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2016 (11) TMI 1069 - ITAT MUMBAI

2016 (11) TMI 1069 - ITAT MUMBAI - TMI - Addition on account of negative stock-in-trade as at the year-end - correct head of income - Held that:- Valuation of the relevant scrips as at the year-end may be lower than the ‘cost’ as recorded in books, as where there is a decline in the market price since. The difference, or the said decline, is only a business loss, which gets absorbed in the valuation of the closing stock. No separate addition/adjustment is required to be made/effected, i.e., apar .....

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he yearend), shall obtain. Also, if the business income is, as contended, assessed as speculative income, the decline therein (on account of the valuation of closing stock) would again stand to be assessed under the same head/category. - However, as we shall presently see, i.e., while discussing the Revenue’s appeal, the categorization of the same as speculative is without basis. Addition by way of such adjustment shall again be carried out by allowing the assessee proper opportunity of hea .....

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hearing. We, therefore, have no hesitation in confirming the impugned order on this score. As regards the reallocation of the administrative expenditure, we find that both the assessee as well as the AO to have allocated the same under different activities without any basis. However, the said allocation is itself rendered of no consequence as the entire business income is to be regarded as nonspeculative. - Denying the ‘claim’ for reduction in the closing stock - Held that:- The entire deta .....

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pg. 1) bears no claim for any reduction in stock; it adopting the same figure of profit, i.e., as obtains per the profit and loss account. We have noted that the stock-in-trade at the year-end (Rs.2,74,36,842/PB pgs. 48-57) is in agreement with the figure as per the balance-sheet (PB pg. 7). No error in the impugned revision was also pointed out to us during hearing. - I.T.A. No. 3573/Mum/2014, I.T.A. No. 3762/Mum/2014 - Dated:- 4-10-2016 - SHRI SANJAY ARORA, AM AND SHRI AMARJIT SINGH, JM For Th .....

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TA No. 3573/Mum/2014) 2. The issue arising in the instant appeal by the assessee is with regard to the maintainability in law, and in the facts and circumstances of the case, of the addition, effected in the sum of ₹ 54,63,795/- in assessment, on account of negative stock-intrade as at the year-end, since confirmed in first appeal. Facts in brief 3. The final accounts of the assessee-company, a share and stock broker, were found by the Assessing Officer (AO) to bear negative stock as at th .....

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value), the same came to be reflected as negative stock. The acquisition by the assessee, which was sans any consideration, recorded or otherwise, being not explained, the same was considered unexplained as to its nature and source. Accordingly, value/s thereof, as on the date/s of acquisition, i.e., on which the same came to be included in the assessee s D-mat account, aggregating to ₹ 24,28,500/-, was brought to tax. Detail of these scrips are as under: (pg. 2 of the assessment order/Tab .....

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ning for f.y. 2008-09, the relevant previous year: (pg. 2 of the assessment order/Table B) Sr. No. Name of the scrip Qty. (Nos.) 1 BPCL 4656 2 Garden Silk 200 3 Reliance Power 3438 4 Thirumal Chem 937 5 Torrent Power 3618 6 Neyveli Lignite 1191 In first appeal, as also before us (through the ld. AR), the assessee explained that as these shares (of the directors and their family members) were kept in pledge (with the Stock Exchange) toward margin money, the same came to be sold as and when the ma .....

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ion. Aggrieved, the assessee is in second appeal. 4. Before us, the assessee raised another plea - that there is negative opening stock, i.e., as at the beginning of the year, as well, and which stands valued at ₹ 34,51,564/-. The value of the negative stock per the assessee s accounts, so that the stock-in-trade as at the year-end stands reduced by that amount, is ₹ 36,78,956/-. Accordingly, only the net accretion to the negative stock during the year, or the net reduction in the cr .....

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DR. on the other hand, relied on the orders by the Revenue authorities. 5. We have heard the parties, and perused the material on record. The facts as emanating from the material on record give rise to a number of questions and, accordingly, issues, which would require being suitably addressed, so as to arrive at the sums, if any, that would stand to be assessed as income, including the question as to the correct head of income. 5.1 Our first observation in the matter is that the assessee has b .....

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so that no further adjustment was arguably called for. And the only issue that could arise in that case was if the purchase cost incurred is more than the sale value, and also if the assessment (of the surplus/ gain) as business income under section 28 was proper. To put things in perspective, the negative values would have to be excluded in determining stock-in-trade, even as the assessee pleads before us, both as at the beginning and the end of the year, and the profit/loss (for the account p .....

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end of the year, impacting its profit accordingly, details of which are as under: (PB pg. 58) Negative stock as on 31.3.2009 Table C Sr. No. Scrip Qty. (Nos.) Rate Amount (Rs.) 1) Bongai Refinery 3903 41 160023 2) BPCL 4653 376 1749528 3) Garden Silk 200 40 8000 4) Glax Smrth 1 704 704 5) Neyveli Lignite 1191 84 100044 6) Reliance Power 3438 103 354114 7) Sudershan chem. 981 92 90252 8) Tata Inv. Corp. 775 231 179025 9) Tata Tea 1135 584 662840 10) Thirumal Chem. 932 47 43804 11) Torrent Power .....

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tities, which are at variance with that adopted in the assessment order), we, accordingly, confirm the addition of ₹ 2,27,392/- to the assessee s business income for the year on account of incorrect valuation of its opening and closing stock-intrade. Though it could be argued that no adjustment in respect of the value of the opening stock is permissible, value of which is to be taken at the same sum (Rs. 2,91,08,820/-) as adopted qua closing stock for the immediately preceding year (PB pag .....

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ns by the Hon ble jurisdictional High Court and Supreme Court settling the law in the matter. We may refer to this addition as Addition 1. We may here also mention that though manifest in the form of (the value of) the closing stock, the addition is essentially on account of unexplained credit inasmuch as the source of the credit of the shares in the assessee s D-mat account is unexplained, which remains unaccounted in financial accounts as well. The sale implies existence of shares, at least in .....

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[2005] 147 Taxman 448 (All). 5.2 The second adjustment warranted is on account of the increase in the quantity of negative stock during the year. For example, a stock, at (-) 500 units - at the beginning of the year, increases to (-) 100 at the year-end. Clearly, there is a net addition of 400 [(-) 100 - (-) 500], in accounts, during the year and, presumably, only at a cost. Surely, further adjustment would be required and merely excluding the negative value qua these (100) shares shall not suf .....

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xcluding the negative values or assigning nil values in-as-much as negative stock is a physical impossibility. Not so doing would tantamount to availing deduction of cost of 400 shares as recorded in books for the current year against sales made during a preceding year, which cannot be. That is, the quantity shall find reflection in the closing stock (to be valued at cost or market value, whichever is less) and, consequently, as opening stock for the following year. This, then, would constitute .....

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ive figure at Col. 3 above, stands already neutralised in the addition of ₹ 2,27,392/- (Addition 1). (2) to be valued at lower of cost/fair market price (as at the relevant date/s) and FMV at the year-end. Needless to add, the A.O. shall, apart from verification and undertaking the exercise afore-said, effect the addition, where so, only after hearing the assessee and meeting its objections, if any. 5.3 The third addition (Addition 3) is qua the peak shortfall during the year, which may be .....

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son is simple: the assessee having no opening stock (in the relevant scrip), has sold, and had therefore acquired, 100 shares during the year up to the peak date. This corresponds to Addition 1, which gets effected when the closing stock is valued at nil. Another 500 shares, however, stand acquired since, and being undisposed as at the year-end, would stand to find reflection in the closingstock. Addition in respect thereof, i.e., by way of closing stock, shall ensue, valuing the same at the low .....

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ried out not only qua stocks recorded at negative figures as at the beginning or the end of the year, but also at any time during the year. Further, one may be tempted to suggest, and it may appear that an addition toward 600 shares is not justified considering the sale (in books) of/in the same number, credited to the P&L A/c. However, as explained hereinbefore, the sale of 500 shares falls in a preceding year, qua which credit therefore cannot be allowed for the current year. The same is a .....

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parate addition/adjustment is required to be made/effected, i.e., apart from that in respect of shortfall w.r.t. the cost stated. Take, for example, the case of the scrip Neyveli Lignite . If the cost of the scrip on the relevant (acquisition) date is ₹ 100/- (say), or otherwise purchased at that cost (say), the same stands recorded in books at ₹ 2,39,600/- and, accordingly, claimed as a deduction. The share price as at the year-end being ₹ 84/- (Table C), the business income w .....

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g for the peak shortfall (during the year) and concomitant adjustment, Addition 2 and Addition 3 are of the same species. Needless to add, the exercise for both these additions is to be carried out for all the shares, and not limited to those shares reporting negative quantity as at the beginning and/or at the end of the year, which may well be positive, even as shortfall (negative stock) subsists during a part of the year. Credit in the form of closing stock in every such case (i.e., with refer .....

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be carried out by allowing the assessee proper opportunity of hearing, meeting its case, if any. 5.4 Before parting with the matter, we may clarify certain aspects thereof. To begin with, the assessee s explanation of the shortfall in shares as on account of shares belonging to the directors or their family members kept as margin money of the company, availed credit of or otherwise monetized on the sale of such shares (on their being in demand) is neither here nor there. The explanation, firstly .....

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as evidenced by their sale and, further, without incurring any obligation qua the same? What prevented the company from recording a credit purchase from the transferor/s? The explanation is even otherwise unsustainable, with the Revenue reporting a difference between the stock with the family members and that sold by the assessee-company. Where acquired for a consideration or otherwise borrowed (placing a notional value), it would not result in a negative (shortfall in) stock. The negative stock .....

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ed as well as it s reliance on the rule of consistency. We have in fact already allowed it credit for the opening negative stock (shortfall) in-as-much as the said stock could only be acquired, or credit there-against availed, whichever one way one may see it, during a preceding year. If anything, it shows the accounts being unreconciled, with differences between the quantitative records (D-mat accounts) and corresponding financial accounts. We have, accordingly, directed for such a reconciliati .....

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the income for the year and, therefore, shall require adjudication by the assessing authority. This may, however, not be construed as placing any limitation on A.O. s examination; the purport being the proper assessment - in framing which he shall have regard to our observations in the matter, in the facts of the case, observing the principles of natural justice. We may here also clarify that irrespective of whether the assessee passes the corresponding journal entries in its accounts, the quant .....

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case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom) (FB). The reliance on J.K. Charitable Trust (supra) and Satish Panalal Shah (supra) is, as would be apparent from the foregoing, completely misplaced. 5.5 We decide accordingly. Revenue s Appeal (in ITA No. 3762/Mum/2014) 6. The assessee-company was during the assessment proceedings observed to have undertaken activities under three broad categories during the year, being .....

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e, particularly considering that Explanation to section 73 was not invoked by the AO. 7. We have heard the parties, and perused the material on record. Share trading, as apparent from the assessee s final accounts, i.e., income (operating) statement and balance-sheet (as at the year-end) respectively, constitutes a principal business of the assessee-company. In fact, the Revenue s relevant ground (Gd. 1) itself admits so. Explanation to section 73, which reads as under, is thus not applicable: L .....

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ists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Accordingly, and even as observed by the ld. CIT(A), we find no basis for holding the income/loss from the said activity as speculative by the AO, nor was any pointed out to us during hearing. We, therefore, have no hesitation in confirming the impu .....

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