TMI Blog2011 (3) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... on of closing stock of shares is admissible, without examining the fact that loss on valuation of share is a speculation loss. 2. The assessee-company is engaged in the business of real estate and development. During the course of assessment proceedings, the A.O. observed that the opening stock of shares of the assessee-company has been shown at ₹ 2.5 crores, while the closing stock was taken at ₹ 25 lakhs, although there was no evidence of any sale of shares. In response to notice, the assessee explained that the assessee-company had acquired shares of M/s. Inalsa Appliances Ltd. in the financial year 2003-04 at issue price of ₹ 10/- each. In the financial year relevant to assessment year under consideration, i.e. A.Y. 2005-06, M/s. Inalsa Appliances Ltd. had gone in liquidation by the order of Hon ble Delhi High Court dated 11/4/2005 and official liquidator was appointed. That the official liquidator has taken over the reins of M/s. Inalsa Appliances Ltd. and has not discharged any payment to its creditors, let alone shareholders. The auditor of the assessee-company, therefore, valued the shares of M/s. Inalsa Appliances Ltd. at the taken value of Re.1/- p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is brought about bona fide and is in accordance with the normally accepted accounting principles, there is no reason to disallow the change in method of valuation. It was further submitted that the assessee-company followed the principles of Accounting Standard (AS) 13 issued by the Institute of Chartered Accountants of India on accounting for investments and this principle of AS-13 is also applicable to shares, debentures and other securities held as stock-in-trade. The ld. C.I.T.(A) after considering the arguments of the assessee, judidical pronouncements relied upon by it and perusing the assessment order and evidences on record directed the A.O. to delete the addition of ₹ 2.25 crores made on account of valuation of closing stock. His observation in this regard is reproduced below :- 5. I have considered the argument of appellant. I have perused the assessment order and detailed observations and findings recorded therein. I have also carefully considered the submission of the AR and provision of Section 145A Sec 145 of the Income Tax Act, and also Case laws relied upon by appellant. On analysis of various judicial pronouncements regarding change in method of valuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial to that effect and otherwise the same will be lacking support. This view is supported by jurisdictional High Court in the case of CIT Vs. Delta Corporation (1993) 71 Taxman 329 (Calcutta). In view of the above and relying on the above cited case laws, and my observations and findings, I direct the Assessing Officer to delete the addition of ₹ 2,25,00,000/- made on a/c of valuation of closing stock. Appellant s appeal is allowed on this point. The department being aggrieved is in appeal before us. 4. The ld. Departmental Representative submitted that the ld. C.I.T.(A) has given relief to the assessee stating that there is no observation of A.O. that there is any mala fide intention of the assessee to change method of valuation of closing stock of shares held by the assessee. The ld. Departmental Representative submitted that the ld. C.I.T.(A) was not justified to put onus on the A.O. He submitted that the assessee had changed method of valuation and, therefore, onus is on the assessee to prove that valuation is bona fide. He, therefore, submitted that the order of the A.O. should be confirmed. 5. On the other hand, the ld. A/R of the assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee-company took the value of closing stock of shares of M/s. Inalsa Appliances Ltd. @ Re.1/- per share at ₹ 25 lakhs on the basis of cost price or market value, whichever is lower. The A.O. rejected the valuation of closing stock based on different method of valuation as, according to him, it was not acceptable in terms of provisions of Sec. 145A of the Act. He, therefore, took the decrease in closing stock at nil in place of decrease in closing stock of ₹ 2.25 crores [Rs.2.5 crores ₹ 25 lakhs] as shown by the assessee-company and a net addition of ₹ 2.25 crores was made to the assessee s total income. The accounts of the assessee-company are duly audited and we find no adverse comment on such audited accounts having been made by the A.O. We further observe that the A.O. has not disputed the rate of valuation of closing stock. Therefore, in our considered opinion, the ld. C.I.T.(A) has rightly held that once the accounts are accepted, there is hardly any scope to attract provisions of Secs. 145 and 145A of the Act. Sec. 145A of the Act was introduced by the Finance (No.2) Act, 1998 w.e.f. 1/4/1999 and circular No. 772 dated 23/12/1998 was issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is permitted to change its method of stock valuation honestly and in accordance with the principles of permitted tax avoidance. In this case the assessee changed its stock valuation method correctly and was entitled to the tax benefit arising therefrom. 6.1. Further, as per decision of Hon ble Apex Court in the case of Sanjeev Woolen Mills Vs. CIT [279 ITR 434 (SC)], the right to change the method of valuation vests with the assessee, if the change in method is a recognized method of valuation and has been regularly followed. The relevant excerpts from the head notes of the decision are reproduced hereinunder :- Choice of the method of accounting lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee s choice of the method regularly employed unless by this method the true income or profits cannot be arrived at. The assessee s regular method would not be rejected as improper merely because it gives him the benefit in certain years or because as per the A.O the other method would have been more preferable. The method of accounting cannot be substituted by the A.O merely bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enerally provides the best evidence of fair value. The valuation of current investments at lower of cost and fair value provides a prudent method of determining the carrying amount to be stated in the balance sheet. [Emphasis supplied]. The assessee-company is bound to follow the accounting standard as it was mandatory and obligatory to follow normally accepted accountings principals. There is no dispute to the fact that the shares of M/s. Inalsa Appliances Ltd., after it went into liquidation, did not have any active market. Therefore, the valuation of current investments of the assessee-company, which were shares of M/s. Inalsa Appliances Ltd., has rightly been taken at lower of cost and fair value, whichever is lower, as a prudent method of valuation of closing stock. 6.4. In view of our discussions above, we are of the considered opinion that the ld. C.I.T.(A) has rightly directed the A.O. to delete the addition of ₹ 2.25 crores made on account of valuation of closing stock. His order on this issue is, therefore, upheld. 7. In the result, the appeal of the Revenue is dismissed. This order is pronounced in the open Court on 11.03.2011. - - TaxTMI - TMITa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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