IN INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI SANJAY ARORA, AM AND SHRI AMARJIT SINGH, JM I.T.A. No. 3573/Mum/2014 (Assessment Year: 2009-10) Ghanshyam Share & Stock Brokers Dy. CIT, Range 4(1), Pvt. Ltd., Aayakar Bhavan, 6th Floor, C/o. D. C. Jain & Co., R. N. 640, M. K. Road, st 75, Bombay Mutual Bldg., 1 Floor, Vs. Mumbai D. N. Road, Fort, Mumbai-400 001 PAN/GIR No. AAACG 3561 H (Assessee) : (Revenue) I.T.A. No. 3762/Mum/2014 ( Assessment Year: 2009-10) Dy. CIT, Range 4(1), Ghanshyam Share & Stock Brokers th Room Ni. 640, 6 Floor, Pvt. Ltd., Aaykar Bhavan, M. K. Road, Vs. 24, 2nd Fanaswadi, D. A. Lane, Mumbai Mumbai-400 004 (Revenue) : (Assessee) Assessee by : Shri D. C. Jain Revenue by : Shri Airiju Jaikaran : 23.06.2016 Date of Hearing : 04.10.2016 Date of Pronouncement O R D E R Per Sanjay Arora, A. M.: These are cross appeals, i.e., by Assessee and Revenue, directed against Order by Commissioner of Income Tax (Appeals)-8, Mumbai ( CIT(A) for short) dated 13.03.2014, partly allowing assessee s appeal contesting it s 2 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. assessment u/s.143(3) of Income Tax Act, 1961 ( Act hereinafter) for assessment year (A.Y.) 2009-10 vide order dated 31.12.2011. Assessee s Appeal (in ITA No. 3573/Mum/2014) 2. issue arising in instant appeal by assessee is with regard to maintainability in law, and in facts and circumstances of case, of addition, effected in sum of Rs. 54,63,795/- in assessment, on account of negative stock-in- trade as at year-end, since confirmed in first appeal. Facts in brief 3. final accounts of assessee-company, share and stock broker, were found by Assessing Officer (AO) to bear negative stock as at year-end in some scrips traded in. shares, listed at paragraph 5 (pages 2-3) of assessment order, were found by him to fall in two categories. For first category, assessee explained them to be shares which came to be transferred to company s dematerialised (D-Mat) account from that of its Directors and their family members, and were sold from assessee s said account. However, as corresponding purchase was not recorded in assessee s accounts (either in quantity or value), same came to be reflected as negative stock. acquisition by assessee, which was sans any consideration, recorded or otherwise, being not explained, same was considered unexplained as to its nature and source. Accordingly, value/s thereof, as on date/s of acquisition, i.e., on which same came to be included in assessee s D-mat account, aggregating to Rs. 24,28,500/-, was brought to tax. Detail of these scrips are as under: (pg. 2 of assessment order/Table A) Sr. Company Name Qty. Amount No. (Nos.) (Rs.) 1 Bongaingaon Refinery 3910 210835 2 Sudharshan Chem 3332 573544 3 Tata Investment Corp 1380 556560 4 Tata Tea 1229 906086 3 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. 5 VST Industries 275 88625 6 VST Tillers 975 92850 Total 2428500 For balance scrips, i.e., second category, detailed as under, assessee could not furnish any explanation, so that same came to be added by valuing same, at total of Rs. 36,35,395/-, at average of lowest and highest rates obtaining for f.y. 2008-09, relevant previous year: (pg. 2 of assessment order/Table B) Sr. Name of scrip Qty. (Nos.) No. 1 BPCL 4656 2 Garden Silk 200 3 Reliance Power 3438 4 Thirumal Chem 937 5 Torrent Power 3618 6 Neyveli Lignite 1191 In first appeal, as also before us (through ld. AR), assessee explained that as these shares (of directors and their family members) were kept in pledge (with Stock Exchange) toward margin money, same came to be sold as and when margin money fell short, requiring disposal/liquidation of shares kept in margin, or even at instance of assessee-company, i.e., on basis of demand for those shares. perusal of D-mat accounts, however, revealed scrips reflected therein to be different from that sold by company. In view of this categorical finding by AO in remand proceedings, which remained uncontroverted, ld. CIT(A) confirmed addition for Rs. 54,63,795/-, i.e., impugned addition. Aggrieved, assessee is in second appeal. 4. Before us, assessee raised another plea - that there is negative opening stock, i.e., as at beginning of year, as well, and which stands valued at Rs. 34,51,564/-. value of negative stock per assessee s accounts, so that stock-in-trade as at year-end stands reduced by that amount, is Rs. 36,78,956/-. Accordingly, only net accretion to negative stock during year, or net 4 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. reduction in credit (net) to P&L A/c on this account, i.e., Rs. 2,27,392/- (3678956 3451564), could only be brought to tax. Reference was made to list of such negative shares as at beginning and end of year (PB pg. 58). assessee s accounts are duly audited, and which should therefore be accepted, following rule of consistency, placing reliance on CIT vs. J.K. Charitable Trust [2009] 308 ITR 161 (SC) and Union of India vs. Satish Panalal Shah [2001] 249 ITR 221 (SC). ld DR. on other hand, relied on orders by Revenue authorities. 5. We have heard parties, and perused material on record. facts as emanating from material on record give rise to number of questions and, accordingly, issues, which would require being suitably addressed, so as to arrive at sums, if any, that would stand to be assessed as income, including question as to correct head of income. 5.1 Our first observation in matter is that assessee has by reducing value of its stock-in-trade as at year-end, i.e., by placing value (stated to be market value at year-end) on some shares recorded at minus figures, has artificially decreased it s business profit for year. sale value of relevant shares having been already credited to Profit & Loss (P&L) Account, not doing so, given nil purchase cost thereof, which is understandable in-as-much as no cost has been incurred toward their acquisition by company, so that no further adjustment was arguably called for. And only issue that could arise in that case was if purchase cost incurred is more than sale value, and also if assessment (of surplus/ gain) as business income under section 28 was proper. To put things in perspective, negative values would have to be excluded in determining stock-in-trade, even as assessee pleads before us, both as at beginning and end of year, and profit/loss (for account period) computed accordingly. That is, opening stock would also have to be computed like-wise, i.e., worked out by placing nil value on 5 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. shares bearing negative quantity. Negative stock, it may be appreciated, is impossibility and stock (of any share or in any scrip) can only be positive figure and, at minimum, at nil. In effect, we are saying what assessee contends by pleading for addition for net reduction claimed in valuing its inventories as at beginning and end of year, impacting its profit accordingly, details of which are as under: (PB pg. 58) Negative stock as on 31.3.2009 Table C Sr. Scrip Qty. Rate Amount No. (Nos.) (Rs.) 1) Bongai Refinery 3903 41 160023 2) BPCL 4653 376 1749528 3) Garden Silk 200 40 8000 4) Glax Smrth 1 704 704 5) Neyveli Lignite 1191 84 100044 6) Reliance Power 3438 103 354114 7) Sudershan chem. 981 92 90252 8) Tata Inv. Corp. 775 231 179025 9) Tata Tea 1135 584 662840 10) Thirumal Chem. 932 47 43804 11) Torrent Power 3618 75 271350 12) VST Inds. 174 238 41412 13) Ravalgon 2 4250 8500 14) VST Tiller 72 130 9360 Total 3678956 Negative stock as on 31.3.2008 (1.4.2009) Sr. Scrip Qty. Rate Amount No. (Nos.) (Rs.) 1) BPCL 4645 433 2011285 2) Neyveli Lignite 3587 124 444788 3) Reliance Power 1635 334 546090 4) Torrent Power 3977 113 449401 Total 3451564 PS: Net negative stock: (-) Rs.2,27,392 [(-) 36,78,956 (-) 34,51,564] 6 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. Subject to verification of values by Assessing Officer (A.O.) (as also quantities, which are at variance with that adopted in assessment order), we, accordingly, confirm addition of Rs. 2,27,392/- to assessee s business income for year on account of incorrect valuation of its opening and closing stock-in- trade. Though it could be argued that no adjustment in respect of value of opening stock is permissible, value of which is to be taken at same sum (Rs. 2,91,08,820/-) as adopted qua closing stock for immediately preceding year (PB pages 7, 40 47), we do not think argument to be valid. This is as both opening and closing stock are to be valued correctly and, two, on same basis, i.e., to arrive at correct income for account period. It is profit for each year, and each year alone, that could be brought to tax for that year; each year being independent unit of assessment. Reference in this context is made to decision in CIT (Dy.) vs. Daman Ganga Paper Ltd. [2014] 63 SOT 47 (Mum), based on decisions by Hon ble jurisdictional High Court and Supreme Court settling law in matter. We may refer to this addition as Addition 1. We may here also mention that though manifest in form of (the value of) closing stock, addition is essentially on account of unexplained credit inasmuch as source of credit of shares in assessee s D-mat account is unexplained, which remains unaccounted in financial accounts as well. sale implies existence of shares, at least in that number and, further, availment of credit in their respect. It is non-passing of corresponding credit entry in books of account that incidence of negative stock arises, itself implying non-explanation as to nature and source of credit. corresponding addition shall be u/s. 68 or, equivalently, as unexplained acquisition of/ investment in shares, liable for addition u/s.69A. Reference in this context may be made to decision in case of CIT v. Jauharimal Goel [2005] 147 Taxman 448 (All). 7 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. 5.2 second adjustment warranted is on account of increase in quantity of negative stock during year. For example, stock, at ( ) 500 units at beginning of year, increases to ( ) 100 at year-end. Clearly, there is net addition of 400 [( ) 100 ( ) 500], in accounts, during year and, presumably, only at cost. Surely, further adjustment would be required and merely excluding negative value qua these (100) shares shall not suffice. This would also obtain in case of positive stock as at year-end, at (say) (+) 100, in which case increase would be at 600 units. exercise is therefore not to be limited to stock with negative quantity/value at year-end. Now, going by our earlier example, increase of 400 shares must find reflection in closing stock as at year-end, and cannot be ignored, which though transpires on opening and closing quantity of such stocks being taken at nil, i.e., valued excluding negative values or assigning nil values in-as-much as negative stock is physical impossibility. Not so doing would tantamount to availing deduction of cost of 400 shares as recorded in books for current year against sales made during preceding year, which cannot be. That is, quantity shall find reflection in closing stock (to be valued at cost or market value, whichever is less) and, consequently, as opening stock for following year. This, then, would constitute Addition 2, i.e., by way of increase in value of closing stock, which on basis of figures/values on record works to Rs.2,28,189/-, detailed as under: Scrip Qty Qty (+)/(-) Value Remarks (closing) (opening) BPCL (-) 4653 (-) 4645 (-) 8 Nil (1) Neyveli Lignite (-) 1191 (-) 3587 (+) 2396 2,01,264 (2) Reliance Power (-) 3438 (-) 1635 (-) 1803 Nil (1) Torrent Power (-) 3618 (-) 3977 (+) 359 26,925 (2) (1) impact of negative year-end stock, which gets included in negative figure at Col. 3 above, stands already neutralised in addition of Rs.2,27,392/- (Addition 1). (2) to be valued at lower of cost/fair market price (as at relevant date/s) and FMV at year-end. 8 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. Needless to add, A.O. shall, apart from verification and undertaking exercise afore-said, effect addition, where so, only after hearing assessee and meeting its objections, if any. 5.3 third addition (Addition 3) is qua peak shortfall during year, which may be at figure different from that obtaining as at beginning or close of year. We may represent this scenario, along with earlier two, as under, with reference to particular scrip (say): Scenario Opg. Stk. Clg. Stk. Peak (-) Difference Remarks 1. (-) 100 (-) 500 - (-) 400 Addition 1 2. (-) 500 (-) 100 - (+) 400 Addition 2 3. (-) 500 (-) 100 (-) 600 (+) 600 Addition 3 In scenario 3, addition would be for value of 600 shares, as against for 400 shares in scenario 2. reason is simple: assessee having no opening stock (in relevant scrip), has sold, and had therefore acquired, 100 shares during year up to peak date. This corresponds to Addition 1, which gets effected when closing stock is valued at nil. Another 500 shares, however, stand acquired since, and being undisposed as at year-end, would stand to find reflection in closing- stock. Addition in respect thereof, i.e., by way of closing stock, shall ensue, valuing same at lower of cost of acquisition or market value (as at year-end). This corresponds to Addition 2. It is this complex, resulting in addition for 600 shares (of which for 100 is u/s. 68/69A and for balance 500 as stock-in-trade at year- end) that we refer to as Addition 3, and which is thus only variant of Addition 2. We refer to this as most cases of Addition 2 may, in actual practice, be cases of Addition 3 and, further, with view to emphasize that exercise afore-said is to be carried out not only qua stocks recorded at negative figures as at beginning or end of year, but also at any time during year. Further, one may be tempted to suggest, and it may appear that addition toward 600 shares is not justified considering 9 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. sale (in books) of/in same number, credited to P&L A/c. However, as explained hereinbefore, sale of 500 shares falls in preceding year, qua which credit therefore cannot be allowed for current year. same is separate transaction. assessee, in fact, by reducing opening value of inventory has effectively neutralized credit (to P&L A/c) to large extent. Continuing further, we are conscious that valuation of relevant scrips as at year-end may be lower than cost as recorded in books, as where there is decline in market price since. difference, or said decline, is only business loss, which gets absorbed in valuation of closing stock. No separate addition/adjustment is required to be made/effected, i.e., apart from that in respect of shortfall w.r.t. cost stated. Take, for example, case of scrip Neyveli Lignite . If cost of scrip on relevant (acquisition) date is Rs. 100/- (say), or otherwise purchased at that cost (say), same stands recorded in books at Rs. 2,39,600/- and, accordingly, claimed as deduction. share price as at year-end being Rs. 84/- (Table C), business income will however stand to be increased only by carrying value of Rs. 84/-, i.e., Rs.2,01,264/-, forming part of closing inventory and, correspondingly, opening inventory for following year, and so on. difference with reference to Addition 1 is that corresponding shares stand already sold in that case and, therefore, to that extent shall not find reflection in closing stock; and profit/loss on sale gets subsumed in P&L Account. And, apart from accounting for peak shortfall (during year) and concomitant adjustment, Addition 2 and Addition 3 are of same species. Needless to add, exercise for both these additions is to be carried out for all shares, and not limited to those shares reporting negative quantity as at beginning and/or at end of year, which may well be positive, even as shortfall (negative stock) subsists during part of year. Credit in form of closing stock in every such case (i.e., with reference and toward decline from peak shortfall during year, as at year- end), shall obtain. Also, if business income is, as contended, assessed as 10 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. speculative income, decline therein (on account of valuation of closing stock) would again stand to be assessed under same head/category. However, as we shall presently see, i.e., while discussing Revenue s appeal, categorization of same as speculative is without basis. Addition by way of such adjustment shall again be carried out by allowing assessee proper opportunity of hearing, meeting its case, if any. 5.4 Before parting with matter, we may clarify certain aspects thereof. To begin with, assessee s explanation of shortfall in shares as on account of shares belonging to directors or their family members kept as margin money of company, availed credit of or otherwise monetized on sale of such shares (on their being in demand) is neither here nor there. explanation, firstly, does not extend to all shares, but only that listed in Table above. Two, question is not as to whom shares belonged to prior to their acquisition by assessee-company, but of nature and source of acquisition thereof by it. Margin money (account) of assessee-company is not off-the-balance sheet item for assessee to have not recorded same (acquisition) in its accounts. Then, again, how does assessee- company acquire proprietary rights over those shares, as evidenced by their sale and, further, without incurring any obligation qua same? What prevented company from recording credit purchase from transferor/s? explanation is even otherwise unsustainable, with Revenue reporting difference between stock with family members and that sold by assessee-company. Where acquired for consideration or otherwise borrowed (placing notional value), it would not result in negative (shortfall in) stock. negative stock itself is reflection of it being not accounted for, much less explained as nature and source of credit/acquisition. How did, even as AO asks, shares came to be credited or transferred to account of and, therefore, sold by assessee-company? That is, considering that it is neither case of purchase nor of borrowing. same, i.e., negative stock , which is 11 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. only with reference to quantity actually sold, also rubbishes assessee s claim of its accounts being audited as well as it s reliance on rule of consistency. We have in fact already allowed it credit for opening negative stock (shortfall) in-as-much as said stock could only be acquired, or credit there-against availed, whichever one way one may see it, during preceding year. If anything, it shows accounts being unreconciled, with differences between quantitative records (D-mat accounts) and corresponding financial accounts. We have, accordingly, directed for such reconciliation, so as to bring out all such discrepancies, discussing some, i.e., rather than confirming only that which subsist as at year-end, also explaining extent and manner of ensuing additions for current year. In other words, we have, while examining assessee s plea of negative opening stock, and which therefore should also be given effect to, accepting it on basis of settled law, also observed other aspects in relation thereto, to find that these have direct impact on income for year and, therefore, shall require adjudication by assessing authority. This may, however, not be construed as placing any limitation on A.O. s examination; purport being proper assessment - in framing which he shall have regard to our observations in matter, in facts of case, observing principles of natural justice. We may here also clarify that irrespective of whether assessee passes corresponding journal entries in its accounts, quantity of all shares subject to adjustments shall, for assessments for subsequent years, be carried forward at quantities determined in this assessment, i.e., as against book quantities. same, apart from following as corollary, is in consonance with principles of equity; taxation of income; and consistency, which former endorses. Further, lest one considers us as having, in so directing, travelled outside scope of appeal, we may advert to decisions, inter alia, in case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom) (FB). reliance on J.K. Charitable Trust (supra) and 12 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. Satish Panalal Shah (supra) is, as would be apparent from foregoing, completely misplaced. 5.5 We decide accordingly. Revenue s Appeal (in ITA No. 3762/Mum/2014) 6. assessee-company was during assessment proceedings observed to have undertaken activities under three broad categories during year, being share trading (proprietary trade) futures and options (F & O) share broking. income from share trading was regarded by AO as speculative income, further increasing same by Rs.15 lacs by allocating administrative expenditure to that category, i.e., as against, as contended, Rs.22,46,112/- by assessee. same was reversed by ld. CIT(A), who found no basis for allocation of administrative expenditure, as well as for categorising income as speculative, particularly considering that Explanation to section 73 was not invoked by AO. 7. We have heard parties, and perused material on record. Share trading, as apparent from assessee s final accounts, i.e., income (operating) statement and balance-sheet (as at year-end) respectively, constitutes principal business of assessee-company. In fact, Revenue s relevant ground (Gd. 1) itself admits so. Explanation to section 73, which reads as under, is thus not applicable: Losses in speculation business. 73. (1) .............. Explanation. Where any part of business of company (other than company whose gross total income consists mainly of income which is chargeable under heads "Interest on securities", "Income from house 13 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. property", "Capital gains" and "Income from other sources", or company principal business of which is business of trading in shares or banking or granting of loans and advances consists in purchase and sale of shares of other companies, such company shall, for purposes of this section, be deemed to be carrying on speculation business to extent to which business consists of purchase and sale of such shares. Accordingly, and even as observed by ld. CIT(A), we find no basis for holding income/loss from said activity as speculative by AO, nor was any pointed out to us during hearing. We, therefore, have no hesitation in confirming impugned order on this score. As regards reallocation of administrative expenditure, we find that both assessee as well as AO to have allocated same under different activities without any basis. However, said allocation is itself rendered of no consequence as entire business income is to be regarded as non- speculative. We decide accordingly, and Revenue fail on both these grounds. We may though add that AO has held that income on account of unexplained investment would not be set off against speculative loss. Deemed income stands to be brought to tax under Chapter-VI of Act, i.e., aggregation of income, and not under any particular head of income specified u/s. 14, as explained by Hon ble Court in Fakir Mohmed Haji Hasan vs. CIT [2001] 247 ITR 290 (Guj). only surviving issue, raised per Gd. 3, is in respect of deletion of addition made by AO, denying assessee s claim for reduction in closing stock and, consequently, profit/income (per revised return) by Rs.12,13,444/-, in in absence of any details. entire details were examined in remand proceedings, to find that revision is on account of revision in rates of valuation of closing stock as at year-end. revised statement is, in fact, in agreement with balance-sheet as at year-end (filed along with original return); assessee explaining stock statement given earlier being as on 04.4.2011, furnished inadvertently. We, in fact, see no issue, i.e., either in principle or on facts. assessee s revised return (PB pg. 1) bears no claim for any reduction in stock; it 14 ITA Nos. 3573 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. adopting same figure of profit, i.e., as obtains per profit and loss account. We have noted that stock-in-trade at year-end (Rs.2,74,36,842/PB pgs. 48-57) is in agreement with figure as per balance-sheet (PB pg. 7). No error in impugned revision was also pointed out to us during hearing. We, accordingly, have no hesitation in confirming impugned order on this score as well. We decide accordingly 8. In result, assessee s appeal is partly allowed and partly allowed for statistical purposes, and Revenue s appeal is dismissed. Order pronounced in open court on October 04, 2016 Sd/- Sd/- (Amarjit Singh) (Sanjay Arora) Judicial Member Accountant Member Mumbai; Dated : 04.10.2016 . . ./Roshani, Sr. PS Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Ghanshyam Share & Stock Brokers Pvt. Ltd. v. Dy. CIT, Range 4(1), Mumbai