SMT DEEPA S PAI vs. THE DEPUTY COMMISSIONER OF

This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee which was admitted by a Bench of this Court by order dated 23.06.2015 on the following substantial questions of law: 1. Whether, the order of the Assessing Authority was sustainable when the direction of the Appellate Tribunal in the earlier appellate order was not followed while concluding the assessment?

Whether the shares held by the appellant having been converted into stock-in-trade, the value of the closing stock at the end of the year was required to be valued at the cost to the business at the time of conversion (i.e. the market value at the time of conversion) or cost of acquisition or net realizable value whichever is less? 3. Whether for valuation of closing stock, when the principle of “original cost or market value whichever is less “is required to be adopted, in the case of shares converted into stock-in-trade, the value as on the date of conversion can be substituted for its original cost?”.

Facts giving rise to the filing of the appeal briefly stated are that the assessee filed return of income for assessment year 2004-05 on 31.10.2004 declaring NIL income. The assessee was holding certain shares as investments while she was a minor. On attaining majority, the assessee converted the shares

The Assessing Officer by an order dated 26.12.2011 valued the closing stock at lower of the cost (conversion cost) or net realizable value of the shares and also levied interest under Sections 234B and 220(2) of the Act. Being aggrieved by the order of the aforesaid Assessing Officer, the appellant filed an appeal, which was dismissed by CIT (Appeals) by an order dated 19.03.2013.

Learned counsel for the appellant submitted that the assessee had converted the shares held by her as a stock-in-trade and claimed the closing stock at the cost at which the shares were acquired or the market value as on that date whichever was lower. However, the aforesaid aspect of the matter has not been appreciated

We have considered the submissions made by the learned counsel for the parties and have perused the record. The entire issue pertains to valuation adopted for conversion of investments to stock-in-trade, opening stock and closing stock. The Tribunal by an order dated 17.09.2010 had remanded the matter to the Assessing Officer. The relevant extract reads as under: “We therefore remit the case back on the file of the Ld. AO to re-compute the profits by

The Supreme Court in COMMISSIONER OF INCOME-TAX, PATIALA, supra has held that where an assessee converts his capital assets into stock-in-trade and starts dealing with them, the taxable profit on the sale must be determined by deducting on sale proceeds and the market value at the time of their conversion into stock-in-trade. The aforesaid principle has neither been taken into account by the Assessing Officer as well as by the CIT (Appeals) and the Tribunal. It is not in dispute before us that the CIT (Appeals) and the Tribunal has not examined the aforesaid aspect of the matter.

In view of preceding analysis, the substantial question of law No.1 framed by this Court is answered in favour of the assessee and against the revenue. In the result, the order passed by the Assessing Officer as well as CIT (Appeals) and the Tribunal are hereby set aide and the matter is remitted to the Assessing Officer to decide the matter afresh in the light of the directions contained in the order dated 17.09.2010 passed by the Tribunal as well as the decision of the Supreme Court in COMMISSIONER OF INCOME-TAX, PATIALA, supra. Therefore, it is not necessary to answer 2nd and 3rd substantial question of law. Accordingly, the appeal is disposed of.