DCIT 4(1), MUMBAI V. DARASHAW & CO. LTD, MUMBAI

ITA 660/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3485 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 06-06-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 01-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income
• Section: 14A; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM AND SHRI N.K. BIL LAIYA, AM ./I.T.A. NO.225/MUM/2011 ./I.T.A. NO.456/MUM/2012 ( / ASSESSMENT YEAR :2007-08 & 2008-09 M/S. DARASHAW & COMPANY PVT. LTD., FLAT NO. 3, RAJESH MANSION, D. VACHHA ROAD, CHURCHGATE, MUMBAI-400 020 THE DCIT, RANGE 4(1), MUMBAI ./I.T.A. NO.229/MUM/2011 ./I.T.A. NO.660/MUM/2012 ( / ASSESSMENT YEAR :2007-08 & 2008-09 THE DCIT, RANGE 4(1), MUMBAI M/S. DARASHAW & COMPANY PVT. LTD., FLAT NO. 3, RAJESH MANSION, D. VACHHA ROAD, CHURCHGATE, MUMBAI-400 020 ./ !' ./PAN/GIR NO. : AAACB 2360F ( # /APPELLANT ) .. ( $%# / RESPONDENT ) # & / ASSESSEE BY : ` SHRI ASHISH MEHTA $%# ' & /DEPARTMENT BY : SHRI JAVED AKHTAR ' ( / DATE OF HEARING :06.06.2013 )* ' ( / DATE OF PRONOUNCEMENT : 12.06.2013 +, / O R D E R PER N.K. BILLAIYA, AM: THESE CROSS APPEALS ARE BY THE ASSESSEE AND THE REV ENUE ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-9, MUM BAI PERTAINING TO M/S. DARASHAW & CO. PVT. LTD. 2 A.YRS. 2007-08 AND 2008-09. SINCE ALL THESE APPEAL S WERE HEARD TOGETHER, THEY ARE DISPOSED OF BY THIS COMMON ORDE R FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 225/MUM/2011 2007-08 ASSESSEES APPEAL 2. THE ASSESSEE HAS RAISED 2 SUBSTANTIVE GROUNDS OF APPEAL. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT HE IS NOT PRESSING GROUND NO. 2. GROUND NO. 2 IS ACCORDINGLY DISMISSED AS NOT PRESSED. 3. GROUND NO. 1 RELATES TO DISALLOWANCE U/S. 14A AT RS. 24,66,986/- AS AGAINST RS. 1,27,335/- COMPUTED BY THE ASSESSEE. 4. THE ASSESSEE IS A SHARE AND STOCK BROKER. DURIN G THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFI CER OBSERVED THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 79.20, 978/- WHICH IS CLAIMED AS EXEMPT U/S. 10(34) OF THE ACT. THE AO F URTHER NOTICED THAT THE ASSESSEE HAS ALLOCATED AN AMOUNT OF RS. 1,27,35 5/- ONLY IN EARNING THE DIVIDEND INCOME. THE AO SOUGHT EXPLANATION FROM T HE ASSESSEE AS TO WHY EXPENDITURE INCURRED EARNING THE DIVIDEND INCOM E SHOULD NOT BE DISALLOWED U/S. 14A R.W. RULE 8D. 4.1. IN RESPONSE, THE ASSESSEE FILED A DETAILED REP LY DT. 23.10.2009 AND SUBMITTED THAT ASSESSEE HAS ALREADY DISALLOWED A SU M OF RS. 1,27,355/- IN THE COMPUTATION OF INCOME THEREFORE, NO FURTHER EXP ENDITURE NEEDS TO BE DISALLOWED. INTEREST DEBITED TO PROFIT AND LOSS ACC OUNT RELATES TO BANKS FOR TRADING IN DEBT SECURITIES. THE ASSESSEE FURTHER EXPLAINED THAT BANK FACILITIES WERE ALLOWED TO BE TAKEN ONLY AGAINST DE BT SECURITIES AND CAN ONLY BE UTILIZED AGAINST PURCHASE OF DEBT SECURITIE S. THE ASSESSEE FURTHER SUBMITTED THAT EVEN IF RULE 8D IS INVOKED, TOTAL DI SALLOWANCE COME TO RS. M/S. DARASHAW & CO. PVT. LTD. 3 8,44,098/- OUT OF WHICH AN AMOUNT OF RS. 1,27,355/- HAS ALREADY BEEN DISALLOWED AND ACCORDINGLY PRAYED TO THE AO THAT AN Y DISALLOWANCE IF MADE SHOULD BE RESTRICTED TO RS. 7,16,743/- ONLY. 4.2. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND A NY FAVOUR FROM THE AO WHO RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT PVT. LTD. 26 SOT 603 AND I NVOKED THE PROVISIONS OF SEC. 14A R.W. RULE 8D AND COMPUTED TH E DISALLOWANCE AT RS. 38,51,983/-. 5. THE ASSESSEE AGITATED THIS MATTER BEFORE THE LD. CIT(A) AND STRONGLY CONTENDED THAT RULE 8D IS NOT APPLICABLE F OR THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) WAS CONVINCED THAT R ULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. HOWEV ER, AT THE SAME TIME HE WAS OF THE VIEW THAT A REASONABLE BASIS OR METHO D HAS TO BE ADOPTED WITH ALL RELEVANT FACTS AND MATERIAL TO COMPUTE THE DISALLOWANCE U/S. 14A OF THE ACT. THEREAFTER THE LD. CIT(A) GAVE A FORMUL A WHICH IS NOTHING BUT THE PROCEDURE LAID DOWN UNDER RULE 8D OF THE RULES AND CONFIRMED THE DISALLOWANCE OF RS. 24,66,986/- AS AGAINST RS. 38,51,983/- MADE BY THE AO. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REIT ERATED THAT RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION AND THE LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE BY ADOPTING THE PROCEDUR E LAID DOWN UNDER RULE 8D. 7. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED TH E FINDINGS OF THE LOWER AUTHORITIES. M/S. DARASHAW & CO. PVT. LTD. 4 8. IT IS NOW WELL SETTLED THAT RULE 8D IS PROSPECT IVE AS HELD BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCEE 328 ITR 81. IT IS ALSO A FACT THAT THOUGH LD. CIT(A) H AS ADMITTED RULE 8D IS NOT APPLICABLE BUT AT THE SAME TIME AS COMPUTED THE DISALLOWANCE AS PER THE PROCEDURE LAID DOWN UNDER RULE 8D. IN OUR CONS IDERATE VIEW, A REASONABLE DISALLOWANCE NEED TO BE MADE U/S. 14A AN D 5% OF THE DIVIDEND INCOME , AFTER ALLOWING A REBATE OF THE AMOUNT ALREADY DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF I NCOME , WOULD MEET THE ENDS OF JUSTICE. GROUND NO. 1 IS PARTLY ALLOWE D. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN A.Y. 2007-08 IS PARTLY ALLOWED. ITA NO. 299/MUM/2011 2007-08 REVENUES APPEAL 10. THE REVENUE HAS RAISED FOLLOWING GRIEVANCES: (1). DELETION OF DISALLOWANCE OF RS. 2,43,566/- MAD E U/S.40(A)(IA) IN RESPECT OF VSAT & TRANSACTION CH ARGES PAID TO STOCK EXCHANGE (2). DISALLOWANCE OF THE ADDITION OF RS. 38,51,983 /- MADE U/S. 14A R.W. RULE 8D OF THE ACT BY AO. (3). DELETION OF THE ADDITION MADE ON ACCOUNT OF P ENALTY OF RS. 53,010/- ON VIOLATION OF THE BYE-LAWS OF THE ST OCK EXCHANGE. 11. SO FAR AS FIRST GRIEVANCE IS CONCERNED, IT IS N OW WELL SETTLED THAT PROVISIONS OF TDS ARE NOT APPLICABLE SO FAR AS VS AT AND LEASELINE CHARGES PAID TO MUMBAI STOCK EXCHANGE ARE CONCERNE D AS HELD BY M/S. DARASHAW & CO. PVT. LTD. 5 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS M/S. STOCK AND BOND TRADING CO. IN ITA NO. 4117 OF 2010 AND SO FAR AS TRANSACTION CHARGES ARE CONCERNED, THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF KOTAK SECURITIES LTD 340 ITR 333 HAS HELD THAT L IABILITY OF TDS EXISTS U/S. 194J IN RESPECT OF TRANSACTION CHARGES ONLY. (I) THAT THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE BEFORE CREDITING THE TRANSACTION CHARGES TO THE ACCOUNT OF THE STOCK EXCHANGE. (II) THAT THOUGH SECTION 194J WAS INSERTED WITH EFFECT FROM JULY 1, 1995, TILL THE AS SESSMENT YEAR IN QUESTION THAT IS ASSESSMENT YEAR 2005-06 BOTH THE REVENUE AN D THE ASSESSEE PROCEEDED ON THE FOOTING THAT SECTION 194J WAS NOT APPLICABLE TO THE PAYMENT OF TRANSACTION CHARGES AND ACCORDINGLY, DUR ING THE PERIOD FROM 1995 TO 2005 NEITHER HAD THE ASSESSEE DEDUCTED TAX AT SOURCE WHILE CREDITING THE TRANSACTION CHARGES TO THE ACCOUNT OF THE STOCK EXCHANGE NOR HAD THE REVENUE RAISED ANY OBJECTION OR INITIATED A NY PROCEEDINGS FOR NOT DEDUCTING THE TAX AT SOURCE. IN THESE CIRCUMSTANCES , IF BOTH THE PARTIES FOR NEARLY A DECADE PROCEEDED ON THE FOOTING THAT SECTI ON 194J WAS NOT ATTRACTED, THEN, IN THE ASSESSMENT YEAR IN QUESTION NO FAULT COULD BE FOUND WITH THE ASSESSEE IN NOT DEDUCTING THE TAX AT SOURC E UNDER SECTION 194J OF THE ACT AND CONSEQUENTLY, NO ACTION COULD BE TAKEN UNDER SECTION 40(A)(IA) OF THE ACT. 12. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, GIVING THE BENEF IT OF BONAFIDE, NO ADDITION IS TO BE MADE IN RESPECT OF TRANSACTION CH ARGES FOR THE YEAR UNDER CONSIDERATION. THIS GROUND OF THE REVENUE IS ACCOR DINGLY DISMISSED. 13. THE SECOND GRIEVANCE OF THE REVENUE HAS BEEN DE CIDED IN ASSESSEES APPEAL IN GROUND NO. 1. ACCORDINGLY, GRO UND NO. 2 IS PARTLY ALLOWED. M/S. DARASHAW & CO. PVT. LTD. 6 14. THE THIRD GRIEVANCE OF THE REVENUE RELATES TO P ENALTY PAID TO THE STOCK EXCHANGE ON VIOLATION OF THE BYE-LAWS. THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS M/S. STOCK AND BOND TRADING CO.(SUPR A) WHEREIN THE HONBLE HIGH COURT HAS HELD THAT PAYMENTS MADE BY THE ASSESSEE TO THE STOCK EXCHANGE FOR VIOLATION OF THEIR REGULATION A RE NOT ON ACCOUNT OF AN OFFENCE OR WHICH IS PROHIBITED BY LAW. HENCE, THE INVOCATION OF EXPLANATION TO SECTION 37 OF THE I.T. ACT, 1961 IS NOT JUSTIFIED. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, GROUND NO. 3 IS DISMISSED. 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IN A.Y. 2007-08 IS PARTLY ALLOWED. ITA NO. 660/M/2012 ASSESSEES APPEAL A.Y. 2008- 09 16. THE SOLE GRIEVANCE OF THE REVENUE RELATES TO D ELETION OF ADDITION U/S. 14A R.W. RULE 8D OF RS. 1,24,22,472/- MADE BY THE AO. 17. THE ASSESSEE IS A SHARE AND STOCK BROKER. DURI NG THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE AO OBSERVED T HAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 44,91,580/- WHICH I S CLAIMED AS EXEMPT U/S. 10(34) OF THE ACT. THE AO FURTHER NOTICED THA T THE ASSESSEE HAS ALLOCATED AN AMOUNT OF RS. 1,75,583/- ONLY IN EARNI NG THE DIVIDEND INCOME. THE AO SOUGHT EXPLANATION FROM THE ASSESSE E AS TO WHY THE EXPENDITURE INCURRED EARNING THE DIVIDEND INCOME SH OULD NOT BE DISALLOWED U/S. 14A R.W. RULE 8D. THE ASSESSEE EXP LAINED THAT IT HAS ALREADY DISALLOWED A SUM OF RS. 1,75,883/- IN THE C OMPUTATION OF INCOME THEREFORE NO FURTHER EXPENDITURE NEED TO BE DISALLO WED U/S. 14A OF THE M/S. DARASHAW & CO. PVT. LTD. 7 ACT. THE ASSESSEE FURTHER EXPLAINED THAT THE INTER EST EXPENDITURE DEBITED IN THE PROFIT AND LOSS ACCOUNT RELATES TO INTEREST PAID TO BANKS FOR TRADING IN DEBT SECURITIES. 17.1. THE ASSESSEE STRONGLY SUBMITTED THAT THE BANK FACILITIES WERE ALLOWED TO BE TAKEN ONLY AGAINST DEBT SECURITIES AN D CAN ONLY BE UTILIZED AGAINST PURCHASE OF DEBT SECURITIES. THE ASSESSEE FURTHER EXPLAINED THAT FOR THE YEAR UNDER CONSIDERATION, IT HAS EARNED INT EREST INCOME ON SUCH DEBT SECURITIES AMOUNTING TO RS. 7,47,26,425/- AND HAS ALSO EARNED PROFIT ON PURCHASE AND SALE OF DEBT SECURITIES AT RS. 9,51 ,45,792/- IN EFFECT THERE IS A PROFIT OF RS. 3,44,35,470/- IN DEBT SECURITIE S AFTER CONSIDERING INTEREST EXPENDITURE. THEREAFTER THE ASSESSEE GAVE THE WORKING OF THE DISALLOWANCE AS PER RULE 8D AND COMPUTED THE DISALL OWANCE AT RS. 39,19,175/-. IT WAS EXPLAINED THAT SINCE ASSESSEE H AS ALREADY DISALLOWED A SUM OF RS. 1,75,883/- IF AT ALL ANY DISALLOWANCE I S TO BE MADE, THE SAME SHOULD BE AT RS. 37,43,292/- ONLY. THE WORKING OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO WHO WENT ON TO COMPUTE THE DISAL LOWANCE BY INVOKING THE PROVISIONS OF SEC. 14A R.W. RULE 8D AN D COMPUTED THE DISALLOWANCE AT RS./ 1,22,46,889/-. 18. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND STRONGLY OBJECTED TO THE MANNER OF COMPUTATION OF DISALLOWA NCE MADE BY THE AO. IT WAS EXPLAINED TO THE LD. CIT(A) THAT THE LOAN HA S BEEN TAKEN AGAINST THE PLEDGE OF DEBT SECURITIES AND THE SANCTIONED C ONDITION WOULD SHOW THAT THE LOAN HAS BEEN SANCTIONED ONLY ON THE PURCH ASE OF DEBT SECURITIES IN WHICH TRADING IS CARRIED OUT BY THE ASSESSEE. S UCH LOAN CANNOT BE UTILIZED OTHER THAN PURCHASE OF DEBT SECURITIES. T HE ASSESSEE FURTHER CONTENDED THAT IT HAS EARNED A NET PROFIT OF RS. 3, 44,35,470/- ON TRADING IN DEBT SECURITIES AFTER CONSIDERING THE INTEREST COST AND INTEREST INCOME, M/S. DARASHAW & CO. PVT. LTD. 8 THEREFORE, NO INTEREST EXPENDITURE IS ATTRIBUTABLE FOR EARNING THE EXEMPT INCOME AND ACCORDINGLY NO DISALLOWANCE SHOULD BE MA DE U/S. 14A OF THE ACT. 18.1. AFTER CONSIDERING THE FACTS AND THE SUBMISSIO NS, THE LD. CIT(A) RELIED UPON THE DECISION OF THE PREDECESSOR OF HIS OFFICE FOR A.Y. 2007-08 IN ASSESSEES OWN CASE DIRECTED THE AO TO CONSIDER THE SAID DECISION OF THE LD. CIT(A) WHILE CALCULATING THE DISALLOWANCE O F INTEREST ON THE OPENING BALANCE OF INTEREST BEARING LOANS AT THE TI ME OF GIVING APPEAL EFFECT. 19. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), RE VENUE IS BEFORE US. 20. THE LD. DEPARTMENTAL REPRESENTATIVE WHILE SUPPO RTING THE ORDER OF THE AO SUBMITTED THAT THE DIRECTION OF THE LD. CIT( A) IS ERRONEOUS INASMUCH AS THE ASSESSEE HAS HIMSELF ADMITTED IN TH E IMMEDIATELY PRECEDING ASSESSMENT YEAR 2007-08 THAT THE BANK LOA NS HAVE BEEN UTILIZED IN PURCHASE OF SHARES OF WHICH INCOME HAS BEEN SHOWN AS BUSINESS INCOME. 21. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHA T HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. THE LD. CO UNSEL STRONGLY SUBMITTED THAT NO BORROWED FUNDS HAVE BEEN UTILIZED FOR EARNING EXEMPT INCOME. DRAWING OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION, THE LD. COUNSEL FOR THE A SSESSEE CONTENDED THAT ASSESSEE HAS SUFFICIENT OWN FUNDS TO MAKE THE INVES TMENTS AND NO PART OF THE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPO SE OF INVESTMENT. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT ON RECORD. A M/S. DARASHAW & CO. PVT. LTD. 9 PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE AS EXH IBITED AT PAGE-1 OF THE PAPER BOOK SUPPORTS THE CONTENTION OF THE COUNSEL T HAT ASSESSEE HAS SUFFICIENT OWN FUNDS TO COVER UP THE INVESTMENTS. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS RE LIANCE UTILITIES & POWER LTD., 313 ITR 340 HAS HELD THAT WHERE BOTH OW N FUNDS AND LOAN FUNDS ARE AVAILABLE WITH THE ASSESSEE, THE PRESUMPT ION IS THAT THE INVESTMENT IS MADE OUT OF OWN FUNDS. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT, IN OUR CONSIDERATE VIEW, THE DISALLOWANCE AS COMPUTED BY THE ASSESSEE UNDER RULE 8D AT RS. 39,19,175/- SHOULD MEET THE ENDS OF JUSTICE. WE, A CCORDINGLY DIRECT THE AO TO RECOMPUTED THE DISALLOWANCE AS DONE BY THE A SSESSEE AFTER GIVING A REBATE OF RS. 1,75,883/- WHICH HAS ALREADY BEEN D ISALLOWED BY THE ASSESSEE IN ITS COMPUTATION OF INCOME. 23. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ITA NO. 456/M/2012 ASSESSEES APPEAL 24. THE FIRST GROUND RELATES TO DISALLOWANCE OF MAR K TO MARK LOSS ON DERIVATIVES OF RS. 5,96,510/- HOLDING THE LOSS AS NOTIONAL LOSS. 25. THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE AS SESSEE BY VARIOUS JUDICIAL PRONOUNCEMENTS SUCH AS EDELWEISS CAPITAL L TD IN ITA NO. 5324/M/07, KOTAK MAHINDRA INVESTMENT LTD IN ITA NO. 1502/M/2012 AND M/S. URUDAVAN INVESTMENT & TRADING PVT. LTD., IN IT A NO. 6997/M/2011. 26. WE HAVE CAREFULLY PERUSED THE ABOVE JUDICIAL PR ONOUNCEMENTS AND WE FIND THAT THE ISSUE IS WELL SETTLED IN FAVOUR OF THE ASSESSEE IN THE LIGHT OF THE DECISION OF THE TRIBUNAL IN THE CASE OF EDEL WEISS CAPITAL LTD M/S. DARASHAW & CO. PVT. LTD. 10 (SUPRA). RELEVANT PORTION OF THE SAID DECISION AT PAGE-6, PARA-7 IS REPRODUCED AS UNDER: THERE IS NO DISPUTE THAT THE ASSESSEE HOLDS DERIVA TIVES AS ITS STOCK-IN-TRADE AND THERE IS ALSO NO DISPUTE THAT IT FOLLOWS THE PRINCIPLE COST OR MARKET PRICE, WHICHEVER IS LOWER IN VALUING THE DERIVATIVES. WHEN THE DERIVATIVES ARE HELD AS STOCK -IN-TRADE THEN WHATEVER RULES APPLY TO THE VALUATION OF STOCK-IN-T RADE WILL HAVE TO BE NECESSARILY APPLY TO THEIR VALUATION ALSO. IT IS A WELL SETTLED POSITION IN LAW THAT WHILE ANTICIPATED LOSS IS TAK EN INTO ACCOUNT IN VALUING THE CLOSING STOCK, ANTICIPATED PROFIT IN TH E SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUG HT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW IN CREASED PROFIT BEFORE ITS REALIZATION. THIS IS THE THEORY UNDERLYI NG THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRI CE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN E STABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. THIS IS WH AT THE SUPREME COURT HELD IN THE CASE OF CHAINRUP SAMPATRA M VS. COMMISSIONER OF INCOME TAX, WEST BENGAL (1953) 24 I TR 481 (SC), SPEAKING THROUGH HONBLE JUSTICE PATANJALI SA STRI, THE THEN CHIEF JUSTICE OF INDIA (PAGE 485 486 OF THE REPOR T). AT PAGE 486 THE SUPREME COURT FURTHER OBSERVED THAT LOSS DUE T O A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEE N ACTUALLY REALIZED. QUOTING FROM THE CASE OF WHIMSTER & CO. VS.COMMISSIONERS OF INLAND REVENUE (1926) 12 TAX CA SES 813, THE SUPREME COURT OBSERVED THAT THE PROFITS THAT ARE CH ARGEABLE TO TAX ARE THOSE REALIZED IN THE YEAR AND THAT AN EXCEPTIO N IS RECOGNIZED WHERE A TRADER PURCHASED AND STILL HOLDS GOODS WHIC H ARE FALLEN IN VALUE IN WHICH CASE THOUGH NO LOSS HAS BEEN REALIZE D NOR IT HAS OCCURRED, NEVERTHELESS AT THE CLOSE OF THE YEAR HE IS PERMITTED TO TREAT THESE GOODS AS OF THEIR MARKET VALUE. THIS DE CISION OF THE SUPREME COURT GOVERNS THE FACTS OF THE PRESENT CASE . IT IS TO THE ASSESSEES STRENGTH THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN ITS GUIDELINES HAVE ALSO APPROVED OF THE R ULE OF PRUDENCE WHICH REALLY MEANS THAT WHILE ANTICIPATED LOSSES CA N BE TAKEN NOTE OF WHILE VALUING THE CLOSING STOCK, ANTICIPATED PRO FITS CANNOT BE RECOGNIZED. THE ANTICIPATED LOSS, IN THE LIGHT OF T HE JUDGMENT OF THE SUPREME COURT CITED ABOVE, CANNOT BE TREATED AS A C ONTINGENT LIABILITY. M/S. DARASHAW & CO. PVT. LTD. 11 RESPECTFULLY FOLLOWING THE ABOVE JUDICIAL DECISION , GROUND NO. 1 IS ALLOWED. 27. SINCE WE HAVE ALLOWED GROUND NO. 1, GRIEVANCE R AISED IN GROUND NO. 2 BECOME OTIOSE. 28. THE ISSUE RAISED IN GROUND NO. 3 ARE IDENTICAL TO THE ISSUE RAISED BY THE REVENUE IN ITS APPEAL VIDE GROUND NO. 1. AS WE HAVE PARTLY ALLOWED THIS GRIEVANCE OF THE REVENUE, THIS GROUND OF THE A PPEAL IS ACCORDINGLY DISPOSED OFF IN SIMILAR LINES AND FOR SIMILAR REASO NS. THIS GROUND IS PARTLY ALLOWED. 29. GROUND NO. 4 BECOME OTIOSE VIDE DECISION AS PER GROUND NO. 1. 30. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS PARTLY ALLOWED. 31. TO SUM UP THE APPEALS FILED BY THE ASSESSEE AS WELL AS THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2013 . +, ' * - .+/ 12.6.2013 * ' 0 SD/- SD/- (VIJAY PAL RAO ) ( N.K. BILLAIYA ) + /JUDICIAL MEMBER + / ACCOUNTANT MEMBER MUMBAI; .+ DATED 12/06 /2013 . . ./ RJ , SR. PS M/S. DARASHAW & CO. PVT. LTD. 12 +, +, +, +, ' '' ' $(1 $(1 $(1 $(1 21( 21( 21( 21( / COPY OF THE ORDER FORWARDED TO : 1. # / THE APPELLANT 2. $%# / THE RESPONDENT. 3. 3 ( ) / THE CIT(A)- 4. 3 / CIT 5. 140 $( , , / DR, ITAT, MUMBAI 6. 0 5 / GUARD FILE. +, +, +, +, / BY ORDER, %1( $( //TRUE COPY// 6 66 6 / 7 7 7 7 ! ! ! ! (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI