ASST CIT 1(3)(1), MUMBAI V. RENAISSANCE PAINTS P. LTD, MUMBAI

ITA 1627/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7798 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 21-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AGAINST DATED PASSED
• Keywords: Transactions in derivatives
• Section: 142(1); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI BEFORE SHRI P.K. BANSAL , VP AND SHRI AMARJIT SINGH , JM / I .T.A. NO. 1627 / M/ 20 1 6 ( / ASSESSMENT YEAR: 20 12 - 13 ) ACIT 1(3)(1), ROOM NO.540 5 TH FLOOR AAYAKARBHAWAN MUMBAI - 4000 20 / VS. M/S RENAISSANCE PAINTS PRIVATE LIMITED 1 ST FLOOR, WARDEN HOUSE SIR P.M. ROAD, FORT, MUMBAI PIN:400001 ./ ./ PAN/GIR NO. : AAACG 2763 M ( / APPELLANT ) .. ( / RESPONDENT ) / DATE OF HEARING : 13.11 .2017 / DATE OF PRONOUNCEMENT : . 22 .1 2 . 2017 / O R D E R PER AMARJIT SINGH, JM: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 31 . 12 .201 5 PASSED BY THE COMMIS S IONER OF INCOME TAX (APPEALS) - 2 , MUMBAI [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO THE ASSESSMENT YEAR 20 12 - 13 . 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: - 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON LAW, THE LD CI T(A) WAS CORRECT IN DELETING THE ADDITION OF RS.59,04,745 MADE DUE TO LOSS IN VALUATION OF CLOSING STOCK, DESPITE THE FACT THAT THE ASSESSEE HAD ADOPT ED THE VALUE STOCKS AS ON ASSESSEE BY: REENU KAPOOR (AR) DEPARTMENT BY: SHRI M.C. OMI NINGSHEN , DR ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 2 31/03/ 2012 ON THE BASIS OF QU OTATIONS RECEIVED IN DECEMBER, 2012 WHICH IS THE SUBSEQUENT FINANCIAL YEAR AND NOT RELEVANT TO THE YEAR UNDER CONSIDERATION?' I (II) 'WHETHER ON FACTS AND IN CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN DELETING THE ADDITION OF RS.59,04,7451 - MADE DUE TO LOSS IN VALUATION O F CLOSING STOCK FOR YEAR UNDER CONSIDERATION DESPITE THE FACT THE ASSESSEE HAS DISCONTINUED ITS BUSINESS IN THE IMMEDIATE SUCCEEDING YEAR AND ACCORD INGLY LOSS CAN BE CLAIMED ONLY IN THE YEAR I N WHICH THE BUSINE SS IS ACTUALLY DISCONTINUED?' 2. 'WHETHER ON FACTS AND IN CIRCUMSTANCE S OF THE CASE AND IN LAW, THE LD .CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE ON BROKERAGE PAID WHEN THE NATURE OF SERVICE RENDERED TO ALLOW BROKERAGE PAID WAS NOT CONCLUSIVELY PRO VED TO BE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSE?' THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR WITHDRAW THE AFORESAID GROUND OF APPEAL, 3. THE BRIEF FACTS OF THE CASE ARE THAT T HE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTA L INCOME TO THE TUNE OF RS.29,0 2,88,280/ - ON 28.09.2012. THE RETURN WAS PROCESSED U/S 143(1) OF THE I.T. ACT, 1961. THEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. NOTICE S U/S 143(2) AND 142(1) OF THE ACT, 1961 WERE ISSUED AND SERVED UPON THE ASSESSEE. THE ASSE SSEE IS ENGAGED IN THE BUSINESS OF CONSTRUCTION ACTIVITY OF PAINTS AND TRADING IN PAINTING, ANTIQUE & STATUES AND ALSO TRADING IN F&O TRANSACTIONS. DURING THE YEAR , THE ASSESSEE HAS SHOWN INCOME FROM HOUSE PROPERTY, LOSS FROM BUSINESS, CAPITAL GAIN AND IN COME FROM OTHER SOURCES. THE DEEMED TOTAL INCOME U/S 115JB WAS SHOWN TO THE TUNE OF RS.34,05,12,395/ - . THE ASSESSEE CLAIMED THE LOSS IN VALUATION OF CLOSING STOCK TO THE TUNE OF RS.59,04,745/ - BUT THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND OF THE SAME WAS ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 3 NOT ACCRUED IN THE CURRENT YEAR , THEREFORE, LOSS TO THE TUNE OF RS.59,04,745/ - OF VALUATION OF CLOSING STOCK WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE . THE ASSESSEE ALSO CLAIMED THE BROKERAGE TO THE TUNE OF RS. 75 LACS BUT FAILED T O CONFIRM THE BROKERAGE TO THE EXTENT OF RS.75 LACS , THEREFORE, THE SAME WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. IN THE APPEAL , THE SAID CLAIM OF THE ASSESSEE WAS ALLOWED BY THE CIT (A), THEREFORE, THE REVENUE HAS FILED THE PRESENT APPEAL B EFORE US. ISSUE NO. 1: - 4. UNDER THIS ISSUE THE REVENUE HAS CHALLENGED THE DELETION OF THE ADDITION OF RS. 59,04,745/ - MADE DUE TO THE LOSS IN VALUATION OF CLOSING STOCK. THE ASSESSEE TOOK THE VALUE OF ENTIRE STOCK AS ON 31.03.2013 AND SHOWED THE LOSS OF RS. 59,04,745/ - . THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND OF THAT THE SAME WAS NOT CLAIMED IN THE RELEVANT YEARS BECAUSE THE ASSESSEE CLAIMED THE ACTUAL LOSS IN THE NEXT YEAR. THE ASSESSEE CHALLENGED THE FINDING OF THE ASSESSING OFFICER AND THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. THE FINDING OF THE CIT(A) IS HEREBY REPRODUCED BELOW FOR READY REFERENCE.: - 4.4 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE ORDER OF THE ASSESSING OFFICER. IN MY VIEW, THE CONTENTION OF THE AP PELLANT HAS SOME FORCE. THE APPELLANT HAS VALUED THE STOCK IN ACCORDANCE WITH 'THE SIGNIFICANT ACCOUNTING POLICIES AS MENTIONED IN THE 'NOTES TO ACCOUNT TO THE BALANCE SHEET' WHICH IS AS UNDER: 'INVENTORY OF TRADING GOODS ARE VALUED AT LOWER OF COST AND N ET REALIZABLE J./VALUE AT FIRST IN FIRST OUT BASIS.' ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 4 BESIDES, THERE IS NO DEVIATION IN THE ACCOUNTING POLICY AS PRESCRIBED U/ S. 145A OF THE ACT AND AS MENTIONED IN THE TAX AUDIT REPORT. VALUATION OF STOCK IS A VITAL FACTOR IN DETERMINING THE TAXABLE INCO ME OF AN ASSESSEE FROM BUSINESS, AS CORRECT PROFITS CANNOT BE ASCERTAINED UNLESS THE OPENING AND CLOSING STOCKS ARE VALUED CORRECTLY. NEITHER THE INCOME TAX NOR THE INCOME TAX PU1ES PRESCRIBES OR PERMITS ANY PARTICULAR METHOD OF VALUATION OF STOCK. AN ASSE SSEE MAY VALUE ITS STOCK EITHER AT COST PRICE OR AT MARKET PRICE, WHICHEVER IS LESS. IT IS THE CHOICE OF THE ASSESSEE 'TO KEEP THE SYSTEM OF VALUATION OF THE CLOSING STOCK AS HE LIKES. 'THE ASSESSING OFFICER CANNOT FORCE HIM TO MAINTAIN STOCK VALUATION SYSTEM I N A PARTICULAR M ANNER AS DESIRED BY THE ASSESSING OFFICER. HOWEVER, ONCE THE SYSTEM OF STOCK VALUATION IS FOLLOWED BY THE ASSESSEE YEAR AFTER YEA R CONSISTENTLY, THE SAME' CANNOT BE CHANGED IN NORMAL CIRCUMSTANCES. LIKEWISE, ONCE THE SYSTEM' OF STOCK VALUATION WHICH HAS BEEN FOLLOWED BY THE - ASSESSEE BY A SET SYSTEM OF VALUATION AND ACCEPTED BY THE ASSESSING OFFICER IN THE PAST, THEN THE ASSESSING O FFICER CANNOT 'REJECT THAT SYSTEM OF STOCK V AL UATION: THIS POINT HAS BEEN WELL DECIDED BY THE SUPREME COURT OF INDIA IN ONE OF THE MOST CLASSIC DECISION , ON THE STOCK VALUATION, NAMELY, IN THE CASE OF CHAINRUP SAMPATRAM .VS. CIT 24 ITR.: 481(SC) THIS DECISIO N OF THE S UPREM E COURT IS ONE OF THE MOST IMPORTANT AND CLASSIC DECISIONS AND WAS AND IS STILL RELEVANT TODAY. ON PAGE 486 OF THE ABOVE JUDGMENT THE JUDGES HAVE STATED: - THIS IS THE THEORY UND ERLYING THE RULE THAT THE CLOSINGSTOCK IS TO BE VALUED A T COST OR MARKET PRICE, WHETHER IS LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND AC COUNTANCY. AS PROFITS FOR INCOME AND TAX PURPOS ES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOU NTING UNLESS OF COURSE SUCH PRINCIPLES HAVE. BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENT UNREALIZED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF GOADS REMAINING UNSOLD AT THE GILD OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOU NT I N A BUSINESS THAT IS CONTINUING ARE NOT BROUGHT INTO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS ALREADY STATED ., LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALIZED. IN THE CASE OF THE APPELLANT THERE IS NO CHANGE IN THE METHOD OF VALUATION OF STOCK AND HENCE . THE VALUATION OF CLOSING STOCK AS SHOWN BY THE APPELLANT HAS TO BE ACCEPTED. REFERENCE MAY BE MADE ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 5 TO THE DECISION OF THE F1ONBLE PUNJAB AND HARYANA HIGH COURT IN THE C ASE OF CIT VS. SATISH ESTATE P. LTD. 361 1TR 451 WHEREIN IT WAS HELD AS UNDER: 'VALUATION OF CLOSING STOCK - LAND PURCHASED BY ASSESSEE IN DISPUTE BEFORE CIVIL COURT - DISPUTE HAVING ADVERSE IMPACT ON MARKET VALUE OF LAND - ASSESSEE REDUCING VALUE OF' CLOSING STOCK - NO CHANGE IN MET HOD OF VALUATION - DEPARTMENT ACCEPTING VALUE AS VALUE OF OPENING STOCK IN SUBSEQUENT YEAR. ADD WON ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK NOT PROPER. FURTHER, THE HONBLE SUPREME COURT IN THE CASE OF C IT. VS. BANNARI AMMAN SUGARS LTD. 349 ITR 708 HAD AN OCCASION TO DECIDE ON THE OF CLOSING STOCK. IN THE SAID CASE , THE HONBLE SUPREME COURT HELD THAT THE VALUATION OF SUGAR SHOULD BE AT A LEVY PRICE AND NOT COST PRICE ALTHOUGH THE LEVY. 5. ON APPRAISAL OF THE ABOVE SAID FINDING, WE NOT ICED THAT THE ASSESSEE HAS APPLIED THE CREDITED METHOD OF VALUATION OF STOCK. THE ASSESSEE CAN VALUE THE STOCK EITHER AT COST PRICE OR AT MARKET PRICE WHICHEVER IS LESS. IF, THE ASSESSEE ONCE ADOPTED THE PARTICULAR SYSTEM OF STOCK VALUATION AND THE SAME WA S FOLLOWED ON YEAR TO YEAR BASIS AND THE SYSTEM CANNOT BE CHANGED IN NORMAL CIRCUMSTANCES. THE ASSESSEE S VALUATION STOCK WAS IN ACCORDANCE WITH THE ACCOUNTING POLICY I.E., INVENTORY OF TRADING GOODS ARE VALUED AT LOWER OF COST AND NET REALIZABLE VALUE AT FIRST IN AND FIRST OUT BASIS. T HE CIT(A) HAS RELIED UPON THE NUMBER OF DECISIONS WHILE D ECIDING THE ISSUE SUCH AS CHAINRUP SAMPATRAM VS. CIT 24 ITR 481 (SC), CIT VS. SATISH ESTATE P. LTD. 361 ITR 451 (P&H) AND CIT VS. BANNARI AMMAN SUGARS LTD. 349 ITR 708 SUPREME COURT. ALLOWING IN THE YEAR OR IN THE SUBSEQUENT YEAR NOWHERE EFFECT THE TAX . TAKING INTO ACCOUNT OF ALL THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT WE ARE OF THE VIEW ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 6 THAT THE CIT(A) HAS DECIDED THE MATTER OF CONTROVERSY JUDICIOUSLY AND C ORRECTLY WHICH IS NOT LIABLE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ACCORDINGLY, THIS ISSUE IS BEING DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO. 2: - 6. ISSUE NO. 2 IS IN CONNECTION WITH THE DELETION OF THE BROKERAGE. THE LD. REPRESENTATIVE OF THE DEPARTMENT HAS ARGUED THAT THE ASSESSEE FAILED TO PROVE THE BROKERAGE WHOLLY AND E XCLUSIVELY FOR BUSINESS PURPOSE, T HEREFORE, THE AO HAS RIGHTLY DISALLOWED THE CLAIM OF THE ASSESSEE. HOWEVER, ON THE OTHER HAND THE LD. REPRESENTATIVE O F THE ASSESSEE HAS RELIED UPON THE ORDER PASSED BY THE CIT(A) IN QUESTION. THE ASSESSEE PAID THE BROKERAGE @ 15 LACS EACH TOTAL TO THE TUNE OF RS 75 LACS TO BHARAT P. MAKWANA, BHAVESH P. MAKWANA AND PARESH P. MAKWANA AND MAYURI B MAKWANA AND TARANG B MAKWANA IN LIEU OF THE SINGLE TRANSACTION OF SALE. THE BROKERAGE WAS PAID @ OF 1 5 LACS TO EACH PERSON. THE TRANSACTION WAS OF THE IN CONNECTION WITH THE SALE CONSIDERATION OF RS.40 CRORES. T HE BROKERAGE WAS LESS THAN 2%. THE ASSESSING OFFICER ALLOWED THE BROKERAGE OF 2% AND DISALLOWED THE BROKERAGE IN CONNECTION WITH THE THREE OTHER FELLOWS. THE CIT(A) ALLOWED THE CLAIM OF THE BROKERAGE TO THE TUNE OF RS.75 LACS ON THE BASIS OF THIS FACT THAT THE SAME WAS LESS THAN 2% OF THE TOTAL SALE CONSIDERATION . THE PREVALENT MARKET RATES ARE NEAR TO 2% OF THE SALE CONSIDERATION. THE CIT(A) RELIED UPON THE LAW SETTLED IN THE CASE OF ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 7 CIT, KERALA - II VS. DR. P. RAJENDRAN 127 ITR 810 KERALA HIGH COURT AND THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF ACIT VS. LEEL A P. NANDA 102 ITD 281. THE FACTS ARE NOT DISTINGUISHABLE AT THIS STAGE. BROKERAGE DOES NOT SEEM HIGH. THEREFORE, IN THE SAID CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CLAIM OF BROKERAGE HAS RIGHTLY BEEN ALLOWED THE CIT(A) WHICH IS NOT LIABLE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. ACCORDINGLY, THIS ISSUE IS BEING DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. 8 . IN RESULT, APPEAL OF THE REVENUE IS HEREBY ORDERED TO BE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 22.12.2 017 SD/ - SD/ - ( P.K. BANSAL ) (AMARJIT SINGH) VICE PRESIDENT JUDICIAL MEMBER MUMBAI; DATED : . 22.12. 2017 V.P. SINGH / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI ITA. NO.1627 /M/201 6 A.Y. 2012 - 13 8 6. / GUARD FILE. / BY ORDER, //TRUE COPY// / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI