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2015 (10) TMI 24 - DELHI HIGH COURT

2015 (10) TMI 24 - DELHI HIGH COURT - TMI - Nature of investment - in the nature of trade or not - Assessee had changed the treatment of the shares by treating them as investment instead of stock in trade - AO concluded that, , the only motive for this undue change in this year (AY 2005-06) appeared to be lowering the tax incidence and taking undue benefit of the exemption from tax on long term capital gains under Section 10(38) of the Act and concessional rate of tax @ 10% on short term capital .....

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an audited balance sheet of a company for a financial year is signed by its Directors and statutory Auditors, and submitted to the statutory authorities, including the Registrar of Companies (RoC) and the income tax authorities, the figures in such balance sheet for the closing stock of shares can simply be altered subsequently by adopting the device of “regrouping” by the Assessee, even by a Board resolution. That is a process unknown to the law. Even from the point of view of principles govern .....

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e statutory authorities including the RoC and the income tax authorities have already been provided with (and perhaps acted upon or accepted) such signed audited accounts for a particular financial year.

The authorities concerned, and in particular the income tax authorities, ought to strictly scrutinise such claims as to 'regrouping' of figures appearing in the audited and signed accounts by an Assessee subsequent to such signing. In other words, the decision regarding such change in .....

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keeping in view the above aspects. The ITAT is urged to call for the complete details of the records both from the AO as well as the CIT (A) and any further relevant particulars to arrive at a correct decision. - ITA 947/2011, ITA 539/2014 - Dated:- 23-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Rohit Madan, Senior Standing counsel For the Respondent : Mr. Simran Mehta, Advocate ORDER 1. ITA No. 947 of 2011 is an appeal by the Revenue under Section 260A of the Income .....

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held by the Tribunal in the nature of investment and not in the nature of trade? 4. In ITA No.539 of 2014, notice was issued limited to the question concerning the treatment of capital loss as business loss. 5. The brief background to the appeals is that the Assessee is a private limited company engaged in the business of trading and finance. For the AY 2005-06, the Assessee filed its return of income on 31st October 2005 declaring a total income of ₹ 3,75,88,170 which comprised of busines .....

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d been treated as investment in the current year. Although the TAR stated that Annexure-3 thereto contained a note on the effect to the profitability of the Assessee, the AO found no such annexure. What was furnished by the Assessee before the AO was a copy of Schedule 4A forming part of the balance sheet and profit and loss (P&L) account as on 31st March 2005. This, according to the Assessee, was the same as Annexure-3 to the TAR. The AO found that the basis of the valuation of the opening .....

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O, the only motive for this undue change in this year (AY 2005-06) appeared to be lowering the tax incidence and taking undue benefit of the exemption from tax on long term capital gains under Section 10(38) of the Act and concessional rate of tax @ 10% on short term capital gains under Section 111A which had been brought into the Act with effect from 1st April 2005. Treating the entire shares held by the Assessee as stock in trade, the AO treated the resultant profit from the sale of shares in .....

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valued at ₹ 9,83,45,399 shown as stock in trade in the Asst. Year 2004-05 have been regrouped under the head investment in the accounts for the Asst. Year 2005-06. Enclosed with the said letter, was a sheet titled Annexure-III, with the opening sentence stating The figures of the previous year as on 31-03-2004 has been regrouped in the following manner . Set out thereunder was a table with two columns for entries in the P&L account and the balance sheet (as regards reserve and surplus .....

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#39; was ₹ 6,88,64,982 and the revised figure was shown as ₹ 16,99,384. 7. The CIT (A) sought a report from the AO on the above letter and enclosures. The AO in his report pointed out that the Assessee had consistently shown these shares as stock in trade. Contrary to the Assessee s claim, it had never shown them as investment prior to AY 2005-06 as evidenced by the auditor s report. Importantly, it was pointed out that the Assessee had shown the value of opening stock as on 1st Apri .....

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hown in the P & L account of AY 05-06 under the head "as at 31.3.04." This indicated that the figures in the Audit Report filed along with the return for AY 04-05 had not been shown in the previous year's column and was changed by the auditor for which a note in Annexure 3 was given which was deliberately not furnished along with the Audit report for AY 05-06. The AO then set out the changed figures under the different heads in a tabular form. The AO concluded that the Assessee .....

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, observed that the AO had accepted the stand of the Assessee that shares were held as investment for AY 2004-05 as well. According to the ITAT, the AO could not have taken a different view for AY 2005-06 particularly since there was no material on record to justify it. 10. During the course of hearing of these appeals on 15th September 2015 the Court called for the record of the AO as well as CIT (A) for the purpose of examining what was in fact stated by the Assessee in the P& L account as .....

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31st March 2005 which was signed by its Directors and by its CA on 5th July 2005 contains two columns giving the figures as on 31st March 2004 and 31st March 2005. It is seen that in this balance sheet the figures given for the inventory as on 31st March 2004 have sought to be shown as per 'regrouping' as indicated in Annexure-3 to the TAR, a copy of which was enclosed by the CA in its letter dated 24th February 2009 addressed to the Additional Commissioner of Income Tax, which has been .....

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the column concerning the position as on 31st March 2004 is the same as the original signed audited balance sheet for the year ending 31st March 2004 or has been changed. 12. It is, therefore, not clear whether after the signing of the audited balance sheet as on 31st March 2004 by Directors and CA any resolution was passed by the Board of Directors of the Assessee deciding to treat as investment the shares shown therein as stock in trade. This is an important aspect which does not appear to hav .....

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uping by the Assessee, even by a Board resolution. That is a process unknown to the law. Even from the point of view of principles governing statutory accounts, such change cannot be simply given effect to in the balance sheet and P&L account for a subsequent year. For instance, such a change, as was sought to be made by the Assessee in the instant case, to the value of the closing stock of shares by treating it as investment instead of stock-in-trade, would affect (and perforce necessitate .....

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