THE ACIT, Circle-2, JAMNAGAR V. Shri Sueshchandra Gangadasbhai Kachhadia, JAMNAGAR

ITA 546/RJT/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2195 (ITAT-RAJKOT)
• Duration Of Justice: 3 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 15-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 04-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C S ANJARIA
• Assessee Lawyers: ANKIT GOKANI
• Keywords: Capital asset converted into stock in trade; Capital asset; Business income; Transactions in derivatives; Date of conversion; Fair market value
• Section: 45(2); 143(3); 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BEN CH, RAJKOT [CONDUCTED THROUGH E-COURT AT AHMEDABAD] (BEFORE SHRI ANIL CHATURVEDI, A.M. & SHRI S. S. GOD ARA, J.M.) ( , , ) ITA NO. 546/RJT/2012 (ASSESSMENT YEAR: 2009-10) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2, JAMNAGAR VS. SHRI SURESHCHANDRA GANGDASBHAI KACHHADIA C/O. M/S. SUPER METAL CORPORATION, SHED NO.374, GIDC, STU UDYOGNAGAR, JAMNAGAR-360004 PAN: ADBPK5808Q (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI C. S. ANJARIA, D.R. RESPONDENT BY : SHRI ANKIT GOKANI, A.R. DATE OF HEARING : 15-03-20 16 DATE OF PRONOUNCEMENT : 22-03-2016 ( )/ ORDER PER ANIL CHATURVEDI, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE REVENUE IS AGAINST THE ORD ER OF CIT(A), JAMNAGAR, DATED 16.07.2012 FOR A.Y. 2009-10. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER: 3. ASSESSEE IS AN INDIVIDUAL STATED TO BE HAVING IN COME FROM BUSINESS AND PROFESSION AND FROM OTHER SOURCES. ASSESSEE FILED HIS RETURN OF INCOME FOR A.Y. ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 2 2009-10 ON 29.12.2011DECLARING LOSS OF RS.38,77,086 /-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER, ASSESSMENT WAS FRAMED U/S. 143(3) OF THE ACT VIDE ORDER DATED 29.12.2011 AND THE TOTAL INCOME WAS DETERMINE D AT RS. 45,03,650/-. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED TH E MATTER BEFORE THE LD. CIT(A) WHO VIDE ORDER DATED 16.07.2012 (IN APPEAL NO. CIT( A) /JAM/218/11-12) GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE O RDER OF LD. CIT(A), REVENUE IS NOW IN APPEAL BEFORE US AND HAS RAISED FOLLOWING GR OUNDS: 1. THE CIT(A) HAS ERRED IN TREATING THE INCOME FRO M TRANSACTIONS IN SHARES AS BUSINESS INCOME INSTEAD OF TREATING THE SAME AS CAP ITAL GAINS AS HELD BY THE ASSESSING OFFICER. 2. THE CIT(A) OUGHT TO HAVE TAKEN IN CONSIDERATION THE FACT THAT IN THE IMMEDIATELY SUCCEEDING YEAR, I.E. AY 2010-11, THE ASSESSEE HAS TREATED PROFIT ON SALE OF ONE SCRIPT, NAMELY WELL PACK, AS EXEMPT CAPITAL GAIN TH OUGH IN THE AY UNDER CONSIDERATION IT WAS TERMED AS STOCK IN TRADE BY TH E ASSESSEE. THIS SUPPORTS THE VIEW OF THE REVENUE THAT THE ASSESSEE IN FACT MADE INVESTMENTS IN SHARES BUT TO LESSEN THE TAX BURDEN, THE SAME WAS DISCLOSED AS BU SINESS INCOME AND THE CLOSING STOCK WAS VALUED AT NET REALISABLE VALUE (N RV). 4. BEFORE US, AT THE OUTSET, LD. D.R. SUBMITTED THA T THOUGH THE REVENUE HAS RAISED VARIOUS GROUNDS, BUT THE SOLITARY ISSUE IS T HE TREATMENT OF INCOME EARNED ON SALE OF SHARES. 4.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A. O. NOTICED THAT ASSESSEE HAD EARNED PROFIT OF F&O TRANSACTION OF RS.2,45,98, 054/- AND LOSS OF F&O TRANSACTIONS OF RS.2,15,50,113/- AND THEREBY HAD EA RNED NET PROFIT OF RS.30,47,941/-. HE ALSO NOTICED THAT ASSESSEE HAD INCURRED LOSS ON TRANSACTIONS OF SALES OF SHARES, WHICH WAS TREATED BY ASSESSEE AS B USINESS LOSS AND ACCORDINGLY HAD VALUED STOCK AT THE END OF THE YEAR AT COST OF MARKET VALUE, WHICHEVER, IS LOWER. ON FURTHER ANALYZING THE ACCOUNTS, A.O. NOT ICED THAT THE LOSS CLAIMED BY THE ASSESSEE WAS NOT ON ACCOUNT OF SALE AND PURCHAS E OF SHARES BUT WAS ON ACCOUNT OF VALUATION OF CLOSING STOCK AT NET REALIZABLE VAL UE. HE WAS THEREFORE OF THE VIEW ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 3 THAT THE PROFITS EARNED ON SALE OF SHARES ARE TO BE TREATED AS CAPITAL GAINS AND NOT AS INCOME FROM BUSINESS, AS CONSIDERED BY THE ASSES SEE. HE ACCORDINGLY WORKED OUT THE INCOME FROM SALE OF SHARES AS CAPITAL GAINS . 5. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF T HE APPELLANT. FACTS OF THE CASE CAN BE PUT IN A NARROW COMPASS. ONLY GROUND OF APP EAL IS THAT AO HAS CHARGED TO TAX THE SHARE TRANSACTIONS OF THE APPELLANT UNDER THE C APITAL GAIN, WHICH WAS OFFERED, BY THE APPELLANT UNDER THE HEAD BUSINESS INCOME. ASSESSEE HAS ENTERED IN TO PURCHASES AND SALES OF SHARES UNDER FUTURE AND OPTIONS AND ON SPO T BASIS. AS THE ASSESSEE HAS SHOWN SPOT SHARE TRANSACTION UNDER THE BUSINESS HEAD THE CLOSING STOCK OF SHARES IN HANDS OF THE APPELLANT AT THE CLOSE OF THE YEAR HAVE BEEN VA LUED AT COST OR MARKET VALUE WHICHEVER IS LESS AND AS AT THE TIME OF CLOSING OF THE BOOKS OF ACCOUNTS I.E. AS AT 31ST MARCH 2009 THERE WAS DOWNFALL IN VALUE OF THE STOCK S HELD IN THE INVENTORY AS CLOSING STOCK THE VALUATION OF THE INVENTORY IS LOWER THAN THE COST OF THE SHARES AND THAT RESULTED IN LOSS IN SHARE BUSINESS OF THE APPELLANT. DUE TO THIS THE ADVANCE TAX OF RS 11,00,000/- PAID BY THE APPELLANT ON 15TH SEPTEMBER 2008 AS FIR ST INSTALLMENT OF ADVANCE TAX FOR AY 2009-10 BECAME FULLY REFUNDABLE. HENCE, AO WAS OF T HE VIEW THAT WHEN THE FIRST INSTALLMENT OF ADVANCE TAX IS PAID BY THE APPELLANT THEN OBTAINING REFUND OF THE SAME AMOUNT WHILE FILING RETURN OF INCOME BY SHOWING LOS SES IS A SCHEME DEVISED BY THE APPELLANT BY SHOWING SHARE INCOME AS BUSINESS INCOM E INSTEAD OF CAPITAL GAINS. SPOT SHARE TRANSACTION DETAILS ARE AS UNDER :- SR NO PARTICULARS AMOUNT IN RS. 1 SALES OF SHARES 15,44,89,181/- 2 CLOSING STOCK 1,16,98,309/- TOTAL 16,61,87,490/- 4 OPENING STOCK 1,73,45,466/- 5 PURCHASES 15,55,52,948/- TOTAL 17,28,98,414/- LOSS 67,10,924/ AGAINST THESE AO HAS MADE COMPUTATION OF SHORT-TERM CAPITAL GAIN OF SHARES AS PER ANNEXURE A TO THE ASSESSMENT ORDER WHEREIN HE HAS T AKEN SPOT SALES OF SHARES DURING THE YEAR AND REDUCE FROM THAT THE COST OF THE SHARE S , WHICH HAS RESULTED IN SHORT TERM CAPITAL GAIN OF RS, 12,93,771/-. IN BOTH THE ABOVE WORKING THERE IS NO DIFFERENCE EXCEPT THAT AO HAS TREATED THE TRANSACTION AS CAPITAL GAIN AND IGNORED THE EFFECT OF OPENING STOCK AND CLOSING STOCK WHEREAS ASSESSEE HAS DISCLO SED INCOME AS BUSINESS INCOME AND ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 4 THEREBY AFTER GIVING EFFECT OF STOCK IN TRADE THE A MOUNT OF LOSS IS RS 67,10,924/-. THEREFORE, THE MAIN ISSUE IN THE APPEALS IS WHETHER THE INCOME FROM THE SPOT SHARE TRANSACTIONS SHOULD BE CLASSIFIED AS INCOME UNDER T HE HEAD 'BUSINESS INCOME' OR INCOME FROM CAPITAL GAINS. THE ISSUE IS DISCUSSED B ASED ON SEVERAL PARAMETERS, FACTS, AND CIRCUMSTANCES OF THE CASE AS UNDER :- I. AO HAS WORKED OUT SHORT TERM CAPITAL GAINS ON SA LES OF THE SHARES DURING THE YEAR AS PER ANNEXURE A TO THE ASSESSMENT ORDER. IN THE SHORT-TERM CAPITAL GAIN, AO HAS MENTIONED THAT ALL THE TRANSACTIONS ARE FOR HOLDING OF SHARES LESS THAN ONE-YEAR HOLDING PERIOD. ON FURTHER LOOKING AT THE STATEMENT, IT IS APPARENT THAT IN CASE OF MUDRA PORT LTD OUT OF TOTAL 12572 SHARES SOLD, 7718 SHARES ARE SOLD ON THE SAME DATE ON WHICH IT IS PURCHASED. FURTHER, OU T OF 50,000 SHARES TRADED OF RELIANCE INDUSTRIES LIMITED, ONLY 6000 SHARES HAVE BEEN SOLD AFTER HOLDING IT FOR A MONTH AND 44000 SHARES HAVE BEEN SOLD ON THE DAY ON WHICH IT IS PURCHASED. FURTHER, ALL 4000 SHARES PURCHASED AND SOLD OF LARS EN & TOUBRO LIMITED ARE SAME DAY TRANSACTIONS. MOREOVER, ALL 16,000 SHARES OF RELIANCE CAPITAL LIMITED ARE SAME DAY TRANSACTIONS. SHARES OF IFCI LIMITED A RE FOR 24 DAYS. AIL OTHER SHARES TRADED ARE WITHIN LESS THAN 30 DAYS HOLDING PERIOD. THEREFORE, ON THE ABOVE FACTS IT IS VERY APPARENT THAT ASSESSEE IS IN HABIT OF SELLING SHARES WITH INTENTION OF EARNING QUICK PROFIT ON SALES WITHIN A VERY SHORT PERIOD. THIS CONDUCT OF THE APPELLANT ALSO PROVES THAT HE DOES N OT INTEND TO HOLD THESE SHARES FOR APPRECIATION AND EARN DIVIDEND ON THEM. II. MOST OF THE PROFIT OUT OF SHORT-TERM CAPITAL GA IN WORKED OUT BY AO IS EARNED ON SAME DAY TRANSACTIONS. III. REGARDING FREQUENCY OF SALES OF SHARES AS EX PLAINED ABOVE AS PER ABOVE STATEMENT OF AO IS THROUGHOUT THE FINANCIAL YEAR. T HE FIRST TRANSACTIONS HAVE STARTED IN THE MONTH OF APRIL AND LAST TRANSACTION IS IN THE MONTH OF MARCH. THEREFORE, IT IS APPARENT THAT APPELLANT HAS DEALT WITH THE SHARES THROUGHOUT THE YEAR. IV. THERE ARE NO CIRCUMSTANCES, WHICH ARE RESPONSI BLE FOR SALE OF SHARES SUCH AS THAT WARRANTS TO DISPOSE OF SOME LIABILITIES ETC. I N THE DAY, TRADING THERE CANNOT BE SUCH COMPULSION ASSUMED IN THE CASE OF THE APPEL LANT. V. FROM THE STATEMENT OF SHORT-TERM CAPITAL GAIN W ORKED OUT BY THE AO IT IS APPARENT THAT OBVIOUS MOTIVE OF ASSESSEE IS TO EARN SHORT-TERM PROFIT. ALL THE SHARES IN WHICH APPELLANT HAS TRADED , IT IS APPARE NT THAT APPELLANT CANNOT HAVE INTEREST TO ACQUIRE CONTROLLING STAKES OR THE SHARE S ACQUISITION ARE CERTAINLY NOT FOR ANY OTHER PURPOSE BUT TO EARN QUICK PROFITS. VI. APPELLANT IS A PARTNER IN THE FIRMS M/S SUPE R IMPEX, M/S ROYAL RECYCLING INDUSTRIES, M/S SUPER METAL CORPORATION AND HAS STA RTED THE BUSINESS OF TRADING AND SPECULATIONS IN SHARES TRANSACTIONS. AS PER ASSESSEE HE HAS STARTED BUSINESS OF TRADING AND SPECULATIONS IN SHARES, HE HAD CONVERTED ALL ITS ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 5 SHARES INTO STOCK IN TRADE, WHICH PREVI OUSLY WAS HELD AS INVESTMENT AS AT 31ST MARCH 2008. FROM ALL THESE COMPANIES TH OUGH ASSESSEE IS A WORKING PARTNER HOWEVER HE HAS EARNED MEAGER REMUNERATION OF RS 50,000 ONLY WHICH IS TAXABLE ALL OTHER PROFITS ARE EXEMPT U/S 10 (2A) OF THE ACT. NOW A DAYS THE TRANSACTION IN SHARES PURCHASES AND SALES CAN BE DONE ONLINE AND TRANSACTIONS CAN BE COMPLETED IN MINUTES ON TELEPHONE. THEREFORE, FOR THIS SOLE REASON IT CANNOT BE SAID THAT AS THE APPELLANT IS A PARTNER IN SOME FIRM , HE WOULD NOT HAVE ANY TIME AVAILABLE WITH HIM FOR DO ING THESE ORGANIZED ACTIVITY. APPELLANT HAS ITS OWN DEMAT AND TRADING ACCOUN T WITH M/S MARWARI SHARES LIMITED, A STOCK EXCHANGE BROKER AND TRANSA CTIONS CAN BE COMPLETED WITHIN MINUTES. THE PRICE OF THE SHARES ALSO AVAILABLE I NSTANTANEOUSLY. NO FURTHER ASSISTANCE OF THE MANAGER OR STAFF IS ALSO REQUIRED IN MOST OF THE CASES. THEREFORE ON THE SOLE REASON OF THE APPELLANT BEING PARTNER IN SOME FIRM CANNOT BE SAID THAT THE ACTIVITY OF TRADING CARRIED OUT BY THE ASSESSEE IS OF INVESTMENT AND NOT BUSINESS. THE OBSERVATION OF A O THAT APPELLANT IS PARTNER IN TWO FIRMS THEN HE COULD NOT BE SAID TO HAVE CARR IED ON THE SHARE TRADING BUSINESS IS MISPLACED FOR ONE REASON ALSO THAT AO HIMSELF HAS TAXED SHARES OPTION AND FUTURE INCOME OF RS 30,47,941/- IN PARA NO 4.12 AND 4.13 OF THE ASSESSMENT ORDER AS BUSINESS INCOME. THEREFORE, IT CANNOT BE SAID THAT FOR FUTURE AND OPTION PROFITS, THE INCOME DERIVED BY TH E APPELLANT IS BUSINESS INCOME AND ON READY MARKET, THE INCOME DERIVED THE ASESSEE IS OF INVESTMENT ACTIVITY. ONE OF THE FALLACY IN THE ASSESSMENT ORDER IS OVERL OOKING THE ACTS THAT SHARE TRADING CAN BE DONE IN TWO WAYS, ONE IN FUTURE MARK ET AND ANOTHER IN SPOT MARKET. THEREFORE, IT IS CONTRADICTORY TO SAY THAT ASSESSEE IS AN INVESTOR ON THE SPOT MARKET AND BUSINESSMAN IN FUTURE MARKET, VII. TREATMENT OF SHARES PURCHASES AND SALES IN TH E BOOKS OF ACCOUNT OF THE APPELLANT IS APPARENTLY BY DRAWING PROFIT AND LOSS ACCOUNT AN D SHOWING IT AS BUSINESS ACTIVITY. THE ACCOUNTS OF APPELLANT ARE ALSO TAX AU DITED ON THE SOLE REASON OF TRADING IN SHARES. THERE IS CASTING OF OPENING AND CLOSING STOCK OF INVENTORIES. ALL THE SHARES IN WHICH APPELLANT HAS MADE PURCHASE S SALES TRANSACTION ARE THROUGH STOCK EXCHANGE AND ARE LIKE LIQUID MARKET I .E. INSTANTANEOUSLY SALEABLE. VIII. IN THE BOOKS OF APPELLANT, SEPARATE ACCOUNT OF TRANSACTION ON CASH SEGMENT AND ON DERIVATIVE SEGMENT WITH THE BROKER IS SHOWN SEPA RATELY. IN DERIVATIVE SEGMENT OUTSTANDING IS RS 15.8 LAKHS AND IN CASH SEGMENT IT IS ONLY RS.1436/- AS IN CASH SEGMENT THE AMOUNT IS PAYABLE ON THE SPOT AS PER RU LES OF EXCHANGE. IX. THE CONDUCT OF THE ASSESSEE OF THE CONVERSION OF ITS SHARES HELD AS THE OPENING OF THE YEAR IN TRADING ACCOUNT AS OPENING STOCK AND TH EN DEALING IN THOSE SHARES, REALIZING PROFIT AND LOSS AND DETERMINING CLOSING S TOCK AT THE CLOSE OF THE YEAR AND VALUING SAME AT THE COST OR MARKET VALUE WHICHE VER IS LESS ITSELF SUGGEST THAT THE MOTIVE OF THE APPELLANT IS TO EARN BUSINESS INC OME ONLY. ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 6 X. ON PERUSAL OF THE AUDITED ACCOUNTS OF THE APPE LLANT, IT IS VERY IMPORTANT TO NOTE THAT DURING THE YEAR ASSESSEE HAS EARNED JUST RS 38 30/- AS DIVIDEND INCOME. THIS ITSELF PROVES THAT APPELLANT IS NOT INVESTING IN SH ARES FOR EARNING DIVIDENDS. XI. APPELLANT HAS DEBITED VARIOUS CHARGES IN THE BO OKS SUCH AS SECURITIES TRANSACTION TAX, SERVICE TAX , TRANSACTION CHARGES ETC WHICH ARE ATTACHED WITH THE SHARES TRADING TRANSACTIONS. ALL THESE EXPENSES HAV E BEEN GRANTED TO THE APPELLANT AS DEDUCTION BY AO AGAINST THE F & O ACTI VITIES. HOWEVER, THESE CHARGES ARE ALSO RELATED WITH THE SALES AND PURCHAS ES OF SHARES IN SPOT MARKET. THEREFORE WHEN THE FULL EXPENDITURE HAS BEEN ALLOWE D BY AO IT CANNOT BE SAID THAT PART OF THE ACTIVITY OF SHARES WHICH IS IN FUT URE AND OPTION MARKET IS TRADING ACTIVITY AND PART OF THE ACTIVITY WHICH IS IN SPOT MARKET (CASH SEGMENT) IS INVESTMENT ACTIVITY. XII. THE MAIN REASON WHY AO HAS NOT ACCEPTED THE BOOK RESULTS OF THE APPELLANT IS THAT THE LOSSES OF THE SHARE TRANSACTION CLAIMED AS BUSINESS LOSS HAS ARISEN NOT ON ACCOUNT OF THE ACTUAL SHARES AND PURCHASES OF TH E SHARES BUT AS PER THE AS VALUATION OF THE CLOSING STOCK AS AT THE END OF THE YEAR. APPELLANT HAS ADOPTED THE METHOD OF VALUATION OF CLOSING STOCK OF SHARES ETC AS THE COST OR NET REALIZABLE VALUE WHICHEVER IS LESS. AS PER THE NORM AL PRACTICE, THE APPELLANT CAN VALUE THE SHARES (I) AT COST, (II) AT MARKET RATES AND (III) AT THE COST OR MARKET VALUE WHICHEVER IS LESS. ACCORDING-TO THE PROVISION S OF SECTION 145A OF THE ACT 145A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTION 145, (A) THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE (I) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY THE ASSESSEE........ XIII. THEREFORE THE ABOVE SECTION MANDATES THAT VAL UATION OF INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOME CHARGEABLE TO TA X HAS TO BE IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE, IN THIS CASE, THE APPELLANT HAS SUBMITTED THAT THIS IS THE FIRST YEAR OF ITS BUSINESS INCOME AND THEREFORE HE HAS AN OPTION TO CHOOSE HIS METHOD OF VALUATION OF INVENTORY AT COST OR MARKET VALUE WHICHEVER LESS IS. APPELLANT HAS MA DE A CONSCIOUS CHOICE IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T, WHICH CANNOT BE FAULTED WITH WHATEVER MAY BE THE RESULTS OF THAT PARTICULAR METHOD, IF THE METHOD IS ACCEPTABLE TO REVENUE AND IS LOGICAL AND REASONABLE . IT HAS ALSO BEEN SUBMITTED BY THE APPELLANT THAT THIS METHOD HAS SO FAR BEEN C ONTINUOUSLY FOLLOWED BY THE APPELLANT AND THERE IS NO CHANGE IN THAT. METHOD OF VALUATION OF CLOSING STOCK AT COST OR MARKET VALUE WHICHEVER IS LESS IS BASED ON THE BASIC ACCOUNTING PRINCIPLES OF PRUDENCE WHICH IS ALSO RECOGNIZED IN THE FIRST ACCOUNTING STANDARD NOTIFIED IN 1996 UNDER THE INCOME TAX ACT WHICH SAY S THAT ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 7 'PRUDENCE. --PROVISIONS SHOULD BE MADE FOR ALL KNOW N LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAIN TY AND REPRESENTS ONLY A BEST ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION .' THIS IS THE MAIN PRINCIPLES BASED ON WHICH THE METH OD OF VALUATION OF INVENTORY AT LOWER OF COST OR NET REALIZABLE VALUE IS BASED. AS PER ACCOUNTING STANDARD 2 ISSUED BY MINISTRY OF CORPORATE AFFAIRS ALSO PROVID ES FOR THE VALUATION OF INVENTORY ONLY BY THIS METHOD, IN FACT VALUATION OF INVENTORY DOES NOT HAVE ANY IMPACT ON THE INCOME OF THE ASSESSEE AS HAD THE ASS ESSEE VALUED THE STOCK AT COST ,THERE WOULD NOT HAVE BEEN ANY OBJECTION BY THE AO, NEXT YEAR THE SAME CLOSING STOCK WOULD HAVE BECOME OPENING STOCK AND ON SALES OF IT WOULD HAVE RESULTED IN LOSS WOULD HAVE BEEN ALLOWED. AS IN THE CASE WITH A LL OTHER BUSINESS, VALUATION OF STOCK IN TRADE ASSUMES GREAT IMPORTANCE AND WITH OUT WHICH THE PROFIT/ LOSS OF THE BUSINESS CANNOT BE COMPUTED. IN THIS CASE, APPE LLANT HAS ADOPTED COST OR NRV WHICHEVER IS LESS AS METHOD OF VALUATION, WHICH IS MOST COMMONLY ADOPTED METHOD OF VALUATION OF INVENTORY. THIS METHOD IS MO RE LOGICAL AND REASONABLE ONE. IN COMPUTING THE NET REALIZABLE VALUE APPELLAN T HAS SUBMITTED THE QUOTATION OF THOSE SHARES ON THE LAST TRADING DAY OF THE YEAR OF EXCHANGES. THEREFORE, THERE CANNOT BE ANY FAULT WITH THE VALUATION DERIVED BY T HE APPELLANT OR THE AMOUNT OF VALUATION. XIV. THE NEXT ISSUE IS REGARDING CONVERTING STOCK S HELD AS AT 1/4/2008 AS OPENING STOCK OF THE APPELLANT. ACCORDINGLY, THE PROVISION OF SECTION 45(2) OF THE ACT, REPRODUCED AS UNDER WOULD APPLY WHEN AS ASSET IS CO NVERTED IN TO STOCK IN TRADE:- '(2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECT ION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSIO N BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOC K-IN-TRADE OF A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION O R TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. ' THE APPELLANT HAS SUBMITTED DETAILED WORKING OF CAP ITAL GAINS ON CONVERSION OF CAPITAL ASSETS INTO STOCK IN TRADE VIDE REPLY DATED 28/11/2011 AND THE SAME WAS PRODUCED BEFORE ME. ASSESSEE HAS RIGHTLY CONSIDERED THE FAIR MARKET VALUE AS FULL VALUE OF CONSIDERATION. HOWEVER, THERE IS A LO SS ON CONVERSION OF CAPITAL ASSETS IN TO STOCK IN TRADE OF RS. 11,079/- WHICH A SSESSES HAS NOT CLAIMED IN THE COMPUTATION OF RETURN OF INCOME AS TOTAL VALUE OF O PENING STOCK IS THE COST OF THE VALUE OF INVENTORY HELD ON THE FIRST DAY OF THE FIN ANCIAL YEAR. THE FAIR MARKET VALUE OF THE SHARES AS ON THE DATE OF CONVERSION AR E ALSO SUPPORTED BY STOCK EXCHANGE QUOTES AND SAME HAS ALSO NOT BE FOUND TO B E INCORRECT. THEREFORE IN ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 8 MY OPINION DUE TO THIS THERE IS NO LOSS TO REVENUE IF THE LOSS IS NOT CLAIMED BY THE APPELLANT. HENCE, IT CAN BE OBSERVED THAT THE TREAT MENT METED OUT TO SUCH CONVERSION IS AS PER THE PROVISIONS OF SEC. 45 (2) OF THE INCOME TAX ACT. THEREFORE, THE CONVERSION OF SHARES HELD AT THE CLO SE OF THE PREVIOUS YEAR BY THE APPELLANT AS OPENING STOCK OF THE CURRENT YEAR CANN OT BE FOUND FAULT WITH. XV. LASTLY, THE OBSERVATION OF AO THAT IT IS CLEA R CASE OF PLANNING TO DEFRAUD REVENUE AND APPELLANT IS NOT WITH THE INTENT OF MOVING IN T O LEGAL BOUNDARIES. ON THE FACT AND CIRCUMSTANCES OF THE CASE, THESE OBSERVATIONS A RE UNWARRANTED. THE NATURE OF BUSINESS IN WHICH THE APPELLANT OPERATES IS VOLA TILE BECAUSE OF THE MARKET CONDITIONS AND IT MAY HAPPEN THAT BECAUSE OF THE ME THOD OF VALUATION ADOPTED BY THE APPELLANT IT MAY RESULT IN TO LOSSES. THIS D OES NOT BECOME A SCHEME TO DEFRAUD REVENUE. HERE THE ASSESSEE ON THE FACTS AND CIRCUMSTANCES OF THE CASE IS CARRYING ON THE BUSINESS THAN IN THAT CASE HE HAS E VERY RIGHT TO VALUE THE CLOSING STOCK AS PER ACCEPTABLE METHOD OF VALUATION OF INVE NTORY. IT IS NOT THE CASE OF THE AO THAT THE METHOD ADOPTED IS NOT ACCEPTABLE TO REV ENUE AS IT IS ILLOGICAL, UNREASONABLE, AND INCORRECT OR A METHOD, WHICH IS U NIQUE AND DEVISED TO REDUCE THE INCOME. JUST BECAUSE OF THE REASON THAT IN THE BUSINESS ACTIVITY, APPELLANT IS INCURRING LOSSES AND THEREFORE ADVANCE TAX PAID IN THE FIRST INSTALLMENT BECOMES REFUNDABLE IT CANNOT BE SAID THAT ASSESSEE HAS ADOP TED ANY MEANS TO DEFRAUD REVENUE. THE TAXABILITY OF SHARE TRANSACTION AS BUS INESS INCOME OR INVESTMENT ACTIVITY ARE ALWAYS THE CAUSE OF DISAGREEMENT BETWE EN THE REVENUE AND ASSESSEE AND ISSUE DEPENDS MOSTLY ON THE FACTS OF THE EACH C ASE AND NO PREDEFINED PRINCIPLES CAN BE APPLIED. THEREFORE, MERELY AS THE APPELLANT HAS OFFERED INCOME UNDER BUSINESS HEAD AND AO FEELS THAT SAME SHOULD H AVE BEEN OFFERED UNDER THE CAPITAL GAIN HEAD, ONLY THIS GROUND CANNOT CHARGE A SSESSEE WITH ADOPTION OF UNACCEPTABLE PLANNING TO DEFRAUD THE REVENUE. 6.1 CONSIDERING THE SUBSTANTIAL NATURE OF THE TRANS ACTIONS, THE MANNER IN WHICH THE BOOKS OF ACCOUNTS OF THE APPELLANT HAS BEEN MAINTAI NED AND AUDITED, MAGNITUDE OF SHARES PURCHASED AND SOLD AND THE RATIO BETWEEN THE PURCHASE AND SALES AND THE HOLDINGS COUPLED WITH THE AMOUNT EARNED ON SAME DAY TRANSACTIONS, IT IS APPARENT THAT APPELLANT IS CARRYING ON THE BUSINESS OF THE SHARES AND SECURITIES. FURTHER AO HIMSELF HAS TAXED THE FUTURE AND OPTION SHARES TRADING AS B USINESS INCOME, IT IS ILLOGICAL TO STATE THAT SHARE TRADING ON SPOT BASIS IS INVESTMENT ACTI VITY. THE FUTURE OPTION SEGMENT TRADING OF THE APPELLANT IS ALSO IN THE SHARES WHIC H HAS BEEN TAXED BY AO IN WHICH ASSESSEE HAS EARNED PROFIT OF RS 27,92,247/-. HENCE AO HAS TAXED THE POSITIVE INCOME FROM FUTURE AND OPTION SHARE TRANSACTION AS BUSINES S INCOME AND REJECTED THE LOSS FROM SPOT SHARE TRANSACTION AS INCOME UNDER BUSINESS HEA D AS SAME RESULTING IN LOSSES. THEREFORE, ON CLOSE LOOK AT THE ACTIVITIES OF THE A PPELLANT, IT IS CLEAR THAT APPELLANT IS CARRYING ON THE BUSINESS OF PURCHASE AND SALE OF SH ARES ON DAY TRADING BASIS, TRADING BASIS AND ON FUTURE AND OPTION BASIS. FURTHER T HE METHOD OF VALUATION OF STOCK AT COST OR IXIRV WHICHEVER IS LESS ADOPTED BY APPELLANT IS PROPER AND JUST. THEREFORE THE INCOME COMPUTED BY THE APPELLANT CANNOT BE REJECTED AND FOUND FAULT WITH. ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 9 6.2 HENCE, I HEREBY DIRECT THE AO TO TREAT THE INCO ME FROM SPOT SHARE TRANSACTIONS AS INCOME UNDER THE HEAD BUSINESS AND PROFESSION AS SHOWN BY THE APPELLANT AND DELETE THE ADDITIONS OF RS.12,93,771/- AS SHORT-TERM CAPIT AL GAIN. THIS GROUND OF APPEAL IS ALLOWED. 6. AGGRIEVED BY THE ORDER OF LD. CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 7. BEFORE US, LD. D.R. SUPPORTED THE ORDERS OF A.O. . ON THE OTHER HAND, LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE THE A.O . AND LD. CIT(A) AND SUPPORTED THE ORDER OF LD. CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE ISSUE IN THE PRESENT CASE IS AS TO WHAT SHOULD BE THE TREATMENT OF INCOME EARNED ON SALE OF SHARES, I.E. WHETHER IT IS TO BE CONSIDERED AS BUSINESS INCOME AS CONSIDERED BY ASSESSEE OR SHOULD BE CONSIDERED AS C APITAL GAIN AS CONSIDERED BY A.O. WE FIND THAT LD. CIT(A), AFTER CONSIDERING TH E SUBMISSIONS OF THE ASSESSEE, HAS GIVEN A FINDING THAT ASSESSEE HAS DEALT WITH TH E SHARES THROUGHOUT THE YEAR, THE ACCOUNTS OF THE ASSESSEE WERE TAX AUDITED FOR T HE SOLE REASON THAT HE WAS TRADING IN SHARES, IN THE BOOKS OF ASSESSEE, ACCOUN TS OF TRANSACTIONS OF CASH SEGMENTS AND DERIVATIVE SEGMENTS WITH THE BROKERS W ERE SHOWN SEPARATELY. LD. CIT(A) HAS FURTHER NOTED THAT THE CONDUCT OF THE AS SESSEE OF CONVERTING THE SHARES HELD AT THE BEGINNING OF THE YEAR INTO TRADING ACCO UNT AS OPENING STOCK AND SUBSEQUENTLY DEALING IN THOSE SHARES AND DETERMININ G THE CLOSING STOCK AND ITS VALUATION AND COST OF MARKET VALUE WHICHEVER IS LES S, SUGGESTS THE MOTIVE OF THE ASSESSEE TO EARN BUSINESS INCOME. HE HAS FURTHER G IVEN A FINDING THAT WHEN ASSESSEE CONVERTED STOCKS HELD AS AT 01.04.2008 AS OPENING STOCK, ASSESSEE HAD RIGHTLY CONSIDERED THE FAIR MARKET VALUE AS FULL VA LUE OF CONSIDERATION AND THE FAIR MARKET VALUE OF SHARES ON THE DATE OF CONVERSION IS SUPPORTED BY STOCK EXCHANGE QUOTES AND WERE NOT FOUND TO BE INCORRECT AND THAT THE TREATMENT METED OUT ITA NO 546/RJT/2012 A.Y. 2009-10 . ( ACIT V S. SHRI SURESHCHANDRA G. KACHHADIA) 10 CONVERSION OF SHARES TO STOCK IS AS PER THE PROVISI ONS OF SECTION 45(2) OF THE ACT. HE HAS FURTHER GIVEN A FINDING THAT ASSESSEE WAS CA RRYING ON THE BUSINESS OF SHARES AND SECURITIES ON DAY TRADING BASIS, TRADING BASIS AND ON FUTURE AND OPTION BASIS. THE AFORESAID FINDINGS OF LD. CIT(A) HAVE NOT BEEN CONTROVERTED BY THE REVENUE BY PLACING ANY CONTRARY MATERIAL ON RECORD. IN VIE W OF THE AFORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) AND THUS, THE GROUND OF REVENUE IS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN OPEN COURT ON 22/03/2016 SD/- SD/- (S. S. GODARA) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED. 22/03/2016 TRUE COPY S K SINHA COPY OF THE ORDER FORWARDED TO:- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT, RAJKOT