629 (Actual purchasing value of Rs. 418,05,944-3,45,60,315 = Rs. 72,45,629). The same is added in the total income of the assessee treating that assessee has undervalued the stock of above shares with sole view to reduce the profit of the company." 3. On appeal by the assessee, the CIT(Appeals) deleted the addition as per findings contained in paragraph No. 7.3 of his order which reads as under:- "7.3 The contentions of the appellant, Assessing Officer and the facts on record are considered carefull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per share, 10,000 shares were out of lot purchased on 25-1-1995 and at the rate of Rs. 266.25 per share and 1,26,500 shares were out of lot purchased on 28-3-1995 to 31-3-1995 and at the rate of Rs. 274.65 per share. 5.2 However, when ld. Accountant Member proceeded to draft the decision he expressed an apprehension that the Assessing Officer having not given the details of sales of shares of M/s. Motorol (India) Ltd., it is not clear as to out of which lot of shares of M/s. Motoral (India) Ltd. the balance stock was available, which otherwise means that the ld. Accountant Member suo moto raised a doubt with respect to correctness of number of balance shares left in the closing stock, purchase rate as well as lot and it was in view of this apprehension that the appeal was re-fixed for specific purpose to get clarification from the assessee. 5.3 The appeal was finally heard on 19-2-2007 when ld. counsel for the assessee was specifically asked by the Bench to furnish the date-wise details of sales of shares of M/s. Motoral (India) Ltd., so that the correctness of figures/other details, such as, date of purchase and rate of purchase mentioned in the assessment order could be veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of the CIT(Appeals) on the basis of sale ground that they were not justified in rejecting the assessee's system of valuation based on average cost method and specially when Assessing Officer has accepted such method with respect to closing stock of shares of 8 other companies. 11. Before deciding this issue, I would like to record an admitted position of facts with respect to this issue - so far as objection of the assessee is concerned and that fact is that the assessee has never at any stage of the proceedings - either before the Assessing Officer or before the CIT(Appeals) or before the Tribunal during the course of hearing of this appeal on 5-10-2006; disputed the facts relating to number of shares of M/s. Motorol (India) Ltd. remaining in the closing stock, as stated in the assessment order, i.e., the assessee never objected to the correctness of the number of shares in the closing stock, lot out of which the shares were found to be balance in stock, date of purchase and cost price. 11.1 Another factual position which in my opinion is also most important and must be recorded here, even at the cost of repetition, is that this appeal was originally heard on 5-10-2006, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as rightly arrived at Rs. 4,18,05,944 (by the Assessing Officer). I am, further, of the opinion that since the assessee had valued the aforesaid shares only at Rs. 3,45,60,315, there was clear cut under-valuation of closing stock of these shares by an amount of Rs. 72,45,629 and revenue authorities were quite justified in making addition to that extent. The order of the CIT(Appeals) on this point is, therefore, confirmed. Revenue's this ground is allowed. 13. In the result, the appeal of the revenue, i.e., ITA No. 1781/Ahd./1999 for assessment year 1995-96 is allowed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 1. As there is a difference of opinion with respect to the issue relating to the valuation of closing stock of shares of M/s. Motorol (India) Ltd., the same is, therefore, referred to the Hon'ble President of ITAT with a request that following question may be referred to a Third Member or pass such order as the Hon'ble President may think fit: "Whether, on the facts and circumstances of the case, specially the fact that the assessee has never disputed the correctness of number of shares remaining in closing stock, date-wise lot out of which the shares in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,18,05,944. He, accordingly, held that the assessee had undervalued the closing stock by Rs. 72,45,629 [Rs. 4,18,05,944 (-) Rs. 3,45,60,315] and added the same to the income of the assessee-company. 4. On appeal, the CIT(A) considering the claim of the assessee, held that the assessee is a trader in shares; that valuation of closing stock is at average cost which is a recognized method, there is no finding by the Assessing Officer that the assessee has not followed this method regularly or that this method is misused; that the assessee's closing stock contained shares of ten companies out of which the Assessing Officer has accepted the valuation on the basis of average cost in respect of eight companies and rejected the valuation in respect of two companies i.e., Indo Tra Decco Ltd. and Motorol (India) Ltd., and that the Assessing Officer has not disturbed the valuation of shares shown by the assessee in respect of those companies in which cost comes to less than average cost; that the Assessing Officer has adopted pick and choose method for valuation of shares at cost and at average cost instead of following a uniform method and that, according to him, the Assessing Officer cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut by applying a cost formula, treating the shares under question as interchangeable, which they indeed are i.e., per the interchangeable principle; the same being not clear from the assessment order. In spite of giving two opportunities neither the Department nor the assessee was in a position to furnish those details. He further held that the matter would require to be remitted back to the file of Assessing Officer for confirming the cost of acquisition of the shares of Motorol (India) Ltd. sold during the year, either on the specific shares sold basis or by applying the average cost method as delineated in the order for which the data as submitted by the assessee or on record may be called for from the assessee or otherwise verified by the Assessing Officer. 7. The learned Judicial Member observed that neither before the Assessing Officer nor before the CIT(A), nor even before the Tribunal, the assessee disputed the fact relating to number of shares of Motorol (India) Ltd. remaining in the closing stock as stated in the assessment order. The assessee never objected the number of shares in the closing stock. The learned counsel was specifically asked for the explanation whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as at the end of the year. It is for the parties to bring the material on record that some sales have taken place. In absence thereof Assessing Officer was to be held justified to proceed on the basis of the material on record and value the stock as per the actual cost of acquisition. The cost at the average price otherwise than actual cost is to be proved by the assessee. No such details as stated above are there, nor furnished by the assessee despite opportunities given. In my opinion, therefore, the CIT(A) was not justified in directing to adopt the valuation by the assessee for which there is no basis given at any stage on the assumed average price when the shares and their cost of acquisition is identifiable and not even disputed by the assessee. The order of the CIT(A) is accordingly to be vacated and that of the Assessing Officer, as opined by the ld. Judicial Member, is to be restored. 9. In the result, the appeal of the revenue on this issue is to be partly allowed. 10. The matter shall now be placed before the Division Bench for passing the appropriate order. ORDER Per Bench Consequent upon difference of opinion between the Members constituting Bench 'C', which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details of any sales alleged to have taken place and there are no details available on record either in assessment order or elsewhere, where would the question of verification arise particularly when the assessee does not, despite opportunities, dispute the cost or the date of acquisition of the stock of shares as appearing as at the end of the year. It is for the parties to bring the material on record that some sales have taken place. In absence thereof Assessing Officer was to be held justified to proceed on the basis of the material on record and value the stock as per the actual cost of acquisition. The cost at the average price otherwise than actual cost is to be proved by the assessee. No such details as stated above are there, nor furnished by the assessee despite opportunities given. In my opinion, therefore, the CIT(A) was not justified in directing to adopt the valuation by the assessee for which there is no basis given at any stage on the assumed average price when the shares and their cost of acquisition is identifiable and not even disputed by the assessee. The order of the CIT(A) is accordingly to be vacated and that of the Assessing Officer, as opined by the ld. J ..... X X X X Extracts X X X X X X X X Extracts X X X X
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