GHANSHYAM SHARE & STOCK BROKERS,MUMBAI vs. DCIT 4(1), MUMBAI

O R D E R Per Sanjay Arora, A. M.: These are cross appeals, i.e., by the Assessee and the Revenue, directed against the Order by the Commissioner of Income Tax (Appeals)-8, Mumbai (‘CIT(A)’ for short) dated 13.03.2014, partly allowing the assessee’s appeal contesting it’s 2 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 31.12.2011.

Assessee’s Appeal (in

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 & 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 the balance scrips, i.e., the second category, detailed as under, the assessee could not furnish any explanation, so that the same came to be added by valuing the same, at a total of Rs. 36,35,395/-, at the average of the lowest and highest rates obtaining for f.y. 2008-09, the relevant previous year: (pg. 2 of the assessment order/Table B) Sr. Name of the 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 the ld. AR), the assessee explained that as these shares (of the directors and their family members) were kept in pledge (with the Stock Exchange) toward margin money, the same came to be sold as and when the margin money fell short, requiring disposal/liquidation of the shares kept in margin, or even at the instance of the assessee-company, i.e., on the basis of a demand for those shares. A perusal of the D-mat accounts, however, revealed the scrips reflected therein to be different from that sold by the company. In view of this categorical finding by the AO in the remand proceedings, which remained uncontroverted, the ld. CIT(A) confirmed the addition for Rs. 54,63,795/-, i.e., the impugned addition. Aggrieved, the assessee is in second appeal.

5.1 Our first observation in the matter is that the assessee has by reducing the value of its stock-in-trade as at the year-end, i.e., by placing a value (stated to be market value at the year-end) on some shares recorded at minus figures, has artificially decreased it’s business profit for the year. The sale value of the relevant shares having been already credited to the Profit & Loss (P&L) Account, not doing so, given a nil purchase cost thereof, which is understandable in-as-much as no cost has been incurred toward their acquisition by the company, so that no further adjustment was arguably called for. And the only issue that could arise in that case was if the purchase cost incurred is more than the sale value, and also if the assessment (of the surplus/ gain) as business income under section 28 was proper. To put things in perspective, the negative values would have to be excluded in determining stock-in-trade, even as the assessee pleads before us, both as at the beginning and the end of the year, and the profit/loss (for the account period) computed accordingly. That is, the opening stock would also have to be computed like-wise, i.e., worked out by placing nil value on the 5 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. shares bearing negative quantity. Negative stock, it may be appreciated, is an impossibility and the stock (of any share or in any scrip) can only be a positive figure and, at the minimum, at nil. In effect, we are saying what the assessee contends by pleading for an addition for the net reduction claimed in valuing its’ inventories as at the beginning and end of the 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 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. Subject to verification of the values by the Assessing Officer (A.O.) (as also the quantities, which are at variance with that adopted in the assessment order), we, accordingly, confirm the addition of Rs. 2,27,392/- to the assessee’s business income for the 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 the value of the opening stock is permissible, value of which is to be taken at the same sum (Rs. 2,91,08,820/-) as adopted qua closing stock for the immediately preceding year (PB pages 7, 40 – 47), we do not think the argument to be valid. This is as both the opening and closing stock are to be valued correctly and, two, on the same basis, i.e., to arrive at the correct income for the account period. It is the profit for each year, and each year alone, that could be brought to tax for that year; each year being an independent unit of assessment. Reference in this context is made to the decision in CIT (Dy.) vs. Daman Ganga Paper Ltd. [2014] 63 SOT 47 (Mum), based on decisions by the Hon’ble jurisdictional High Court and Supreme Court settling the law in the matter. We may refer to this addition as Addition 1. We may here also mention that though manifest in the form of (the value of) the closing stock, the addition is essentially on account of unexplained credit inasmuch as the source of the credit of the shares in the assessee’s D-mat account is unexplained, which remains unaccounted in financial accounts as well. The sale implies existence of shares, at least in that number and, further, availment of credit in their respect. It is the non-passing of the corresponding credit entry in the books of account that the incidence of negative stock arises, itself implying non-explanation as to the nature and source of the credit. The 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 the decision in the case of CIT v. Jauharimal Goel [2005] 147 Taxman 448 (All).

7 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. 5.2 The second adjustment warranted is on account of the increase in the quantity of ‘negative stock’ during the year. For example, a stock, at (–) 500 units – at the beginning of the year, increases to (–) 100 at the year-end. Clearly, there is a net addition of 400 [(–) 100 – (–) 500], in accounts, during the year and, presumably, only at a cost. Surely, further adjustment would be required and merely excluding the negative value qua these (100) shares shall not suffice. This would also obtain in case of a positive stock as at the year-end, at (say) (+) 100, in which case the increase would be at 600 units. The exercise is therefore not to be limited to stock with ‘negative’ quantity/value at the year-end. Now, going by our earlier example, the increase of 400 shares must find reflection in the closing stock as at the year-end, and cannot be ignored, which though transpires on the opening and closing quantity of such stocks being taken at nil, i.e., valued excluding the negative values or assigning nil values in-as-much as negative stock is a physical impossibility. Not so doing would tantamount to availing deduction of cost of 400 shares as recorded in books for the current year against sales made during a preceding year, which cannot be. That is, the quantity shall find reflection in the closing stock (to be valued at cost or market value, whichever is less) and, consequently, as opening stock for the following year. This, then, would constitute Addition 2, i.e., by way of increase in the value of the closing stock, which on the basis of the 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) The impact of the negative year-end stock, which gets included in the negative figure at Col. 3 above, stands already neutralised in the addition of Rs.2,27,392/- (Addition 1). (2) to be valued at lower of cost/fair market price (as at the relevant date/s) and FMV at the year-end.

8 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. Needless to add, the A.O. shall, apart from verification and undertaking the exercise afore-said, effect the addition, where so, only after hearing the assessee and meeting its’ objections, if any.

5.3 The third addition (Addition 3) is qua the peak shortfall during the year, which may be at a figure different from that obtaining as at the beginning or the close of the year. We may represent this scenario, along with the earlier two, as under, with reference to a 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, the addition would be for the value of 600 shares, as against for 400 shares in scenario 2. The reason is simple: the assessee having no opening stock (in the relevant scrip), has sold, and had therefore acquired, 100 shares during the year up to the peak date. This corresponds to Addition 1, which gets effected when the closing stock is valued at nil. Another 500 shares, however, stand acquired since, and being undisposed as at the year-end, would stand to find reflection in the closing- stock. Addition in respect thereof, i.e., by way of closing stock, shall ensue, valuing the same at the lower of cost of acquisition or market value (as at the year-end). This corresponds to Addition 2. It is this complex, resulting in an addition for 600 shares (of which for 100 is u/s. 68/69A and for the balance 500 as stock-in-trade at the year- end) that we refer to as Addition 3, and which is thus only a 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 a view to emphasize that the exercise afore-said is to be carried out not only qua stocks recorded at negative figures as at the beginning or the end of the year, but also at any time during the year. Further, one may be tempted to suggest, and it may appear that an addition toward 600 shares is not justified considering the 9 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. sale (in books) of/in the same number, credited to the P&L A/c. However, as explained hereinbefore, the sale of 500 shares falls in a preceding year, qua which credit therefore cannot be allowed for the current year. The same is a separate transaction. The assessee, in fact, by reducing the opening value of the inventory has effectively neutralized the credit (to the P&L A/c) to a large extent. Continuing further, we are conscious that the valuation of the relevant scrips as at the year-end may be lower than the ‘cost’ as recorded in books, as where there is a decline in the market price since. The difference, or the said decline, is only a business loss, which gets absorbed in the valuation of the closing stock. No separate addition/adjustment is required to be made/effected, i.e., apart from that in respect of shortfall w.r.t. the cost stated. Take, for example, the case of the scrip ‘Neyveli Lignite’. If the cost of the scrip on the relevant (acquisition) date is Rs. 100/- (say), or otherwise purchased at that cost (say), the same stands recorded in books at Rs. 2,39,600/- and, accordingly, claimed as a deduction. The share price as at the year-end being Rs. 84/- (Table C), the business income will however stand to be increased only by the carrying value of Rs. 84/-, i.e., Rs.2,01,264/-, forming part of the closing inventory and, correspondingly, the opening inventory for the following year, and so on. The difference with reference to Addition 1 is that the corresponding shares stand already sold in that case and, therefore, to that extent shall not find reflection in the closing stock; and the profit/loss on sale gets subsumed in the P&L Account. And, apart from accounting for the peak shortfall (during the year) and concomitant adjustment, Addition 2 and Addition 3 are of the same species. Needless to add, the exercise for both these additions is to be carried out for all the shares, and not limited to those shares reporting negative quantity as at the beginning and/or at the end of the year, which may well be positive, even as shortfall (negative stock) subsists during a part of the year. Credit in the form of closing stock in every such case (i.e., with reference and toward decline from the peak shortfall during the year, as at the year- end), shall obtain. Also, if the 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, the decline therein (on account of the valuation of closing stock) would again stand to be assessed under the same head/category. However, as we shall presently see, i.e., while discussing the Revenue’s appeal, the categorization of the same as speculative is without basis. Addition by way of such adjustment shall again be carried out by allowing the assessee proper opportunity of hearing, meeting its case, if any.

5.4 Before parting with the matter, we may clarify certain aspects thereof. To begin with, the assessee’s explanation of the shortfall in shares as on account of shares belonging to the directors or their family members kept as margin money of the company, availed credit of or otherwise monetized on the sale of such shares (on their being in demand) is neither here nor there. The explanation, firstly, does not extend to all the shares, but only that listed in Table A above. Two, the question is not as to whom the shares belonged to prior to their acquisition by the assessee-company, but of the nature and source of the acquisition thereof by it. Margin money (account) of the assessee-company is not an off-the-balance sheet item for the assessee to have not recorded the same (acquisition) in its accounts. Then, again, how does the assessee- company acquire proprietary rights over those shares, as evidenced by their sale and, further, without incurring any obligation qua the same? What prevented the company from recording a credit purchase from the transferor/s? The explanation is even otherwise unsustainable, with the Revenue reporting a difference between the stock with the family members and that sold by the assessee-company. Where acquired for a consideration or otherwise borrowed (placing a notional value), it would not result in a negative (shortfall in) stock. The negative stock itself is a reflection of it being not accounted for, much less explained as the nature and source of the credit/acquisition. How did, even as the AO asks, the shares came to be credited or transferred to the account of and, therefore, sold by the assessee-company? That is, considering that it is neither a case of purchase nor of borrowing. The same, i.e., ‘negative stock’, which is 11 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. only with reference to the quantity actually sold, also rubbishes the assessee’s claim of its accounts being audited as well as it’s reliance on the rule of consistency. We have in fact already allowed it credit for the opening ‘negative stock’ (shortfall) in-as-much as the said stock could only be acquired, or credit there-against availed, whichever one way one may see it, during a preceding year. If anything, it shows the accounts being unreconciled, with differences between the quantitative records (D-mat accounts) and corresponding financial accounts. We have, accordingly, directed for such a reconciliation, so as to bring out all such discrepancies, discussing some, i.e., rather than confirming only that which subsist as at the year-end, also explaining the extent and manner of the ensuing additions for the current year. In other words, we have, while examining the assessee’s plea of negative opening stock, and which therefore should also be given effect to, accepting it on the basis of the settled law, also observed other aspects in relation thereto, to find that these have a direct impact on the income for the year and, therefore, shall require adjudication by the assessing authority. This may, however, not be construed as placing any limitation on A.O.’s examination; the purport being the proper assessment - in framing which he shall have regard to our observations in the matter, in the facts of the case, observing the principles of natural justice. We may here also clarify that irrespective of whether the assessee passes the corresponding journal entries in its accounts, the quantity of all shares subject to adjustments shall, for assessments for the subsequent years, be carried forward at quantities determined in this assessment, i.e., as against book quantities. The same, apart from following as a corollary, is in consonance with the principles of equity; taxation of income; and consistency, which the former endorses. Further, lest one considers us as having, in so directing, travelled outside the scope of the appeal, we may advert to the decisions, inter alia, in the case of Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom) (FB). The reliance on J.K. Charitable Trust (supra) and 5.5 We decide accordingly.

The income from share trading was regarded by the AO as speculative income, further increasing the same by Rs.15 lacs by allocating administrative expenditure to that category, i.e., as against, as contended, Rs.22,46,112/- by the assessee. The same was reversed by the ld. CIT(A), who found no basis for the allocation of the administrative expenditure, as well as for categorising income as speculative, particularly considering that Explanation to section 73 was not invoked by the AO.

‘Losses in speculation business. 73. (1) ..............

Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house 13 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.’ Accordingly, and even as observed by the ld. CIT(A), we find no basis for holding the income/loss from the said activity as speculative by the AO, nor was any pointed out to us during hearing. We, therefore, have no hesitation in confirming the impugned order on this score. As regards the reallocation of the administrative expenditure, we find that both the assessee as well as the AO to have allocated the same under different activities without any basis. However, the said allocation is itself rendered of no consequence as the entire business income is to be regarded as non- speculative. We decide accordingly, and the Revenue fail on both these grounds. We may though add that the AO has held that the 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 the Act, i.e., aggregation of income, and not under any particular head of income specified u/s. 14, as explained by the Hon’ble Court in Fakir Mohmed Haji Hasan vs. CIT [2001] 247 ITR 290 (Guj). The only surviving issue, raised per Gd. 3, is in respect of deletion of addition made by the AO, denying the assessee’s ‘claim’ for reduction in the closing stock and, consequently, profit/income (per the revised return) by Rs.12,13,444/-, in the in the absence of any details. The entire details were examined in the remand proceedings, to find that the revision is on account of revision in the rates of valuation of the closing stock as at the year-end. The revised statement is, in fact, in agreement with the balance-sheet as at the year-end (filed along with the original return); the assessee explaining the 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. The assessee’s revised return (PB pg. 1) bears no claim for any reduction in stock; it 14 & 3762/Mum/2014 (A.Y. 2009-10) Ghanshyam Share & Stock Brokers Pvt. Ltd. adopting the same figure of profit, i.e., as obtains per the profit and loss account. We have noted that the stock-in-trade at the year-end (Rs.2,74,36,842/PB pgs. 48-57) is in agreement with the figure as per the balance-sheet (PB pg. 7). No error in the impugned revision was also pointed out to us during hearing. We, accordingly, have no hesitation in confirming the impugned order on this score as well. We decide accordingly