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Case Law Citation:
CIT vs. Morgan Securities & Credits
Pvt. Ltd. (Delhi High Court), Income tax (Appeal) no. 947 of 2011 and 539 of
2014, Date of Judgment: 23/09/2015
Brief of the Case
Delhi High Court held In the case of CIT vs.
Morgan Securities & Credits Pvt. Ltd. that any changes in the audited financials
like for e.g., the ‘regrouping’ of shares in the present case, if at all
permissible, has to be preceded by a legally acceptable procedure adopted by
the Assessee, and in any event prior to the finalization and signing of the
audited balance sheet for a particular financial year.
Facts of the Case
Assessee is a private limited company engaged
in the business of trading and finance. For the AY 2005-06, the Assessee filed
its return of income on 31st October 2005 declaring a total income of
Rs.3,75,88,170 which comprised of business loss of Rs.(-)1,08,73,143, net short
term capital gain of Rs.4,84,61,310 and long term capital gain of Rs.51,92,406.
The AO noticed from Clause 11 of the tax audit report (TAR) in Form 3CD that
there has been a change in the method of accounting affecting the profitability
of the company. The inventory of shares valued at Rs. 9,83,45,399 had been
treated as investment in the current year.
According to the AO, the only motive for this
undue change in this year appeared to be lowering the tax incidence and taking
undue benefit of the exemption from tax on long term capital gains under
Section 10(38) of the Act and concessional rate of tax @ 10% on short term
capital gains under Section 111A. Treating the entire shares held by the
Assessee as stock in trade, the AO treated the resultant profit from the sale
of shares in the sum of Rs.10,22,58,060 as business profit in the hands of the
Assessee and directed it to be brought to tax as such.
Held by CIT (A)
The CIT (A) held that the transactions under
consideration were on investment account and not stock in trade and directed
the AO to amend the computation of total income accordingly.
Held by ITAT
ITAT held that the AO had accepted the stand
of the Assessee that shares were held as investment for AY 2004-05 as well.
According to the ITAT, the AO could not have taken a different view for AY
2005-06 particularly since there was no material on record to justify it.
Held by High Court
The record of the AO for AY 2005-06 reveals an
important fact concerning the regrouping of the investment by the Assessee for
the year ending 31st March 2004. It is seen that the audited balance sheet of
the Assessee for the year ending 31st March 2005 contains two columns giving
the figures as on 31st March 2004 and 31st March 2005. It is seen that in this
balance sheet the figures given for the “inventory‟ as on 31st March 2004 have
sought to be shown as per ‘regrouping’. However, balance sheet as on 31st march
2014 were not produced.
It is, therefore, not clear whether after the
signing of the audited balance sheet as on 31st March 2004 by Directors and CA
any resolution was passed by the Board of Directors of the Assessee deciding to
treat as investment, the shares shown therein as stock in trade. This is an
important aspect which does not appear to have merited attention by the CIT (A)
or even the ITAT.
It is unacceptable that after an audited
balance sheet of a company for a financial year is signed by its Directors and
statutory Auditors, and submitted to the statutory authorities, including the
ROC and the income tax authorities, the figures in such balance sheet for the
closing stock of shares can simply be altered subsequently by adopting the
device of regrouping by the Assessee, even by a Board resolution. That is a
process unknown to the law.
Even from the point of view of principles
governing statutory accounts, such change cannot be simply give effect to in
the balance sheet and P&L account for a subsequent year. For instance, such
a change, as was sought to be made by the Assessee in the instant case, to the
value of the closing stock of shares by treating it as investment instead of
stock-in-trade, would affect in the balance sheet and P&L accounts for at
least two financial years. It is doubtful if this can at all be done
particularly if the statutory authorities including the ROC and the income tax
authorities have already been provided with such signed audited accounts for a
particular financial year.
Considering that above aspects having not been
examined by the ITAT, the Court sets aside the order of the and remands the
said appeal to the ITAT for a fresh consideration keeping in view the above
aspects. The ITAT is urged to call for the complete details of the records both
from the AO as well as the CIT (A) and any further relevant particulars to
arrive at a correct decision.
Accordingly, appeal disposed of.
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