TAXAP/316/2002 1/9 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 316 of 2002 For Approval and Signature: HONOURABLE MR.JUSTICE K.A.PUJ Sd/- HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Sd/- ==================================== 1. Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2. To be referred to the Reporter or not ? NO 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ==================================== DY.COMMISSIONER OF INCOME TAX - Appellant Versus GUJARAT STATE INVESTMENTS LTD. - Opponent ==================================== Appearance : MR MANISH R BHATT for Appellant. MR SN SOPARKAR, Senior Advocate with Ms. Vaibhavi Parikh for Opponent. TAXAP/316/2002 2/9 JUDGMENT ==================================== CORAM : HONOURABLE MR.JUSTICE K.A.PUJ and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 25/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K.A.PUJ) 1. The revenue has filed this appeal under Section 260A of the Income-tax Act, 1961 for assessment year 1990 – 91 proposing to formulate the following substantial question of law :- “Whether the Income Tax Appellate Tribunal was right in law and on facts in deleting the disallowance of Rs.16,06,194/- made by the A.O. on account of notional loss claimed by the assessee ?” 2. The appeal was admitted on 17.01.2003 and this Court has re-formulated the substantial question of law :- “Is the assessee entitled to notionally compute the brokerage amount that would be payable on the closing stock of debentures for working out the value of such closing stock ?” 3. Heard Mr. M.R. Bhatt, learned Senior Standing Counsel appearing for the revenue and Mr. S. N. Soparkar, learned Senior Counsel appearing with Ms. Vaibhabi Parikh for the assessee. TAXAP/316/2002 3/9 JUDGMENT 4. The brief facts giving rise to the present appeal are that the assessee Company has shown losses in value of securities (being the difference between the net realisable value and the cost of non-convertible Debentures of G.S.F.C.) written off amounting to Rs.1,68,94,215/-. The assessee was required to explain how losses in value of securities have been shown, because in the earlier year, the assessee had valued non-convertible Debentures of GSFC at the cost price. The cost price of non-convertible debentures of GSFC is at Rs.30/- whereas the assessee has valued its stock of 76,44,440/- non-convertible debentures of GSFC, Baroda at the rate which is less than Rs.28/- per Non-convertible debenture. On being asked, on what basis it has been valued at the said rate, the assessee Company submitted that the Company was holding the shares and securities as stock in trade. Valuation of stock in trade is done on the basis of cost price or market price whichever is less. The Company was holding 76,44,441/- Non-convertible Debentures of GSFC Baroda, on the face value of Rs.30/-. The market TAXAP/316/2002 4/9 JUDGMENT price in stock exchange of Non-convertible debenture of GSFC is Rs.28/- and hence, the market value of Rs.28/- was considered for valuation. The Controller & Auditor General in the course of audit of the accounts for the year 1989 – 90 of the Company has pointed out that from the market price of the debentures adopted by the Company, the brokerage payable on sale of the debentures shall be deducted to arrive at the net realizable value of the debentures. The net realizable value is the estimated selling price in the ordinary course of business, less cost of completion and cost necessarily to be incurred in order to make the sale. Thus, assessee has considered the brokerage while valuing the closing stock at market value and loss of Rs.16,06,194/- was claimed. The Assessing Officer was of the view that the assessee has never stated that its method of closing stock is net realizable value. He was, therefore, of the view that net realizable value basis is not correct and is not in accordance with the assessee's own accounting principles. 5. Being aggrieved by the order of the Assessing Officer, TAXAP/316/2002 5/9 JUDGMENT the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Ahmedabad who vide his order dated 11.09.1995 confirmed the order of the Assessing Officer. While confirming the order of the Assessing Officer, the learned CIT (Appeals) has observed that the assessee itself has taken the correct market price as quoted on that day at Rs.28/- per share. It has been reduced as per the Audit report. As per the accounting standards, for accounting of investments, issued by the Institute of Chartered Accountant, the market value is the amount obtained from the sale of shares in the open market, less expenses to be incurred on or before disposal. The learned CIT (Appeals) was of the view that it is a hypothetical situation and the correct value is to be at the rate shown in the stock exchange. He has, therefore, not agreed to the Audit report and loss of Rs.16,06,194/- was not accepted and, accordingly, the disallowance made by the Assessing Officer was upheld by the learned CIT (Appeals). 6. Being further aggrieved by the order of the learned TAXAP/316/2002 6/9 JUDGMENT CIT (Appeals), the assessee took up the matter before the Income Tax Appellate Tribunal, Ahmedabad. The Tribunal while reversing the finding of the Assessing Officer as well as CIT (Appeals), has taken the view that market price which is concerned to the assessee should be the price - less deduction of brokerage etc. because that was the net realized value of securities. The same should be the market price for the assessee. The Tribunal further observed that the accepted accounting principles suggest for finalizing the financial statement by the said value. The profit / loss arrived from such financial statement will be the correct profit / loss of a business concerned for the year for which statements are prepared. The Tribunal was, therefore, of the view that the stand taken by the revenue authorities is not correct and the assessee is entitled to claim the loss of Rs.16,06,194/-. 7. It is this order of the Tribunal which is under challenge in the present Tax appeal. 8. Mr. Manish R. Bhatt, learned Senior Standing Counsel TAXAP/316/2002 7/9 JUDGMENT appearing for the revenue has submitted that the Tribunal has proceeded on altogether an erroneous premises. The accounting standard prescribed by the institute of Chartered Accountant nowhere states that even notional brokerage should be taken into consideration while working out the correct market value. If the assessee has not sold the shares, no brokerage amount has been incurred by the assessee. There is no question of claiming the said brokerage for the purpose of valuation of the closing stock. It is true that to value the closing stock, either market value or cost whichever is less should be adopted. However, no further adjustment is required to be read in the market value. If the assessee has adopted the market value, then that market value should not be further reduced by the brokerage etc. and hence, the Tribunal has committed an error to consider the notional brokerage and uphold the contention of the assessee. He has, therefore, submitted that the Assessing Officer as well as the learned CIT (Appeals) have taken the correct view. TAXAP/316/2002 8/9 JUDGMENT 9. Mr. S. N. Soparkar, learned Senior counsel appearing for the assessee, on the other hand, relied on the order of the Tribunal and submitted that as per the accounting standard, the loss claimed by the assessee is required to be allowed. 10.We have considered the rival submissions. We have also gone through the orders passed by the authorities below. Our attention is drawn to the Audit report and the relevant provisions of the accounting standards, we are of the view that the assessee was not justified in claiming the notional loss. It is never contemplated. As a matter of fact, the assessee has been regularly following the method of valuation either at the market value or cost whichever is low. The Assessing Officer has also referred to assessment order so far as the method followed by the assessee in earlier year. If the market value is lower in the year under consideration, it is open for the assessee to adopt that method. However, the market value is not to be reduced further by way of any notional brokerage. The assessee is, therefore, not justified in claiming the loss and the loss TAXAP/316/2002 9/9 JUDGMENT claimed by the assessee was rightly disallowed by the Assessing Officer. We fully agree with the reasoning adopted by the CIT (Appeals). We, therefore, reverse the finding arrived at by the Tribunal and uphold the stand of the revenue. 11.This Tax appeal is accordingly allowed and question formulated by us is answered in favour of the revenue and against the assessee. The assessee is, therefore, not entitled to compute the notional brokerage amount that would be payable on the closing stock of debentures for working out the value of such closing stock. 12.This Tax appeal is disposed of accordingly without any order as to costs. Sd/- Sd/- [K. A. PUJ, J.] [B. N. MEHTA, J.] Savariya