Jai Prakash Singhal, New Delhi V. DCIT CC-22, New Delhi

MA 470/DEL/2009

• Counselvise Citation: [2010] 123 COUNSELVISE.COM (IT) 4478 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 12-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 28-08-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Bad and doubtful debts
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH D DELHI ] BEFORE SHRI R. P. TOLANI, JM & SHRI K. D. R ANJAN, AM MISC. APP. NO. 470 (DEL) OF 2009. [ IN I. T. APPEAL NO. 2262 (DEL) OF 2008 ]. ASSESSMENT YEAR : 2006-07. SHRI JAI PRAKASH SINGHAL, DY. COMMIS SIONER OF INCOME-TAX, D - 14 / 8, MODEL TOWN, VS. CE NTRAL CIRCLE : 22, D E L H I - 110 009. N E W D E L H I. PAN/GIR NO. AAGPP8743D ( APPLICANT ) ( RESP ONDENT ) ASSESSEE BY : SHRI K. SAMPATH, ADV.; DEPARTMENT BY : SHRI N. K. CHAND, SR. D. R.; O R D E R. PER K. D. RANJAN, AM : THIS MISC. APPLICATION BY THE ASSESSEE HAS BEEN FI LED AGAINST THE ORDER DATED 25TH JUNE, 2009 PASSED BY THE ITAT FOR ASSESSMENT YEAR 2 006-07. 2. THE ASSESSEE IN HIS MISC. APPLICATION HAS RAISED TWO ISSUES. THE FIRST ISSUE RELATES TO VALUATION OF THE CLOSING STOCK. THE ASSESSEE IN TH E MISC. APPLICATION HAS REPRODUCED CERTAIN PARTS OF THE ORDER AS BELOW :- (I) ON THE ISSUE OF CONSTRUING THE SALE OF 8 ,500 SHARES OF HFCL AS HAVING BEEN HELD AS STOCK IN TRADE AND RESULTING IN A BUSI NESS LOSS, YOUR HONOURS HAVE IN PARA 7 HELD THAT NOT TO BE SO, PRINCIPALLY BECAU SE OF THE APPELLANT HAVING 2 MISC. APP. NO. 470 (DEL) OF 2009. SHOWN THE VALUE OF SHARES AT COST PRICE WHICH, IN Y OUR HONOUR'S OPINION, IS NOT GERMANE TO THEIR BEING HELD AS STOCK-IN-TRADE. IN THIS CONNECTION YOUR HONOUR'S HAVE OBSERVED AS UNDER : IF THE ASSESSEE HAD HELD THESE SHARES AS STOCK I N TRADE, IT SHOULD HAVE FORMED THE PART OF TRADING ACCOUNT AND SHARES SHOUL D HAVE BEEN VALUED AT COST PRICE OR MARKET PRICE WHICHEVER WAS LOWER AS ASSESS EE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE LD. CIT (APPE ALS) HAS GONE WRONG IN PRESUMING WHEN HE OBSERVES IT IS A UNDISPUTED FACT THAT THE SHARES IN QUESTION WERE HELD BY ASSESSEE AS STOCK IN TRADE RIGHT FROM THE DATE THEY WERE PURCHASED WHEREAS THE ASSESSING OFFICER HAS DISPUT ED THIS FACT IN THE ASSESSMENT ORDER. (II) YOUR HONOURS HAVE FURTHER OBSERVED IN THIS VE RY PARA THAT : MERELY BECAUSE IN THE BALANCE SHEET THE SHARES HA VE BEEN SHOWN AS STOCK IN TRADE WILL NOT MEAN THAT SHARES WERE HELD AS SUC H. THE ASSESSEE HAS TO DEMONSTRATE THE FACT THAT THE SHARES WERE VALUED AT MARKET PRICE OR COST PRICE WHICHEVER WAS LOWER. (III) THE TRIBUNAL FURTHER OBSERVES IN THE SAME P ARA THAT : IF THE ASSESSEE HAD NOT TAKEN INTO ACCOUNT THE PRO FIT OR LOSS ARISING ON VALUATION OF CLOSING STOCK ON THESE DATES THE SH ARES CANNOT BE HELD AS STOCK IN TRADE. 3. IT HAS BEEN STATED THAT THE OBSERVATIONS OF THE TRIBUNAL ARE ERRONEOUS AS THERE IS NO PROPOSITION OF LAW OR COMMERCIAL PRACTICE WHICH DEC REE THAT CERTAIN ITEMS WOULD BE CONSTRUED AS STOCK-IN-TRADE ONLY IF THEY ARE VALUED AT LOWER OF COST OR MARKET PRICE. IT HAS ALSO BEEN STATED THAT IF ASSESSEE HAD VALUED THE CLOSING STOC K AT COST PRICE, ADVERSE INFERENCE CANNOT BE TAKEN AS VALUATION OF STOCK IN TRADE IS A STANDARD AND ACCEPTED ACCOUNTING PRACTICE. EVEN AS PER THE RETURN FORM PRESCRIBED BY THE DEPARTMENT, V ALUATION OF STOCK AS COST IS INDICATED AS PERMISSIBLE METHOD. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. AS A MATTER OF FACT IN THE CASE OF ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THE CLOSING 3 MISC. APP. NO. 470 (DEL) OF 2009. STOCK OF GOODS TRADED IS TO BE VALUED AT COST PRICE OR MARKET PRICE, WHICHEVER IS LOWER, AS IT GIVES THE TRUE PICTURE OF PROFIT AT THE END OF THE YEAR. IF THE MARKET PRICE OF A COMMODITY TRADED BY THE ASSESSEE IS LOWER THAN THE COST PRICE THE ASSESSEE HAS TO TAKE THE MARKET PRICE BEING LOWER OF TWO SO AS TO REFLECT THE TRUE PROFIT OF THE YEAR. HOWEVER IN A CASE WHERE THE MARKET PRICE IS HIGHER THAN THE COST PRICE, THE ASS ESSEE WILL VALUE THE STOCK IN TRADE AT COST PRICE AS PERMITTED UNDER THE ACCOUNTING STANDARDS. IN THE CASE BEFORE US, THE LD. CIT (APPEALS) HAS OBSERVED THAT THERE WAS NO DISPUTE TH AT THE SHARES WERE HELD AS STOCK IN TRADE WHEREAS THE ASSESSING OFFICER HAD DISPUTED THIS FAC T IN THE ASSESSMENT ORDER. IN ORDER TO VERIFY WHETHER THE SHARES WERE HELD AS STOCK IN TRADE OR I NVESTMENT, THE DIRECTION WAS GIVEN TO THE ASSESSING OFFICER TO FIND OUT WHETHER ASSESSEE HAD TAKEN INTO ACCOUNT THE PROFIT OR LOSS ARISING ON VALUATION OF THE CLOSING STOCK IN EARLIER YEARS. THE ASSESSEE WHEN MAINTAINS THE SHARES AS STOCK IN TRADE DEFINITELY AS ON THE LAST DAY OF THE ACCOUNTING YEAR, THERE WOULD BE THREE SITUATIONS : (I) THE COST PRICE AND MARKET PRICE AR E SAME ON THE LAST DAY OF THE ACCOUNTING YEAR RESULTING IN NO PROFIT OR LOSS; (II) THE MARKET PR ICE WILL BE HIGHER BUT THE ASSESSEE WILL VALUE THE CLOSING STOCK AT COST PRICE; AND (III) IN A CAS E WHERE THE MARKET PRICE IS LOWER THAN THE COST PRICE THE ASSESSEE WILL VALUE THE STOCK AT MAR KET PRICE RESULTING IN LOSS ON ACCOUNT OF VALUATION OF STOCK. THERE CAN BE ANOTHER SITUATION SUBSEQUENT TO SITUATION MENTIONED IN (III) WHERE IN ANY LATER YEAR THE MARKET PRICE IS HIGHER THAN THE COST PRICE, THE ASSESSEE WILL VALUE THE STOCK AGAIN AT COST PRICE RESULTING INTO PROFIT . THIS IS NORMAL PRACTICE TO BE FOLLOWED BY THE ASSESSEES WHILE VALUING THE CLOSING STOCK. IN O RDER TO FIND OUT WHETHER THE ASSESSEE HAS TAKEN INTO ACCOUNT THE PROFIT OR LOSS IN EARLIER YE ARS, THE AFORESAID DIRECTION WAS GIVEN. THERE IS NOTHING WRONG WITH THE DIRECTION. THE ASSESSEE H AS TO PROVE WITH EVIDENCE THE STOCK WAS HELD AS STOCK IN TRADE AND NOT AS INVESTMENT. THERE FORE, IN OUR CONSIDERED OPINION, THERE IS NO MISTAKE APPARENT FROM RECORD TO BE RECTIFIED UNDER SECTION 254(2) OF THE ACT. ACCORDINGLY, THIS GROUND TAKEN BY THE ASSESSEE IS DISMISSED. 5. ANOTHER ISSUE RAISED IN THE MISC. APPLICATION RE LATES TO WRITE OFF OF PURCHASE ADVANCE, WHICH BECAME BAD DURING THE YEAR UNDER CONSIDERATIO N. IT HAS BEEN PLEADED THAT THE ASSESSING OFFICER HAS HELD THAT CONDITIONS OF SECTION 36(2) O F THE ACT WERE NOT SATISFIED. THE TRIBUNAL HAS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSI NG OFFICER WITH THE DIRECTIONS TO EXAMINE THE CASE OF THE ASSESSEE UNDER SECTION 37(1) OF THE ACT , BUT NO VERDICT HAS BEEN GIVEN ON FINDING OF THE ASSESSING OFFICER. 4 MISC. APP. NO. 470 (DEL) OF 2009. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. IN ASSESSMENT ORDER THE ASSESSING OFFICER HAD EXAMINED THE CLAIM OF THE ASSESSEE UNDER SECTION 36(1)(VII) AND HAD DISALLOWED THE CLAIM. HE HAD NO T EXAMINED THE CASE OF THE ASSESSEE AS BUSINESS LOSS UNDER SECTION 37 OF THE ACT. HOWEVER , BEFORE THE LD. CIT (APPEALS) IT WAS PLEADED THAT ASSESSEE HAD NOT CLAIMED THE AMOUNT WR ITTEN OFF AS BAD DEBTS UNDER SECTION 36(1)(VII) OF THE ACT AND THE SAME WAS CLAIMED AS B USINESS LOSS. THE LD. CIT (A), HOWEVER, HAS ALLOWED THE CLAIM OF THE ASSESSEE UNDER SECTION 37(1) OF THE ACT. AT THE SAME TIME HE OBSERVED THAT THE AO WAS NOT JUSTIFIED IN DISAL LOWING THE SAME AS BAD DEBTS. THEREFORE, THE FINDING OF THE LD. CIT (A) IS NOT IN CONSONANCE WITH PROVISIONS OF SECTION 37(1) OF THE ACT. REVENUE HAD FILED APPEAL BEFORE THE TRIBUNAL THAT T HE AO HAD DISALLOWED THE AMOUNT AS BAD DEBTS WHEREAS THE LD. CIT (A) HAD TREATED THE SAME AS BUSINESS LOSS UNDER SECTION 37(1) OF THE ACT. IN ORDER TO EXAMINE WHETHER THE AMOUNT WRITTE N OFF SHOULD BE ALLOWED AS BUSINESS LOSS, THE MATTER HAS BEEN REMANDED BACK TO THE AO AS HE H AD NOT EXAMINED THE CLAIM OF THE ASSESSEE UNDER SECTION 37(1) OF THE ACT AND HAD PRO CEEDED WITH THE MATTER UNDER SECTION 36(1)(VII) OF THE ACT. ACCORDINGLY, IN OUR CONSIDE RED OPINION, THERE IS NO MISTAKE APPARENT FROM RECORD TO BE RECTIFIED, REGARDING THIS GROUND ALSO, RAISED IN THE MISC. APPLICATION. 7. IN THE RESULT, THE MISC. APPLICATION FILED BY TH E ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON : 12 TH MARCH, 2010. SD/- SD/- [ R. P. TOLANI ] [ K. D. RANJ AN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 12 TH MARCH, 2010. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPLICANT. 5 MISC. APP. NO. 470 (DEL) OF 2009. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 6 MISC. APP. NO. 470 (DEL) OF 2009.