ITO 8(1)3, MUMBAI V. AZOFEN P. LTD, MUMBAI

ITA 1509/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54852 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 01-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P PEERYA
• Assessee Lawyers: C N VAZE
• Keywords: Business income; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI S.V. MEHROTRA , ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A.NO. 1509/MUM/2010 ASSESSMENT YEAR : 2006-07 THE INCOME-TAX OFFICER -6(2)(3), R.NO. 562, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI 400 020. VS. M/S. FOCUS HOLDING PVT. LTD., 7/8, MAJIRI MAKARAND SOCIETY, VEER SAVARKAR MARG, MAHIM, MUMBAI 400 016 PAN: AAAC 0763 C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P. PEERYA RESPONDENT BY : SHRI C.N. VAZE O R D E R PER S.V. MEHROTRA, AM: THIS APPEAL BY THE REVENUE, IS DIRECTED AGAINST TH E IMPUGNED ORDER DATED 16.10.2009, PASSED BY THE LEARNED COMMISSIONER OF I NCOME-TAX (APPEALS)-12, MUMBAI, FOR THE ASSESSMENT YEAR 2006-07 ON THE FOLL OWING GROUNDS: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE WITH REGARD TO CHANGE OF METHOD OF ACCOUNTING FOR THE PURPOSE O F VALUATION OF CLOSING STOCK CONSISTENTLY FOLLOWED BY THE ASSESSEE . 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN TRADING AND INVESTM ENT OF STOCK, MUTUAL FUNDS, ETC. IT HAD FILED ITS RETURN OF INCOME DECLARING TO TAL INCOME OF RS. 1,66,141/- FROM THE FOLLOWING SOURCES: (I) SHARE TRADING BUSINESS; (II) LONG TERM CAPITAL LOSS ON SALE OF UNQUOTED SHARES; (III) DIVIDEND INCOME; AND (IV) INCOME FROM OTHER SOURCES. ITA NO.1509M/2010 M/S. FOCUS HOLDING P. LTD.. 2 3. THE ASSESSING OFFICER NOTED THAT THE ASSESSEES SUBMISSION WAS THAT IT WAS TRADING IN QUOTED SHARE, MUTUAL FUNDS AND INVES T IN UNQUOTED SHARES. HE ALSO NOTED THAT THE ASSESSEE HAD SHOWN CLOSING STOCK OF MUTUAL FUND OF RS.53,59,928/- IN ITS BOOKS OF ACCOUNT. HE FURTHER NOTED THAT THE SAID STOCK WAS VALUED AT PURCHASE COST. HE EXAMINED THE ACCOUNTING POLICY O F THE ASSESSEE COMPANY AND OBSERVED THAT ASSESSEE VALUED ITS CURRENT ASSETS AS AT MARKET VALUE. SINCE THE MUTUAL FUND FORMED PAST OF CURRENT ASSET, HE CONCL UDED THAT THE ASSESSEE SHOULD HAVE VALUED ITS MUTUAL FUND AS PER MARKET VALUE. HE NOTED THAT IN EARLIER YEAR ALSO ASSESSEE HAD VALUED ITS MUTUAL FUND AT COST. HE REQ UIRED THE ASSESSEE TO FURNISH ITS EXPLANATION IN THIS REGARD. THE ASSESSEES REPL Y HAS BEEN REPRODUCED AT PAGE 2 OF THE ASSESSMENT ORDER WHEREIN, INTER ALIA, IT HAS BEEN POINTED OUT THAT SINCE THE MUTUAL FUND SCHEMES ARE INTRINSICALLY IN THE NATURE OF INVESTMENTS AND NOT MEANT FOR TRADING, THEREFORE, THEY HAVE BEEN VALUED AT CO ST BEING INVESTMENT IN NATURE. IT WAS FURTHER CLARIFIED THAT AS PER THE ACCOUNTING PO LICY ALSO ONLY SHARES, WHICH WERE TRADED FREQUENTLY, WERE MARKED TO MARKET WHEREAS TH E MUTUAL FUND SCHEMES BEING IN THE NATURE OF INVESTMENTS WERE HELD AT COS T. FURTHER, IT WAS POINTED OUT THAT IN MARCH 2007, THE ASSESSEE HAD REFINED ITS AC COUNTING POLICY ACCORDINGLY. THE A.O. DID NOT ACCEPT THE ASSESSEES CONTENTION FOR T HE FOLLOWING REASONS: (A) ASSESSEE IS CONSISTENTLY FOLLOWING THE VALUATION OF SHARES AND SECURITIES ON MARKET RATE; (B) THE METHOD OF VALUATION OF STOCK AS PER AUDIT REPOR T WAS MARKED TO MARKET METHOD (C) ASSESSEES STOCK INCLUDES SHARE AND MUTUAL FUND UNI TS; (D) ASSESSEE HAD NEVER STATED THAT MUTUAL FUNDS WERE IT S INVESTMENTS; (E) THE PROFIT ON SALE OF MUTUAL FUND WAS OFFERED FOR T AXATION UNDER BUSINESS INCOME AND NOT UNDER CAPITAL GAINS. HE, THEREFORE, CONCLUDED THAT ASSESSEE HAD CARRIED ON TRADING IN MUTUAL FUNDS AND BALANCE MUTUAL FUND UNITS AT THE END OF FINANCIAL Y EAR WAS ITS STOCK IN TRADE. HE, ACCORDINGLY, COMPUTED THE VALUE OF MUTUAL FUNDS AT MARKET RATE AND MADE ADDITION ITA NO.1509M/2010 M/S. FOCUS HOLDING P. LTD.. 3 OF RS.32,70,678.85 AS PER THE DETAILS AT PAGE 3 OF HIS ORDER ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF MUTUAL FUNDS. 4. IN THE STATEMENT OF FACTS BEFORE THE LD. CIT(A), IT WAS, INTER ALIA, POINTED OUT THAT DURING THE ASSESSMENT YEAR 2005-06, THE S TOCK OF MUTUAL FUNDS HAD BEEN MERGED WITH THE STOCK OF SHARES AND REFLECTED AS ST OCK IN TRADE AS CURRENT ASSETS. THEREAFTER, REALIZING THE BASIC NATURE OF MUTUAL FU ND BEING DIFFERENT FROM THAT OF SHARES, THE MUTUAL FUND WAS SEGREGATED AND DISCLOSE D IN BALANCE SHEET SEPARATELY AND VALUED AT HISTORICAL COST IN LINE WITH ITS BASI C OBJECT AND NATURE AS INVESTMENT. AS REGARDS THE A.OS OBJECTION THAT ASSESSEE HAD OF FERED PROFITS ON REDEMPTION AS BUSINESS PROFIT, THE ASSESSEE POINTED OUT THAT SINC E THE OPENING STOCK OF MUTUAL FUND WAS NET ASSET VALUE BASED, I.E. MARKET VALUE, THE ASSESSEE OFFERED THE PROFITS AS BUSINESS PROFIT TO AVOID ANY LOSS OF REVENUE. TH E LEARNED CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSION DELETED THE A DDITION, INTER ALIA, OBSERVING THAT IN THE ACCOUNTING POLICY THERE WAS NO MENTION THAT MUTUAL FUND UNITS HAVE TO BE VALUED AT MARKED TO MARKET PRICE. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO PARA 3.3. OF THE ASSESSMENT ORDER AND POINTED OUT THAT ASSESSEE WAS DOING BUSINESS IN MUTUAL FUNDS. HE SUBMITTED THAT AS PER THE ACCOUNTING POLI CY CURRENT ASSETS WERE TO BE VALUED AT MARKED TO MARKET PRICE AND SINCE THE MUT UAL FUNDS FORM PART OF CURRENT ASSETS, THEREFORE, THEY SHOULD HAVE BEEN VALUED AT ON THE SAME BASIS ON WHICH THE SHARES WERE VALUED. THE LEARNED COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THERE IS NO CHANGE IN THE METHOD OF ACCOUNTING OF THE ASSES SEE. HE SUBMITTED THAT MUTUAL FUNDS WERE KEPT AS INVESTMENT AND THEREFORE, THEY H AVE TO BE VALUED AT COST PRICE. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE PER USED THE RECORDS OF THE CASE. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS REG ARDING THE METHOD OF VALUATION OF MUTUAL FUNDS HELD BY THE ASSESSEE. IN SCHEDULE G T O THE BALANCE SHEET AT ITEM ITA NO.1509M/2010 M/S. FOCUS HOLDING P. LTD.. 4 NO.4, THE ACCOUNTING POLICIES FOR VALUATION OF INVE STMENTS AND INVENTORIES READ AS UNDER: (A) INVESTMENTS IN SHARES AND SECUR ITIES ETC. ARE SEGREGATED AS INVESTMENTS AND STOCK IN TRADE (B) SHARES & SECURITIES THAT ARE CLASSIFIED AS INVESTME NTS ARE VALUED AT COSTS WHEREAS SHARES, WHICH ARE HELD AS C URRENT ASSETS ARE MARKED TO MARKET VALUE. IN THE OPINION O F THE MANAGEMENT, CURRENTLY IN THE LIGHT ON ON-LINE TRADI NG IN SHARES, THE TRADING VOLUME HAS INCREASED SUBSTANTIA LLY. SHARES ARE NOT HELD FOR A LONGER PERIOD, ACCORDINGL Y, THE MARKED TO MARKET PRICE IS A PROXIMATE COST OF EACH SCRIP. THIS ACCOUNTING POLICY CLEARLY SEGREGATES BETWEEN S HARES AND SECURITIES HELD AS INVESTMENT OR AS STOCK IN TRADE. IT IS CLEARLY STA TED THAT SHARES AND SECURITIES THAT ARE CLASSIFIED AS INVESTMENTS, ARE VALUED AT COST. THE REAL CONTROVERSY IN THE PRESENT CASE IS BECAUSE THE VALUATION OF MUTUAL FUN D IN EARLIER YEAR WAS AT NET ASSET VALUE BUT IN SUBSEQUENT YEAR AT COST. THE RES ULT IS THAT THE OPENING STOCK IS VALUED AT NET ASSET VALUE AND CLOSING STOCK HAS BEE N VALUED AT COST. THEREFORE, THE ISSUE IS TO BE EXAMINED WHETHER THE ASSESSEE WAS JU STIFIED IN VALUING THE MUTUAL FUND AT COST OR NOT. IT IS WELL SETTLED PRINCIPLE O F VALUATION OF STOCK THAT THE SAME IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LESS. ADMITTEDLY, THE VALUATION OF MUTUAL FUND AT COST WAS LESS THAN ITS NET ASSET VALUE AND, THEREFORE, AS PER NORMAL COMMERCIAL ACCOUNTING PRINCIPLE, NO FAULT CO ULD BE FIND WITH THE ASSESSEES VALUATION OF CLOSING STOCK OF MUTUAL FUNDS AT COST EXCEPT TO THE EXTENT THAT OPENING STOCK WAS AT MARKET VALUE. SINCE THE CHANGE HAS BEE N BROUGHT OUT MAINLY AFTER TAKING INTO CONSIDERATION THE NATURE OF SECURITY AN D, THEREFORE, IN OUR OPINION, NO ADJUSTMENT WAS CALLED FOR IN THE VALUE OF CLOSING S TOCK. THE CONCEPT OF VALUATION OF STOCK AT COST OR MARKET PRICE, WHICHEVER IS LESS , IS BASED ON THE PRINCIPLE THAT UNEARNED PROFITS ARE NOT TO BE TAXED. IT IS NOT TH E CASE OF THE REVENUE THAT IN SUBSEQUENT YEAS ASSESSEE AGAIN ALTERED THE BASIS OF VALUE. ON THE CONTRARY, THE ASSESSEE HAS STARTED TRADING THE MUTUAL FUND AS ITS INVESTMENT. THEREFORE, WE DO ITA NO.1509M/2010 M/S. FOCUS HOLDING P. LTD.. 5 NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LEARNED CIT(A). HIS ORDER IS CONFIRMED. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF DECEMBER, 2010. SD. SD. (VIJAY PAL RAO ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED THE 3 RD DECEMBER, 2010. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, CITY 6, MUMBAI 4. THE CIT(A)-12, MUMBAI 5. THE DR F BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI